Saturday, March 06, 2004

 

I am quitting the Ayatollah Sistani fan club. After fighting for democracy and against fake caucuses he seems to have switched to blocking signing of the Iraqi basic law in order to support tyranny of the majority. After meeting with him, SCIRI delegates refused to sign the document as reported in the New York Times


"The [5]Shiite leaders are objecting to two parts of the constitution. They say they want to get rid of a provision that would allow a minority of Iraqi voters to reject a permanent constitution. According to the document now in dispute, the constitution will go before Iraqis in a nationwide referendum. If a majority of Iraqis approve it, it will become permanent, unless two-thirds of the voters in three Iraqi provinces reject it. In that case, the constitution would go down to defeat.

The Shiite leaders, who represent a majority of Iraqis, want to delete the provision that would allow the three provinces, called governerates, to defeat the constitution.

The Shiite leaders are also seeking an expansion of the powers of the presidency. Under the proposed constitution, the national assembly would choose a president and two deputy presidents, who would choose a prime minister by an unanimous vote.

Shiite leaders said they want to either increase the number of presidents and deputies to five, or they simply want to expand the powers of the single presidency. "

The 3 president, presidency was designed as the principal protection against tyranny o fhte Shiite majority.

I think this is very bad news. I suspect that Sistani's stated belief that clergyman should stay out of politics (made when Saddam Hussein was in power) had at least as much to do with Sistani's eagerness to stay out of his grave as with his true beliefs.

posted by Robert permalink and comments4:08 AM

 

Someone is in a Pickle

I could not make this up.

Joint Statement

Of Senate Judiciary Chairman Orrin Hatch, (R-Utah)

And Ranking Member Patrick Leahy (D-Vt.)



On the Release of the Pickle Report



“Due to an administrative error, the unredacted version of the Senate Sergeant At Arms Report was mistakenly released to the media Thursday afternoon.

link

The report, of course, concerns the reading of Democrat's private computer files by Republican hackers. Thus it concerns improper access to sensitive information.

My guess is that some sly staffer is trying to convince reporters that the whole problem is just that people at the Senate Judiciary Committee are clueless about security privacy and secrecy.

posted by Robert permalink and comments2:32 AM

 

More on the 2.4 trillion dollar sure thing.
Brad notes that John Quiggen says the S-word.

Actually Brad et al said the S word a while ago discussing open market operations in the stock market in
J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers, and Robert J. Waldmann (1989) "The Size and incidence of the Losses From Noise Trading," Journal of Finance vol 44 pp 681-96 (July 1989).

Now one problem with the SSTF making a killing investing in stock is that massive purchases would drive up prices eliminating the puzzling premium, that is, driving the stock premium down to a reasonable level for a representative agent or a deep pockets long lived agent like the SSTF. In particular jumps in stock prices when the plan is unsecretly discussed, proposed and passed by congress would give windfall capital gains to investors. Uncertainty about the plans prospects would add risk.

I think there should be a simple way to deal with this. bundle the plan to buy a lot of stock with a plan to penalize stock relative to bonds. This way the combined policy would have (roughly) no effect on stock prices.

So we would need a way to penalize stock relative to bonds. How about double taxation of dividends ?
Works for me.

Ah from Feldstein to creeping socialism aided by reintroducing double taxation of dividends in less than 10 posts.

Not to mention from "the Lindsey Feldstein,Samwick plan to "Clinton's proposed diversification of the social security fund".

posted by Robert permalink and comments1:55 AM

Thursday, March 04, 2004

 

I agree with Mark Schmitt the Decembris and Brad Delong that David Brooks needs to spend more time with his family. Brooks wrote

" [Senator John] Edwards deserves some praise because he is the only major candidate who talks consistently about the poor. The problem is that he talks about poverty in an obsolete way, which suggests he has learned nothing from the past 40 years.

Edwards talks about poverty in economic terms. He vows to bring jobs back to poor areas and restrict trade to protect industries. He suggests that if we could take money from the rich and special interests, there'd be more for the underprivileged.

This kind of talk is descended from Marxist theory, which holds that we live in the thrall of economic conditions. What the poor primarily need is more money, the theory goes."

which should be enought to disqualify him from writing op eds. This post is a bloated comment to Brad's post and begins with a reply to a commenter who wrote.

"Here's another definition of poverty: Even given the means of providing material needs or comfort, the poverty-striken would still find ways of squandering their newfound means thereby reverting to their "ground" state of having no means."
Posted by Lawrence at March 4, 2004 07:20 AM


Lawrence: You write about what would happen to the "poverty striken" sic. Do you mean each and every one of them ? If not your argument does not follow. If so, you are crazy. Some people, for example, Andrei Shleifer, have been poor and dependent on public and private assistance for reasons unrelated to fecklessness (believe me you have probably never met such an unfeckless person).

Brooks argument that the it is wrong to think that "take money from the rich ... and there would be more for the underprivileged" is a very very extreme statement. All estimates of dead weight losses from taxes and transfers imply that the underpriveleged get more if you tax the rich more and transfer. This shows that Brooks is not just extreme but also inumerate as he seems not to realize that there are numbers less than one and more than zero.


As noted by other commenters, Brooks characterization of Edwards' proposals (in the quoted passage) is so brief that it is not even a travesty.

His idea of what we learned in the past 40 years describes a shift in ideologoical fashion not the result of examination of evidence. What convinces Brooks that undesirable side effects of the earned income credit outweigh its desirable direct effects. All evidence suggests that the side effects are excellent almost better than the direct effects ? Or does he think that the EIC is not a transfer ?

Finally Brooks' idea that "Marxist theory" supports welfare shows ignorance or contempt for the facts. Marx definitely argued that nothing except for nationalization of the means of production would do any good for workers let alone the lumpens.

So Brooks should not work for the NYT, but it is reasonable for them to try to be balanced. There must be some right of center commentator who is not ignorant and dishonest. Brad proposes Brink Lindsey. I think Josh Chafetz and David Adsnik ares OK (they might consider themselves to be left of center). Any others ? It is hard to be a serious right of center commentator while to be right of center you almost have to defend the Bush administration. Still it should be possible.

posted by Robert permalink and comments5:10 PM

Wednesday, March 03, 2004

 

The post just below got a link from Brad
and so was visited by over 100 people (a lot for this blog). In case any come back for more, I will explain a little.

First I agree with Brad that the idea that the treasury can make a killing playing the stock market is separate from the issue of saving social security. Social security shortfalls have a present value in the trillions, so making a killing would help the social security administration, but one could as well
present the multi trillion dollar almost sure thing as a plan to fund socialized medicine or the expansion of the US empire or whatever.

The question is can the treasury make a lot of money without hurting private agents by selling a few more hundreds of billions of bonds and buying stock ?

Before getting (again) to the problems, I want to explain why this might be a good idea, or, more exactly, would have been a good idea if done in 1945. First there is the fact that in the postwar period, at least until the exuberant 90s, stock was a great buy for a huge deeper than deep pockets investor like the US treasury. The average return on stock was much higher than the average return on treasury bills. This is (or was) presumably a risk premium. Oddly if one looked only at aggregate data on market returns and consumption, it is (was) almost impossible to explain this risk premium (as pointed out by Mehra and Prescott). They worked a while ago when the Prescott et al approach to macroeconomics was to do microeconomics with a representative consumer.

The idea of a representative consumer is to assume that we are all equal so each has wealth income and consumption etc equal to average wealth income consumption etc.. Then assume we are rational and fiugre out what would happen. Such models are also used to guide policy by people who don't care at all about income distribution (including Prescott).

In a rational representative consumer model, assets should earn a risk premium if their return is positively correlated with average consumption. The idea is that a high average return isn't so great if it is especially high when we consume a lot and are not hungry and low when we consume little and are hungry. Oh the market return is the return on an index fund. It should be the return on an index fund of all listed stocks.

Oddly the market return is almost perfectly uncorrelated with consumption ?!? This is very odd and implies that, unless the representative consumer is incredibly risk averse, stocks were (are) under-priced. That the average person would be better off buying more stock. This is also true for someone with a long time horizon. The return on stock over *all* long periods was better than the return on treasury bonds.

The reader (if any) will have noticed many parentheses. The reason is that, while it seems clear that the market was under-priced from 1945 to say 1980 at least, it is not at all clear that it is still under-priced. In fact, part of the 90s bull market might have been a correction of this mistake.

OK so why is (was) the stock market undervalued ?
1) One possible reason is that people systematically underestimate(d) the returns on stock, that is, that they are (were) systematically irrationally pessimistic.
2) Another possibility is that people don't (didn't) know to invest. The risk on a portfolio of only one or a few stocks is much greater than the risk on a diversified market portfolio. Indeed with time people began investing in index funds and the aggregate price earnings ratio rose.
3) the representative stock owner is different from the representative consumer. In the period studied by Mehra and Prescott almost all of the stock market risk was born by very few people. about 50% of individually owned shares were owned by 1% of people. More importantly almost all pensions were defined benefit so the worker didn't need to care how the pension fund managers did. The correlation of food consumption with stock returns was higher for people who actually owned stock as shown by Campbell and Mankiw (yes the head of the CEA).
d) There might have been a "peso problem" a low risk of a catastrophic collapse of stock prices. This scared rational people but, in the event, it didn't happen. this means that the average return over the period would be a very bad estimate of the expected (ex ante average) return.


Imagine that we are back in say 1955 (predictions are hard especially about the future). For a utilitarian, it would have been a good idea for the treasury to sell more bonds and buy stock. This is true for any of the theories of the stock premium listed above.

1) if people are irrational they are helped by removing (part) of their consumer sovereignty. If people would serve their own interests by buying stock, forcing them to hold stock as citizens is in their interest. One key question is whether people would eliminate the public program by buying less stock personally. I think this is silly. I think it is clear that people don't keep track of what the government is doing on their behalf. Also brokerage fees would keep many people at 0 personal stock holding.
2) the plan would force people (as citizens) to hold a diversified portfolio.
3) the plan would make all people (as citizens) shareholders spreading the risk. The risk was strangely concentrated. Again the strange concentration of share ownership could have been due to brokerage fees etc.
4) A catastrophic lasting collapse of share prices (a in 1929) would happen exactly when the govt should run a huge deficit. If there was such a risk, the plan would serve as an automatic stabilizer.

I really think that the government could have changed the path of consumption in a way which increased expected utility of almost everyone by selling more bonds and buying stock. Thus I think it could have spent more on say health care and left the path of private consumption one that gave higher utility too.

The problems are.
a) First it is easy to predict the past. Maybe the great opportunity has passed now that price earnings ratios have increased. Maybe the stock premium is now what it would be if there were a rational representative agent.
b) if the treasury is required to buy all stocks proportional to their market capitalization there is a chance for fraud (see the 2 cows joke below)
c) if some bureaucrat is allowed to pick stocks there is a huge risk (certainty?) of corruption.
d) if individuals are allowed to pick stocks (as in the Bush admin proposal) and to chose to not pick stocks at all the whole thing doesn't work at all.

I think a is the key thing. I have to admit that, even though I just argued that stocks are a great buy, I personally don't own any and have a defined benefit pension.

posted by Robert permalink and comments11:07 AM

Sunday, February 29, 2004

 

Now for something completely different. Do I (partly) agree with Martin Feldstein, Larry Lindsey and George W Bush ?

It seems that Bush was not dishonest when he suggested that private social security accounts could be part of a plan to save social security. He really believed something like that because Larry Lindsey told him and Lindsey got the idea form his old prof. Martin Feldstein (and a co-author). The idea was so crazy that it went no where in the Bush administration (and that is saying something). However, I am not sure I am totally convinced it is crazy.

Brad DeLong notes correctly that it doesn't really have anything to do with social security. The idea is that there is a multi trillion dollar sure thing for the US treasury -- issue treasury bonds and buy corporate bonds and stock. Some of the huge profits from this deal were to be used to save social security and others to give people who wanted private accounts to get higher returns.

One crude way to view this is that Bush and Lindsey bought into the bubble just as it was about to burst. The pressure for private accounts came from the idea that stock was a great buy, which, as usual became very strong at the peak of the bubble. The idea vanished as voters suddenly found stock scary again when the bubble burst.

However, the idea that stocks are, on average, underpriced has considerable support. The equity premium is a puzzle. The evidence is that, since WWII, Stocks have far out perform treasury bonds over every long period. Clearly most of the evidence is from some time ago. I think it is possible that investors just made a mistake and have since corrected it (so no more multi trillion dollar sure things). The mistake would not be simply hating stocks but rather failing to diversify and then correctly perceiving undiversified stock portfollios as highly risky.

I am perfectly willing to believe that Stock is still underpriced. I am also willing to believe that quality premia on bonds are too high. Now if I think people are making a mistake do I think the government should correct it by selling (safe) bonds and buying stock ? Sounds good to me.

One might argue that rational investors would shift their private portfollios from stock to treasury bonds to cancel the maneuver. I believe that rational investors are too few to matter.

So what would be the problem ? Well would someone at treasury decide which stocks to buy ? I don't trust any one team of people to be competent to do that and expect huge corruption. I think just about everyone agrees that it would be a bad idea. Actually I'm not sure about "just about everyone". For all I know all living human beings think that would be a bad idea.


OK so the plan has to be that the treasury buys say x% of all stock and corporate bonds. Here I see another problem. It is very nice to deal with someone who has to buy x% of your stuff no matter how much and how bad it is.

Let me put it this way. There are two cows. One belongs to Mr A and one to Ms B. A and B, who are very very rich,incorporate and issue shares in an IPO rating each cow as worth a billion dollars. They buy each other's shares. Treasury has to give each of them 100 million dollars for 10% of a cow.

Doesn't sound so good for the honest citizen. Still scams like this exist already, consider the case of Harkin energy or more recently Enron. There are semi sometimes enforceable rules about arms length transactions.

I personally think the treasury should issue even more t-bills and buy say 1% of stock and corporate bonds in the USA.

posted by Robert permalink and comments3:06 AM