Wednesday, December 7, 2016

When aren't they efficient?

The approach to markets, especially betting markets, supposes that they are efficient or trending towards efficiency.  There is a specific circumstance where markets no longer trend toward efficiency, that is basically never discussed.

Walk into a convince store, look at the dozen drinks on display.  How many choices are there?  Not 12, 13.  1 for each drink, and 1 for not purchasing a drink at all.  Take 130 people, each day each of the dozen drinks gets bought 10 times, and 10 times the "no purchase" is exercised.

10 people day after day are not buying drinks.  If they are $1 each then after a year you have 10 people with $365 that they are willing to use on drinks if there was one they liked.  This (potentially) opens up a brand new niche in the market, as the daily savings allows for a new product to enter the market.  One day on the shelves a specialty drink will appear, aimed at satisfying this segment.  Perhaps it will be priced at $2, perhaps $20.

Strip away the savings, instead of a dollar spent every time, give each of the 130 people a coupon for 1 drink that expires at the end of each day.  Now there is no build up of savings and so no incentive to create a more expensive drink for those with particular (or peculiar) tastes.

This is the major flaw in electoral "markets", votes can't be rolled over in anticipation of a better candidate 2, 4 or 40 years down the line.  Marginalized groups tend to stay marginalized and powerful groups powerful thanks to the absence of this mechanism.

Now we are potentially living in an even more dangerous time.  Financial markets have become so entangled that there is no fundamental way to "save" outside of it.  Sell stocks because you are worried about the economy?  What are you going to do with the cash?  The solvency of banks is directly tied to the solvency of the US Treasury, which is tied back to the strength of the economy.

Whenever someone makes the following mistake, "markets aren't worried about default because if they were interest rates on government debt would be higher" simply ask them this "Where should I put my money if I am afraid of a government default in my country?".

Sunday, October 9, 2016

People don't appreciate scale

Marginal Revolution links to a Minimum Garaunteed job proposal, that is incredibly naive.

The guaranteed job will consist of a variety of mental and physical tasks that can be easily monitored either online or within existing institutions. The mental tasks might be activities such as keyboarding practice, doing arithmetic exercises on an internet training program, doing exercises in word processing, doing spread sheets, reading reports and summarizing them, or completing online courses. The physical tasks might include doing specific exercises, digging holes and filling them, moving weights, and other similar type activities. The goal of these activities is not to produce usable output for society, but to provide work activities by which people can translate their time into income. To the degree possible, these working experiences will provide training in skills and an introduction to customs and behavior useful in the real-world market jobs

The US labor force is currently around 160 million people, with a 5% UE rate some 8 million people are going to be eligible for this work, assuming only 1 in 10 decides to take the government up on the offer and assuming that zero people out of the labor force get pulled back in the Federal Government will be providing jobs for 800,000 people at any one time.  Of course the "safety net" is most important during times of trouble, during the last recession the UE rate peaked near 10%, to provide jobs during a period like that would result in the government running an industry of 1.6 million people.  Wal-Mart is the largest employer in the US and has fewer than 1.5 million employees here.

Of course the honor system doesn't work so you need to have people oversee these activities, and managers to organize and watch the overseers (and again and again), along with payroll, legal departments (for when someone claims repetitive stress disorders from doing to prescribed activities), HR departments so people can complain that their website is down/they didn't get paid/their disabilities aren't catered to, coders on the front and back end of websites and all manner of other positions.

It is basically inevitable that this program, if it was at all successful, would become the single largest employer of people in the US, its "employees" will almost certainly agitate to form a union at some point (with some bizarre potential complications) and all of this is going to have to be designed in a way to double in size within a few months during a recession.

The most obvious blind spot in politics these days is that the sheer size of proposed solutions are generally brushed aside. I mean if Wal-Mart can build a labor force of 1.5 million over decades, then surely the government can build something even bigger with a few pen strokes, a few good intentions and a 5 page proposal outlining the finer points.

Wednesday, September 21, 2016

Self driving cars and PSST

Arnold Kling thinks that self driving cars will push people away from car ownership almost entirely, and underesitmates the complexity of car ownership.

If Uber and Lyft are reliable and affordable, then you do not need to own a car. 

He does, to his credit, say "if", but the reliable and affordable are never going to be affordable enough.  Kling's view of the economy is summed up by his description of Patterns of Sustainable Specialization and Trade (PSST), whereby complex relationships are constantly trying to find an equilibrium, he would be good to think of the complex relationships Americans (in particular) have with their cars, and how that could be replicated in the real world.

First off lots of people customize their cars, and I am not talking about rims and paint jobs.  One of our cars has two kids seats in it, with straps adjusted to their sizes, a collapsable stroller in the trunk along with a fair amount of dirt, bits of snacks wedged into the seats, and various toys and children's books scattered about.  For a ride sharing company to meet my individual demand for a car they are going to need at the ready a car with two kids seats of the right size near my house, not have a passenger shortly after me allergic to peanuts, and not care or charge for cleaning out dog hair, mulch or topsoil.  I may be unusual in the specific things that I do with my car, but I am hardly unusual in that I do specific things with my car.

The second problem is one of use patterns.  The issue with rentals of any kind is that there is always a peak load that needs to be filled.  Hotels are expensive not because it costs $36,500 ($100 a night) a year to build, rent, maintain and profit off a single hotel room but because most nights hotel rooms sit empty, and then a handful of times a year they are packed to the brim.  It is a fact of life that the times that you want to use X are usually the times lots of other people want to use X.  For the majority of people to use Uber or Lyft instead of their own cars their fleets will have to be large enough to accommodate the peak load on roads, you know, rush hour.  Not only will they have to be big enough to handle the average load, but they will also need to be big enough to handle the worst traffic days when an accident, breakdown or construction doubles commute times, and all the 9 am traffic who, theoretically, would be riding around in cars that the 8 am traffic used is suddenly stranded and running an hour late.

Lastly fully automated autos are going to reduce a lot of the non financial costs of driving.  The boredom of sitting in traffic will be replaced by entertainment, the discomfort many feel sitting in car seats can be replaced with better designs now that the steering wheel is out of the way, and the safety risks of driving should be mitigated.  An economist should expected that self driving cars will reduce the costs of driving, and so should increase the incidence of driving.  This should mean people get more use and value out of owning their individual car(s), which will push back heavily against corporate ownership.

Friday, August 19, 2016

It can't all be money

I'm only two years behind on this debate about fractional reserve banking.  Since I am writing for no one I can summarize it very quickly.  John Tamny says that the money multiplier doesn't exist and Warren Gibson says that it does.  As usual the answer comes down to definitions.  Warren Gibson says that credits in your checking account (or anything part of M1) is money-

Most definitely, because it fits the definition perfectly: a generally accepted medium of exchange

I will focus on the last 3 worlds of this line, but first a silly example.  Suppose the Federal reserve prints up trillions of dollars worth of crisp, clean bills.  It packs them on trucks, ships them down to Cape Canarveral, loads them onto a shuttle and blasts them into space where it escapes the Earth's orbit and sails away into the cold, black emptiness of space.  Is this money?  It all looks, feels and matches the legal definition of money back on Earth, but how would it effect the prices of goods and services?  The obvious answer is that it wouldn't, and so the economic answer is that it isn't money.  What if the Fed printed that money, but then locked it in an underground vault and held it there never intending to use it?  Same answer, so when we talk about money part of the definition has to be about the accessibility of that money.  On to fractional reserve banking.

Adam takes $100 and deposits it in his bank, his bank says "come back anytime and get it", then lends $90 out to Bill who deposits that $90 into a different bank.  This bank also says "come back anytime and get it", and then promptly loans out $81 to Charles, and so on and so on.  If you take the sum total of everyone's bank account once the process has completed there would be $1,000 totaled across them.  This is where Warren Gibson gets the idea that the "money supply" must be $1,000, Tammy is a finance guy though, so he looks at the broader picture.  Every dollar created after the initial deposit is an asset and a liability.  When Adam's bank makes the $90 loan they create a $90 asset, but the also saddle themselves with a $90 deficit that they owe to Adam.  Back to accessibility.

Can $1,000 be withdrawn from the banking system and be spent?  No.  If Adam withdraws his $100, then his bank has to run to Bill and demand their $90 back (assuming all deposits and loans are callable at any time), Bill runs to his bank to withdraw the $90, who has to run to Charles to get the $81.  No matter how you slice it only $100 can be withdrawn from the system and then spent on goods and services, and there is no way to get the effect of $1,000 on goods and services.

This is exactly the effect that full reserve Austrians cite when they state that Fractional Reserve Banking is fraudulent, there is no way for all people in the line to effectively use their individual deposits.  If some guy in the middle of the chain withdraws his $50 to spend then that immediately prevents Adam from ever accessing his full $100, while also calling in every loan made beyond that $50 deposit.

As far as empirical (anecdotal!) evidence, I think it is on the side of Tamny.  Japan has a massive public debt, which has been building for a few decades now, the level of reserves held by the Japanese Central bank have exploded, and yet the only inflation seen in the immediate past was a short term blip when the sales tax increase went into effect.  If M1 is money, if government bonds paying near zero are also money (which flows from the same definition as Gibson tries to use) and if inflation is due to increases in the money supply, then you can't escape the prediction that Japan should be crumbling amid hyper inflation.