Category Archive for: Reading [Return to Main]

Sunday, July 31, 2005

Sunday Reading

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Sunday, July 17, 2005

Sunday Reading

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Sunday, July 10, 2005

Sunday Reading

Here are some things to read.

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Sunday, July 03, 2005

Sunday Reading

For all of you spending your 4th of July weekend roughing it at Camp Wireless, here are some newspaper articles to read with your camp coffee while the pancakes and bacon cook on your Outpost Stove:

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Sunday, June 26, 2005

Sunday Reading

Some opinions. It seems evident that the tone is changing and finally, though I hope this isn’t simply a case of seeing through wishful eyes, it appears that harder questions are being asked of this administration:

For the birds. I wonder if stories two and three are related?

Why we teach those boring classes on statistics and probability:

Attack of the robo lobsters

Machines really do mimic life:

Home prices, Oil Prices, Saving, China, and the Fed:

You guessed it. Social Security:

Serious story:

And, on the environmental front:

They probably should have let this guy finish his bong hit:

And finally, since it's time for summer reruns to begin, I thought I'd start the season off with an animation from Lee A. Arnold on Social Security.  If you missed it the first time around, take a look:

Friday, June 24, 2005

Why Do So Many Households Hold So Few Interest-Bearing Assets?

I'm not sure this post will inspire as many comments as the post below it, but increasing national saving is an important issue both generally and in the Social Security reform debate, so I thought I'd present some empirical evidence on how the accumulation of financial assets by households changes as households become more informed about financial markets. A paper by Casey Mulligan (University of Chicago) and Xavier Sala-i-Martin (Columbia University) appearing in the Journal of Political Economy, Vol. 108, No. 5. (Oct., 2000), pp. 961-991 (JSTOR stable URL – subsc.) reports that according to the Survey of Consumer Finances, 59% of U.S. households hold no interest-bearing financial assets over and above employer held pension funds and IRAs. Why do so many households hold so few assets? The authors argue that the transactions and learning costs of entering financial markets are sufficiently high so as to more than offset the expected earnings for most households. They also suggest that people with retirement fund assets such as employer held pensions and IRAs have lower transactions and learning costs because their exposure to retirement assets may bring additional understanding of how such markets function. They find that “(a) the elasticity of money demand is very small when interest rate is small, (b) the probability that any individual holds any amount of interest-bearing assets is positively related to the level of financial assets, and (c) the cost of adopting financial technologies is negatively related to participation in a pension program.”

I want to focus a bit more on (c) which tells us that participation in a pension program increases the likelihood of holding financial assets at all income levels. The Social Security debate is often centered around the idea of an ownership society for lower and middle income class workers so the focus will be on households with low amounts of financial wealth. A new econometrics textbook that will be out this fall uses data from the study to investigate this issue. The example in the book asks “How likely is an individual with $1,000 in total assets to hold any of it as interest-bearing assets if he or she has no retirement accounts?." At an asset level of $1,000 the probability (from probit estimates) that an individual will hold any of the $1,000 in interest bearing assets is 12%. However, when an individual already has a pension plan of some type, the probability of holding additional financial assets rises to 18%. Also, note that these percentages pertain to a particular asset level, $1,000, and according to result (b) the percentages increase as the asset level increases.

This is evidence that one of the barriers to entering financial asset markets is the cost of learning how they operate. This may also explain why discussions of add-on accounts have noted much higher participation rates with opt-out as opposed to opt-in programs. There is a much larger incentive to learn what you need to know to protect the principal or liquidate the assets than there is to put the assets into a retirement account. That is, if the investments are automatic or if particular funds, etc. must be chosen there is an incentive to make sure the principal is protected and to learn the rules under which the principal can be drawn down if needed. In the process needed knowledge is obtained. When the system is opt-in, the expected return is not sufficient to trigger the learning needed as a prerequisite to participation in financial markets.

Let me be clear. I believe the solvency issue has been oversold and we do not need to radically alter the Social Security program. This is in no way a call for private accounts to solve some imagined hyped-up problem. But decreasing the barriers to participation by lower and middle income households in financial markets is an important goal and this tells us something important about how to do that. As I watch colleagues fret over the very few retirement options available to them (me too), and these are Ph.D. economists, and as intelligent friends ask questions about annuities (like what the heck are they?), etc., it seems to me that these barriers are substantial.

I do not know if it is lack of knowledge of the types of financial assets, their risk-return characteristics, knowing where to go to purchase assets at the lowest fee, and so on that constitutes the biggest barrier to participation. But the change in participation rates from 12% to 18% in the numbers above at relatively low asset levels from simply having a pension account no matter how passive the participation suggests there are potential gains to be made through better education. Less than full information among participants is a known market failure, especially when information is asymmetric (why do annuities come to mind again?). My casual observation, and more to the point empirical results, suggest lack of information is a substantial problem. If we can identify and overcome areas where lack of knowledge is a barrier to participation, perhaps we can increase participation in financial markets at all income levels, particularly among low to middle class households.

What is the most important informational barrier? Is it as simple as knowing where to go to buy an asset like a T-Bill, corporate bond, or index fund? Or is it a lot more than that?

Thursday, June 23, 2005

Did Monetary Policy Change Permanently in 1979?

[Note: This is a nice non-technical discussion of monetary policy, but the post is somewhat long. If you are more interested in Social Security and other issues, scroll right on by ...]

There has been quite a bit of discussion concerning the merits, implementation, and effectiveness of inflation targeting lately at this site. I’ve been watching for something readable but still technically sound on this topic to pass along and I recalled this piece by Benjamin Friedman, first presented at the Federal Reserve Bank of St. Louis conference on “Reflections on Monetary Policy 25 Years After October 1979,” St. Louis, October 7-8, 2004. Before discussing the paper, let me point those of you who are advocates of inflation targeting and those of you who have reservations about inflation targeting to two readable papers on this issue:

  • Friedman, Benjamin M. 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting." International Finance, 7 (March), 129-136. [copy here]   
  • Mishkin, Frederic S. 2004. "Why the Fed Should Adopt Inflation Targeting." International Finance, 7 (March), 117-127. [copy here]   

The question Friedman is addressing in this paper is how policy to today is related, if at all, to changes in monetary policy implemented during the Volcker years in response to the October 1979 experience. There are three areas of focus, a change in policy objectives such as placing more weight on inflation and less on output, a change in the policy instrument such as a change from an interest rate target to targeting a monetary aggregate, and a change in focus from monetary aggregates such as M1 and M2 to measures of reserves or the monetary base. The paper also talks about why the Fed might be too hesitant to adjust interest rates in response to economic conditions as reflected in measures such as inflation and unemployment, another recent topic of discussion, and how this results in a lagged interest rate term in the Taylor rule (this is called smoothing). Finally, commitment to rules versus discretion in monetary policy is also discussed. For those who are interested in this topic, I think this is worth reading:

What Remains from the Volcker Experiment?, Benjamin M. Friedman, NBER Working Paper No. 11346, May 2005 (sub.): [also available free here]:… [T]here remains a widespread sense that the world of monetary policymaking in the United States has been somehow different since 1979. What exactly is different, and in what respects those differences stem from the innovations introduced in 1979, are questions well worth addressing. … [T]he broad public discussion of the Federal Reserve’s new approach in 1979 primarily emphasized the elevation of quantitative money growth targets … from the irregular and mostly peripheral role … to center stage. ... The Open Market Committee had chosen to place primary emphasis on the narrow M1 aggregate, but … Evidence since then shows that by the mid 1980s M1 had disappeared altogether as an observable influence on policymaking, and the same happened to the broader M2 measure by the early 1990s … [T]he main point here is simply that the reliance on money growth targets that was key to at least the public presentation of the new monetary policy regime in 1979 has now entirely disappeared.

The same is true for … an open market operating procedure based on the quantity of either nonborrowed or borrowed reserves. … The only way in which some version of a reserves-based operating procedure could have survived … would have been if policymakers thought the relationship between reserves growth and economic activity was more reliable than the relationship between interest rate growth and economic activity. Few economists have been prepared to make that case. As a result, the Federal Reserve has gone back to carrying out monetary policy by fixing a short-term interest rate – in the modern context the overnight federal funds rate – just as it did for decades prior to 1979.

That leaves … the Volcker experiment represent[ing] a new, presumably greater weighting attached to achieving “price stability” … has that greater weighting survived? The post-1979 record of price inflation in the United States surely creates some prima facie presumption to this effect. … Does this … represent a genuine change in the weighting placed on inflation … Or is there some other explanation, independent of the Volcker experiment? One point worth making explicitly is that … there is no evidence that the increased tolerance for interest rate fluctuations that the Federal Reserve exhibited during the Volcker period has survived. One of the most frequently offered criticisms of monetary policy operating procedures based on fixing short-term nominal interest rates is that central banks have traditionally proved too hesitant to adjust the interest rates they set, and when they do move interest rates they have tended to do so too slowly. The usual explanation is that, in addition to their objectives for such macroeconomic variables as price inflation and the growth of output and employment, central banks also take seriously their responsibility to maintain stable and well functioning financial markets … For this reason, now-conventional expressions of operating rules for monetary policy, like the “Taylor rule,” normally include a lagged interest rate along with measures of inflation and output (or employment) relative to the desired benchmark.

Part of what distinguished the Volcker experiment was the unusually wide … fluctuations of short-term interest rates that occurred under the Federal Reserve’s quantity-based operating procedures. … in recent … no such fluctuations have been allowed to occur. Might the Federal Reserve again permit them if doing so seemed necessary to rein in incipient inflation? Perhaps so, but on the evidence there is no ground for claiming that this aspect of the 1979 experiment has survived either. …

The United States experienced little inflation in the 1950s, and not much in the 1960s either. Hence the historical evidence is also consistent with the view that the 1970s were exceptional, rather than that the experience since 1979 has differed from what went before as a whole. Even the idea that the Volcker experiment represented a return to the greater policy weight on price stability vis-a-vis real outcomes that had motivated the Federal Reserve before the 1970s, and that this renewed commitment to price stability has lasted ever since, would make the events of 1979 a major and lasting contribution to U.S. monetary policymaking. But … other explanations are also possible. … Resolving the merits of … other potential interpretations of the historical record … is surely a worthwhile object of empirical research. … Finally, one further aspect of what 1979 may or may not have been about bears attention. Perhaps what was important about the changes … was not the specifics of money growth targets and reserves-based operating procedures but rather … in the traditional language of this subject, to impose “rules” where there had been “discretion.” … But to the extent that it was a form of rule … it too clearly failed to survive. Federal Reserve policymaking in recent years has epitomized what “discretion” in monetary policy has always been about. Precisely for this reason, advocates of rules over discretion today continue to seek some way of moving Federal Reserve policymaking in that direction. The proposal of this kind that has attracted the most interest currently is “inflation targeting.” Whether adopting inflation targeting would be a good or bad step for U.S. monetary policy is a separate issue. But one reason the issue is even on the agenda today is that the movement in this direction that the experiment of October 1979 represented did not last either.

Sunday, June 19, 2005

Time to Call a Plumber

Yes, you’ve convinced a lot of people there’s a problem: 

Poll Finds Broad Pessimism on Social Security Payments, NY Times: A majority of Americans are … pessimistic that Social Security will pay the benefits they expect … the … debate over Social Security's long-term solvency … has left its mark … Fifty-one percent of respondents said they did not think Social Security would have the money to pay the benefits they expect when they retire; 70 percent of those under 45 felt that way…

But just as many do not want you to try and fix it:

Poll Shows Dwindling Approval of Bush and Congress, NY Times: ...Two-thirds said they were uneasy about Mr. Bush's ability to make sound decisions on Social Security. Only 25 percent said they approved of the way Mr. Bush was handling Social Security ... Moreover, 45 percent said that the more they hear about Mr. Bush's Social Security plan, the less they like it ... The sharpest drop in Congressional approval in recent months occurred among Republicans ...

Rather than call a professional, who would tell you the problem can be fixed rather easily if you know what you are doing, you are going to try and fix it yourself. All that’s needed is to blow a great big hole in the budget and to borrow a whole bunch more money. Here’s the latest gem of desperation:

GOP Senators to Propose New Tack On Social Security, Washington Post: Key Republican lawmakers, scrambling to keep President Bush's Social Security proposals afloat, plan next week to embrace ... funding personal retirement accounts with surplus revenue that now pays for other government programs. The strategy is controversial because it would create new budget problems. Either the diverted money would have to be replaced with new taxes, or Congress would have to slash programs now funded by Social Security's excess payroll taxes. Republicans said yesterday that they will address those concerns later. … Sen. Rick Santorum (Pa.), [and] ... Sen. Lindsey O. Graham (S.C.) … will join Sen. Jim DeMint (R-S.C.) …

The essence of this proposal is nothing new. It diverts money flowing into Social Security to private accounts. It’s the same old pig dressed up in a different outfit.

Here’s something new. More stories about Social Security!   

And in another surprise, stories on housing:

  Two-faced cats on the lookout for animals on the loose:

           From animals to meaty stories about vegetarians:

Outsourcing, trade, consumer confidence, and oil.  If we threw in immigration it would be pique Lou Dobbs:

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Sunday, June 12, 2005

Lots and Lots of Sunday Reading ...

First, if there’s not enough to read here, David Altig has more from all around blogland here and here.  Also, if you missed Lee Arnold's 12 minute animation on Social Security, it's worth watching so here it is again

Next, in the copycat division, an entry for Markets in Everything:

Just can’t get enough Greenspan in your life?

Greenspan's echo does not sound like Fisher:

Hasta be CAFTA:

Those silly bonds:

Wrong time of the year for Snow:

Bush looks for traction:

Here’s the odds he’ll find it:

The bad news is last, trade and budget deficits, or is it good news?

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Sunday, June 05, 2005

Lots of Sunday Reading

Lots of Sunday reading on class issues, Social Security, China, the Fed, and other issues:

Class Issues

Social Security


The Fed

Global Forum


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Sunday, May 29, 2005

Some Reading for the Weekend


Asset Valuation and Bubbles

  Relatively Inelastic Demand

Information and Demand

Relatively Inelastic Supply


Labor Markets

I didn’t read the next one, but the teaser poses a question: How are people who show up three times less productive than those who are absent?

  Tax Incidence

  Health Care


Mythical Beings

Subscription only:

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Sunday, May 15, 2005

Some Reading

Some articles that might be of interest:

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Wednesday, March 30, 2005

Interesting Books on Economics

Following up on the yesterday's post, here are some interesting books on economics from Bill Harbaugh's home page:

Basic questions about preferences and the usual economic assumptions:

Choosing the Right Pond by Robert Frank. Maybe it's not how much stuff you have, but whether you have more stuff than the other guy. For a more economic approach to questions of human nature, and in particular questions of status, Choosing the Right Pond is an excellent book. Frank attempts to resolve some "puzzles" that appear when economic theory is applied to real life.

The Red Queen by Matt Ridley. The Red Queen explores the evolutionary history of sex and its effects on human nature. Through numerous examples from nature and human society, Ridley traces biologists and psychologists views on the significance and "goals" of things such as monogamy, gender and race bias, puberty, feminism and beauty. It serves as an excellent introduction to the realm of evolutionary psychology. For the non-scientist, it also serves as an introduction to evolutionary psychology.

The Moral Animal , by Robert Wright The influence of human evolution on everyday life. Wright, a journalist (former editor of the Economist), has researched current trends and conclusions in the field, and has packaged them in an excellent book that explores the everyday phenomenon of marriage, childrearing and the like.

Passions within reason: the strategic role of the emotions, by Robert Frank. Why getting angry and falling in love are rational, in different circumstances. So, if even our emotions are rational, why not analyze them using economic tools?

Adam Smith's Wealth of Nations. You've probably heard of this one. Online version here.

Adam Smith's Theory of Moral Sentiments. Smith's other book. It's very different. Online version here.

Experimental Economics:

The Handbook of Experimental Economics by John H. Kagel Alvin E. Roth (Editors). The industry standard introduction to the field. Assumes you know a bit about economics.

Experimental Economics by Douglas D. Davis, Charles A. Holt. More of an emphasis on market behavior, explains relevant parts of economic theory.

Economic Choice Theory : An Experimental Analysis of Animal Behavior by John H. Kagel, Raymond C. Battalio, Leonard Green A fascinating look at how useful economic ideas are for describing animal behavior.

Politics, Policy, History:

Stone Age Economics, by Marshall Sahlins. I haven't read this in years, but I remember it as an attempt to use economics to analyze behavior in primitive societies. Maybe there are more recent attempts to do the same, if so I'd appreciate hearing about them.

The rise and decline of nations, by Mancur Olson.An intriguing explanation for the decline of civilizations from Rome to the U.S. (well, it was written when Carter was President) based on economic theories about how special interest groups affect political decision-making.

Peddling Prosperity, by Paul Krugman. Examples of the interaction between economy theory and real world problems.

Manias, Panics and Crashes : A History of Financial Crises, By Charles P. Kindleberger. "An informative and entertaining history of financial crises from the timeof the South Sea Bubble in the early eighteenth century to the worlddepression of the thirties and the mini-panics of the early seventies."(N.Y.: Basic Books, 1978).

Against the tide: an intellectual history of free trade, Douglas Irwin. Some arguments for and against free-trade over history, from Aristotle to Adam Smith to Krugman.

Game Theory:

Game Theory Evolving, by Herbert Gintis. An excellent intro to what game theory is, with an evolutionary slant that makes for interesting reading. Starts with simple games, assumes you know some economics but no game theory.

Thinking Strategically, by Dixit and Nalebuff. What game theory is and how it can help you succeed in business and life.

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Saturday, March 05, 2005

Article from The New York Times on the need for Social Security Reform

Another interesting article, this one on the need for Social Security reform:

The New York Times: A Question of Numbers by Roger Lowenstein

Informative Krugman article from The New York Review of Books

This article by Krugman about Social Security is informative:

The New York Review of Books: "America's Senior Moment," by Paul Krugman