Sunday, June 28, 2009

Not enough dollars is not the problem

A Sunday doco on TV1 this evening explained the effectiveness of a community based series of education and training initiatives in Otorahunga which have proven surprisingly and overwhelmingly effective for employers, those who would have been unemployed and the community. Suffice to say it has been devastatingly successful.

Govt funding for the scheme is about to be removed – at least in part. Times are tough, recession, competing demands etc…all plausible and apparently tragic.

Unfortunately the next point in the analysis was missed – the current formal educational system – a vast consumer of scarce resource notably money - is not delivering what is required to achieve the desired objectives and there is a viable alternative.

For one employee the best thing that happened to him was getting tossed out of school and ending up in the programme… he is now a successful apprentice, a local firm has a valuable employee and the community is better off.

The point is less that funding should not be cut but that it should be taken away from the formal education sector and re directed to initiatives such as this. Put even more simply by keeping people in schools for many we are paying for their education twice over.

Not a problem of too little money but money allocated to the wrong institutions. Sitting in school to year 13 having not shown aptitude for or interest in the academic career offered by education to pre university level is simple misallocation.

Too many school students, too many teachers, and not enough allocation to training initiatives which match workplace opportunity to would be employees.

There will be numerous detailed differences in different communities, schools, work places and the like. The evidence is strong however that it is not lack of money per se which is the problem but misallocation.

The courage required to correct this problem at root however, is massive. Much easier to say lack of resource is the problem than to face the need to correct compounded years of assuming that the standard formal, largely academic driven schooling system works. For many it doesn’t – time to start starving the dogs and feeding the stars.

Regulation and Distrust

This from Marginal Revolution…. there are problems with the second graph by the look of it (the data set used is thought to have problems) but the underlying premise is intuitively plausible and readily observable at present.

In an interesting paper, Aghion, Algan, Cahuc and Shleifer show that regulation is greater in societies where people do not trust one another.  The graph below, for example, shows that societies with a greater level of distrust have stronger minimum wage laws.  Note that the result is not that distrust in markets is associated with stronger minimum wages but that distrust in general is associated with greater regulation of all kinds.  Distrust in government, for example, is positively correlated with regulation of business.  Or to put it the other way, trust in government (as well as other institutions) is associated with less regulation.

Aghion et al. argue that the causality flows both ways on the regulation-distrust nexus. Distrust makes people turn to government but in a society with a lot of distrust government is often corrupt and this makes people distrust even more.  Crucially, when people distrust others they invest not in the highest return projects but in human and physical capital that is complementary to distrust--for example, they invest in human capital that helps them bond with their group/tribe/family rather than in human capital that helps them to bond with "outsiders" and they invest in physical capital that is more difficult to expropriate rather than in easier to expropriate capital, even though in both cases the latter investments may be the all-else-equal higher return investments.  Such distrust traps are quite similar to Bryan Caplan's idea traps.

Thus, societies with a lot of distrust generate regulation and corruption and citizens who don't have the skills or preferences to break out of the distrust equilibrium.  Consider, for example, that in societies with a lot of distrust parents are less likely to consider it important to teach their children about tolerance and respect for others.Distrustrespect

Friday, June 19, 2009

Obama’s financial reforms – an unfortunately accurate appraisal from WSJ…..

“The main idea behind the Obama Administration’s new financial revamp is this: With more power and a modest reshuffling of the bureaucratic furniture, the same regulators who missed the last credit mania will somehow prevent the next one. If nothing else, this concept is certainly true to President Obama’s campaign theme of “hope”.”

One striking  point made is that all of the hand wring and in particular the way the reforms are conceived and presented serves to entirely avoid any light being cast on considering the role of the government – from housing policy , the SEC’s role, the role regulation and the “work” of the Fed – and what might be to blame in that quarter.

Another triumph for rent seeking – the worst of it is the poor guy probably thinks this really will work.

Wednesday, June 10, 2009

The first test of US Govt letting go… will they???

Banks in the US are currently (and laudably) lining up to repay TARP loans and get out of govt clutches.  If you pass the stress test or have plans which will get you over the line then you should be “free to go”. Schools out – or is it?

With the debt and as part of some TARP funding the govt took a bunch of warrants which of course turn to equity under certain conditions. When you repay do you get the warrants back. Silence so far – Treasurer Tim has said it is “an issue”. Yes Dr Phil…. it sure is.

Its a kind of nationalising call option unless the warrants are returned to sender or cancelled. The ability of the US administration to get out of the sector will be tested over this and it should provide a valuable clue. The uncertainty is not good – would shareholders invest in banks with this call hanging around in the wings?

Watch this space.

Tuesday, June 9, 2009

Peter L. Bernstein, Explainer of Stock Risks, Dies – Loss of major mentor

Peter L. Bernstein, an economic historian and popularizer of the efficient market theory, which changed trading behavior on Wall Street, died Friday at New York-Presbyterian/Weill Cornell hospital, The New York Times’s Louis Uchitelle writes. He was 90 and lived in Manhattan.

The cause was pneumonia contracted after he broke a hip, his family said.

Mr. Bernstein published most of his best-known books in the last 20 years of his life, including the best-selling “Against the Gods: The Remarkable Story of Risk” (John Wiley & Son) in 1996 and “Capital Ideas: The Improbable Origins of Modern Wall Street” (Free Press) in 1991.

In these books and in earlier work, he embraced and explained an investment strategy that came to be known as efficient market theory. Rather than just picking stocks because they seemed to be good bets, investors increasingly diversified their portfolios, using sophisticated mathematical equations, developed in academia, with the goal of measuring and managing risk.

“We went from na├»ve and haphazard stock-picking to looking at the whole portfolio in the context of how capital markets operate,” William F. Sharpe, an economist at Stanford who received a Nobel Prize for his work developing the new strategy, told The Times. “Peter Bernstein’s contribution was as an interpreter and communicator, and he certainly did popularize academic finance.”

The hope was that with diversification, the stock market would be less likely to collapse, although Mr. Bernstein worried that a collapse could occur. He was an advocate of more market regulation to prevent one. But he also argued that the wealth and entrepreneurial energy generated by a rising stock market were worth the risk.

He made that point in 2005 in a semimonthly newsletter that he published for many years. Five days before his death, he republished the article in the same newsletter, Economics and Portfolio Strategy, adding a prologue in which he said, “With hindsight, most readers today would find our position in 2005 to have been a prescription for tragedy.”

Then, quoting the Alfred Lord Tennyson line, “ ’Tis better to have loved and lost than never to have loved at all,” he concluded: “There was wisdom in Tennyson’s words. Who can say he was wrong beyond debate? That would be a sorry world indeed.”

Mr. Bernstein was the founder, in 1973, of Peter L. Bernstein Inc., which published his newsletter and also had as clients wealthy families and foundations, helping them manage their wealth. A year later, he founded the Journal of Portfolio Management, a scholarly journal that brought traders and academics into communication with each other as they developed efficient market theory.

They did so, in part, because more and more Americans held stock, mainly through mutual and pension funds. Picking stocks with a broker no longer met most people’s needs.

“As institutions and professional managers became the principal players, innovation was inevitable,” Mr. Bernstein wrote in “Capital Ideas,” his best-known book on efficient market theory. “But innovation must be preceded by theory.”

In the last 25 years of Mr. Bernstein’s life, nearly all his work focused on markets. But he had cast a broader net earlier, particularly in his writings with the late Robert L. Heilbroner, a historian and the author of a classic economics book, “The Worldly Philosophers.”

Mr. Bernstein and Mr. Heilbroner, both New Yorkers, were lifelong friends. They met in first grade at the Ethical Culture School and moved on together to Horace Mann Academy and then Harvard, graduating in 1940 with degrees in economics. For 25 years, until Mr. Heilbroner’s death in 2005, they made a point of having lunch together on the day before Christmas.

Like many others of their era, they were Keynesians, and they argued that public spending was necessary for a healthy market economy. They also argued that government’s role in the economy should not have been curtailed as President Ronald Reagan sought to do in the 1980s, when he argued that the deficit was too large to maintain public spending. It was not too large, they said, as a percentage of the nation’s economic output.

Peter Lewyn Bernstein was born in Manhattan on Jan. 22, 1919, a son of Allen and Irma Lewyn Bernstein. After graduating from Harvard magna cum laude, and after a year as an economist at the Federal Reserve Bank in New York — working for a Harvard professor who had gone to the Fed — he spent World War II as an officer in the Office of Strategic Services, the C.I.A.’s predecessor, in London.

While in Europe, he married the former Shirley Dowd, an American working as a secretary for the military. She died in 1971. The couple was childless. In 1972, Mr. Bernstein married a widow, Barbara L. Soskin, who took his last name. She survives, as does a stepgrandson, Peter Brodsky of Dallas, from Mrs. Bernstein’s first marriage, and three stepgreat-grandchildren.

After the war, Mr. Bernstein taught at Williams College and then became a loan officer in a commercial bank in New York, learning about risk, he later explained, as he assessed the creditworthiness of the borrowers.

Family pressure led him to Wall Street. After his father died in 1951, the family insisted that he take control of the father’s business, Bernstein-Macaulay, a wealth management firm. It was sold in 1967 and Mr. Bernstein stayed on as manager until 1973, having agreed to do so.

But he had already immersed himself in writing and scholarship, and from then on he focused on markets and risk, with occasional digressions. One of those was “Wedding of the Waters: The Erie Canal and the Making of a Great Nation” (W.W. Norton, 2005), in which he returned to public works spending.

“Without the gritty determination of a small group of men convinced of the prospect of a great nation,” he wrote, “the Erie Canal would not have been built and the Western territories would in all likelihood have broken away.”

Friday, June 5, 2009


Thanks to NZBR

The last quarter century has witnessed remarkable progress of mankind, says economist Andrei Shleifer.  The world's per capita inflation-adjusted income rose from $5,400 in 1980 to $8,500 in 2005.  Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just as fast.  Compared to 1980, many more countries in the world are democratic today.  The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes.

Three important events mark the beginning of this period.  In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty.  In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth.  A year later, Ronald Reagan was elected President of the United States and also embraced free market policies.  All three of these leaders professed inspiration from the work of Milton Friedman.  It is natural, then, to refer to the last quarter century as the Age of Milton Friedman, says Shleifer.

Some of the central facts of economic and social development during 1980-2005:

  • During this period, world per capita income grew at about 2 percent per year, including rapid growth in East and South Asia.
  • Between 1980 and 2000, the share of the world's population living on less than $1 a day fell from 34.8 percent to 19 percent.
  • The World Bank forecasts that the number of people living on less than $1 a day will continue to fall sharply despite population growth, and account for 10 percent of the world's population by 2015.

What about economic policies?

  • The world median inflation rate in 1980 was 14.3 percent; by 2005 that median declined to 4.1 percent.
  • Top marginal income tax rates fell around the world from the population-weighted average of 65 percent in 1980 all the way down to 36.7 percent in 2005.
  • In the 1980s, most governments restricted foreign exchange transactions; by 2005 "black market" exchange rates have nearly vanished.
  • Tariff rates, which fell from the population-weighted world average of 43 parallel with vast expansion in world trade.
  • Over the last six years, the number of procedures an entrepreneur must follow before he can legally start a business declined, although East Asia and Latin America remain heavily overregulated.

Source: Andrei Shleifer, "The Age of Milton Friedman," Journal of Economic Literature, Vol. 47, No. 1, March 2009.

For text:

Wednesday, June 3, 2009

Shocking piece of rent seeking….. the self serve

I am still struggling to believe the latest from the Gareth Morgan marketing machine. His latest call to liquidate the Cullen Super Fund is of course God’s work and a no brainer. Some ideas are simply dumb – so that’s all fine.

The idea of distributing the funds as some sort of Kiwi Slaver instrument is not… (a) it’s an inequitable and inefficient idea and (b) it’s a piece of self serving rubbish from a Kiwi Saver Provider…

Not everyone buys the Kiwi Slaver line…. if you think politicians keep the kind of promises required for that to work just review the last 6 months both here and overseas.

Even those who do may not be keen on a provider dishing up a recipe for new clients under the guise of objective analysis.