Monthly Archives: October 2015

It Pays to Have Academic Economists on the Board

In a Bank of Finland discussion paper, Bill Francis, Iftekhar Hasan and Qiang Wu argue that there is evidence for academic economists to be useful after all. Academics on the board of directors “are valuable advisors and effective monitors.” The authors write in the abstract:

Directors from academia served on the boards of around 40% of S&P 1,500 firms over the 1998-2011 period. … We find that companies with directors from academia are associated with higher performance and this relation is driven by professors without administrative jobs. We also find that academic directors play an important governance role through their advising and monitoring functions. Specifically, our results show that the presence of academic directors is associated with higher acquisition performance, higher number of patents and citations, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO forced turnover-performance sensitivity. Overall, our results provide supportive evidence that academic directors are valuable advisors and effective monitors and that, in general, firms benefit from having academic directors.

Birth Order Matters—Marginally

That’s the finding of a large study by Julia Rohrer, Boris Egloff and Stefan Schmukle.

Abstract:

… Empirical research on the relation between birth order and intelligence has convincingly documented that performances on psychometric intelligence tests decline slightly from firstborns to later-borns. By contrast, the search for birth-order effects on personality has not yet resulted in conclusive findings. We used data from three large national panels … In our analyses, we confirmed the expected birth-order effect on intelligence. We also observed a significant decline of a 10th of a SD in self-reported intellect with increasing birth-order position, and this effect persisted after controlling for objectively measured intelligence. Most important, however, we consistently found no birth-order effects on extraversion, emotional stability, agreeableness, conscientiousness, or imagination. On the basis of the high statistical power and the consistent results across samples and analytical designs, we must conclude that birth order does not have a lasting effect on broad personality traits outside of the intellectual domain.

ScienceDaily report.

Chicago Economics

Chicagonomics, a new book by Lanny Ebenstein, describes the evolution of the Chicago school. The book is reviewed by Tyler Cowen in a blog post and by the Economist. From the latter review:

Before the 1940s, Chicago’s professors were much closer to the liberalism of British political economists such as Adam Smith, Jeremy Bentham and John Stuart Mill than the libertarianism of Hayek and Friedman in the 1980s and early 1990s. Mr Ebenstein looks at the ideas of scholars such as Jacob Viner and Frank Knight, and concludes that while they favoured individual freedom, their policy prescriptions did not exclude government action. Both perceived Smith as justifying the state intervening in the economy at times, such as with the provision of infrastructure, education for the young and the funding of arts, culture and science.

By the 1940s, the use of redistribution to ensure that everyone had a basic standard of living was accepted by most Chicago economists. For instance, Henry Simons, when he worked at Chicago between 1939 and 1946, set out how redistribution, by diffusing economic power in a society, was necessary in a free society. Even Hayek, in his libertarian polemic of 1944, “The Road to Serfdom”, supported the use of environmental regulation and state-run social-insurance systems.

After they retired Hayek and Friedman became deeply libertarian. Mr Ebenstein says “the virtual neoanarchism that both preached” later on placed them “outside the classical liberal tradition”. Hayek argued that citizens should have the right to have their taxes refunded if they did not consume government services and Friedman railed “against government at almost any time”. Both enjoyed being in the limelight, even though their views did not fit with their earlier scholarly work. Mr Ebenstein bemoans the current popular perception of the Chicago school, as well as conservatives’ embrace of it, as based on these more extreme later utterances.

 

Cochrane for Growth

In a blog post, John Cochrane proposes step-by-step (politically unattractive) measures to increase growth:

  • Smarter (growth-oriented) regulation, in particular
  • Higher equity requirements and less short-term funding rather than complex financial regulation
  • Deregulation of health care supply
  • More cost-benefit analysis in environmental policy
  • Broad-based consumption rather than investment taxes
  • Clear separation of allocative and distributive fiscal policy
  • Focus on distortions in social programs
  • Deregulation of labor markets
  • Rational immigration rules distinguishing between permits to entry, reside, or work and citizenship
  • Less government intervention in the student loans market
  • Less protection, more free trade
  • More spending for the legal and criminal justice system
  • Etc.

Low Interest Rates

In the 17th Geneva Report on the World Economy (Low for Long? Causes and Consequences of Persistently Low Interest Rates), Charles Bean, Christian Broda, Takatoshi Ito and Randall Kroszner take up the theme of a recent report by the White House Council of Economic Advisors (see previous blog post). In the abstract, some of the authors’ conclusions are summarized as follows:

… aggregate savings propensities should fall back as the bulge of high-saving middle-aged households moves through into retirement and starts to dissave; this process has already begun. And though Chinese financial integration still has some way to run, the net flow of Chinese savings into global financial markets has already started to ebb as the pattern of Chinese growth rotates towards domestic demand rather than net exports. Finally, the shifts in portfolio preferences may partially unwind as investor confidence slowly returns. But … the time scale over which such a rebound in real interest rates will be manifest is highly uncertain and will be influenced by longer-term fiscal and structural policy choices.

One chapter in the report discusses the Japanese experience.

Regulation, Elimination of Cash, and Organized Crime

In a blog post, Gilles Saint-Paul describes how organized crime exploits the arbitrage opportunities that (bad) regulation creates.

He predicts that eliminating cash transactions by decree, along the lines of policy proposals currently en vogue, will lead organized crime to establish alternative, sound mediums of exchange that the general public might adopt.

“Fiskalunion auf tönernen Füssen (Fiscal Union on Shaky Grounds),” FuW, 2015

Finanz und Wirtschaft, October 7, 2015. PDF. Ökonomenstimme, October 9, 2015. HTML.

Fiscal union proposals are not convincing:

  • Enforcement should be key but remains weak.
  • Monitoring and counteracting of “imbalances” is dubious.
  • Subsidiarity is important.

PS: In the FT (October 18), Wolfgang Münchau reaches a similar conclusion albeit from a different starting point: “Better no fiscal union than a flawed one.”

Banks Face Wipeout in some Financial Services

In the FT, Martin Arnold summarizes a McKinsey study on banking. Arnold entitles his article “McKinsey warns banks face wipeout in some financial services.”

According to the report, competition arises from technology companies that deliver specific financial services at much lower cost.

McKinsey said technological competition would reduce profits from non-mortgage retail lending, such as credit cards and car loans, by 60 per cent and revenues by 40 per cent over the next decade. … It predicted a smaller, but still significant, chunk of profits and revenues would be lost from payments processing, small and medium-sized enterprise lending, wealth management and mortgages. These would decline between 35 and 10 per cent, McKinsey said.

See my previous posts on structural change in banking and fintech competition for banks.