Moises Naim Watch

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Mark Manson writes,

One of my best friends recently told me that the prestigious multinational corporation he worked for was itching to permanently send him to India. They wanted him to manage their expansion into that market. And, obviously, India is a huge emerging market. They gave him the Godfather offer to go — enough money to live in a mansion, with personal chefs, private drivers, everything. The irony, of course, was that my friend is a first generation Indian-American. His parents gave up everything decades ago and fought their way to the US to give their kids opportunities they would never have had back in India. They succeeded. What they didn’t expect was that that opportunity for their son they gave up everything for? It was back in India.

One of my big take-aways from Naim’s The End of Power is that emerging economies have a lot going for them. If the future belongs to auto-didacts, it also belongs to people who are comfortable living in more than one country.

Energy Breakthroughs?

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The latest issue of MIT Technology Review lists ten (not-yet-proven) breakthrough technologies. Two that caught my eye:

Solar panels that are twice as efficient as current designs. Although I strongly oppose subsidizing current solar industries, I do hope for a “solar singularity,” meaning that at some point solar power becomes more efficient than other sources of energy and then continues to increase its advantage.

A new circuit breaker that would allow the electric grid to operate on direct current, which

can efficiently transport electricity over thousands of kilometers and for long distances underwater

High School Education

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Julie Berry Cullen, Steven D. Levitt, Erin Robertson, and Sally Sadoff write,

our advice to high schools when it comes to underperforming students is to redefine the mission and eschew traditional success metrics like test scores, focusing instead on more pragmatic objectives like keeping kids out of trouble, giving them practical life skills, and helping with labor market integration. That conclusion will no doubt be unsatisfying to many readers. In an ideal world, high schools would perform miracles, bringing struggling students back from the brink schools and launching them towards four-year college degrees.

So far, I could call this Journal of Economic Perspectives symposium on education “Living with the null hypothesis.”

On Early Childhood Education

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President Obama says that the science is clear. Greg J. Duncan and Katherine Magnuson are not so sure.

We find that the evidence supports few unqualified conclusions. Many early childhood education programs appear to boost cognitive ability and early school achievement in the short run. However, most of them show smaller impacts than those generated by the best-known programs, and their cognitive impacts largely disappear within a few years. Despite this fade-out, long-run follow-ups from a handful of well-known programs show lasting positive effects on such outcomes as greater educational attainment, higher earnings, and lower rates of crime. Since findings regarding
short and longer-run impacts on “noncognitive” outcomes are mixed, it is uncertain what skills, behaviors, or developmental processes are particularly important in producing these longer-run impacts

John Cochrane on Housing Finance

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He writes,

Suppose that mortgages were bundled into securities, intermediated by mutual funds whose values float, just like those of equity mutual funds, and held around the world in retirement accounts, pension funds, and our endowments’ portfolios, without government guarantees at every step. This would be a terrific financial structure

I think that this would be an improvement. However, the household demand for risk-free assets might lead banks or money-market funds to offer fixed-rate instruments backed by these floating-rate securities. Add enough leverage and you have a very shaky financial structure. In any case, I continue to believe that if there were no government actions distorting the price differential between a thirty-year mortgage with an interest rate fixed for just five years and a thirty-year fixed-rate mortgage, the latter would cease to dominate the housing finance system in the U.S.

Burt Malkiel vs.John Cochrane on Investment Managers

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In the Journal of Economic Perspectives, Malkiel writes,

The major inefficiency in financial markets today involves the market for investment advice, and poses the question of why investors continue to pay fees for asset management services that are so high. It is hard to think of any other service that is priced at such a high proportion of value.

Cochrane writes,

After all, active management and fees have survived 40 years of efficient-market disdain. Economists who would dismiss “people are stupid” as an “explanation” for a pricing anomaly that lasts 40 years surely cannot use the same “explanation” for the persistence of active management. Economists who think the evidence favors lots of “inefficiencies” in the market are even less well placed to deplore active management. They should conclude that we need more, or at least better, active management to They should conclude that we need more, or at least better, active management to correct the market’s inefficiencies. Their puzzle is the inability of existing managers correct the market’s inefficiencies. Their puzzle is the inability of existing managers to pick low-hanging fruit. to pick low-hanging fruit.

I suppose that one can believe that there are a lot of inefficiencies in the market and also believe that active managers are so bad at finding these inefficiencies that they actually make things worse.

Anyway, read the whole essay.

What I’m Reading

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New books by Kevin Williamson and by Tim Kane and Glenn Hubbard. Both take as their premise the thesis that the U.S. is on an unsustainable fiscal course. In The End Is Near and It’s Going to be Awesome, Williamson treats this as an opportunity, while in Balance, Kane and Hubbard treat it as a threat. Perhaps it would be appropriate at some point to jointly review them at length.

If I might boil the Kane-Hubbard book down to one sentence, it would be that without a balanced budget amendment to avert fiscal collapse, America will lose its great power status. I can imagine conservatives, thinking in terms of the civilization-barbarism axis, nodding firmly in agreement. However, by the same token, I can picture progressives and libertarians shrugging with indifference.

Williamson appears to be in the latter category. So far (I am less than 1/3rd finished), the book is assembling a standard array of libertarian arguments. Anyone who already resonates to the freedom-coercion axis is bound to like it. My guess is that Williamson is headed toward an embrace of what I have called civil societarianism. So far, it looks as though he is arguing for views that I share, although he expresses them with greater certitude.

From Permanent Press to Permanent Clean

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Walter Russell Mead writes,

A Kickstarter success story making the rounds of the Internet this week caused us to perk up our ears here at Via Meadia. A Brooklyn-based company called Wool & Prince has developed a dress shirt that doesn’t require ironing and can be worn for extended periods of time without it starting to stink.

Pointer from Nick Schulz, who reminds me that in our book we talked about the progress represented by permanent press and speculated that in the future we might see permanent clean.

Connecting Household Balance Sheets to PSST

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Interesting comment found by Glenn Reynolds. From Jeffrey Levin:

If you dig around and research start-ups you will find that the majority of start-ups are funded by second mortgages or HELOC draws. Due to the housing crash, that equity is just not there for the vast majority of people looking to start up a new business. Its one of the large reasons why commercial credit expansion has been so moribund. Without getting off the ground from seconds or HELOC’s all those startups that would have made it past year 1 and then been able to obtain standard commercial business loan never got off the ground and thus never graduated to commercial loan financing. You have to walk first before you can run. Startups don’t start in the commercial loan department (at least most of them don’t).

Recalculation means discovering new patterns of sustainable specialization and trade. Doing so requires entrepreneurial trial and error. As Levin points out, the stereotypical 20-year-old in a garage is actually atypical. Most entrepreneurs are like I was, forty years old and risking accumulated wealth. If my wealth had suddenly been halved in 1993, I doubt that I would have started a business in 1994.

And whose wealth got crushed by the housing crash? According to a paper by Edward Wolff, as cited in the WSJ blog:

The big drop in home prices between 2007 and 2010 meant a 59% loss in home equity for people under 35, compared with just 26% for people generally. That meant a massive loss of wealth, or “net worth” — what people own minus what they owe. People ages 35-44 saw a 49% fall in home equity.

Thanks to Mark Thoma for the pointer.

Home Ownership’s Negative Employment Externalities

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David G. Blanchflower and Andrew J. Oswald write,

We explore the hypothesis that high home-ownership damages the labor market. Our results are relevant to, and may be worrying for, a range of policymakers and researchers. We fi nd that rises in the home-ownership rate in a US state are a precursor to eventual sharp rises in unemployment in that state. Th e elasticity exceeds unity: A doubling of the rate of home-ownership in a US state is followed in the long-run by more than a doubling of the later unemployment rate. What mechanism might explain this? We show that rises in home-ownership lead to three problems: (i) lower levels of labor mobility, (ii) greater commuting times, and (iii) fewer new businesses. Our argument is not that owners themselves are disproportionately unemployed. Th e evidence suggests, instead, that the housing market can produce negative externalities’ upon the labor market. Th e time lags are long. Th at gradualness may explain why these important patterns are so little-known.

Pointer from Steve Goldstein of the WSJ.

I would suggest viewing these findings as tentative at best. As the authors write,

We are unable, in this paper, to say exactly why, or to give a complete explanation for the patterns
that are found

There are many conceivable explanations for the findings. Bear in mind that conventional macro distinguishes between cyclical and structural unemployment. To aggravate structural unemployment, home ownership would have to result in permanent mis-matches between skills and labor demand. To aggravate cyclical unemployment, home ownership would have to make wages stickier, or somesuch. In a PSST framework, home ownership would have to make it more difficult for entrepreneurs to discover new forms of comparative advantage.

I personally would rate as low the probability that there is truly a causal relationship between home ownership rates and subsequent unemployment rates. Still, it is refreshing to see a paper that runs counter to the “home ownership is great” mantra.