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.

Sterilized Exchange Rate Intervention

In a Baker Institute working paper, Jeffrey Frankel reviews the Plaza Accord 30 years ago. Regarding the effectiveness of sterilized intervention, he argues that

… purchases and sales on the scale that governments are generally prepared to make will not have much effect if the market is already firmly convinced of the proper value of the currency. … The successful effect of intervention comes when the market holds weak views as to the true worth of the currency, particularly in the case of a speculative bubble, and is willing to be led by the authorities. A good example of this was the dollar in 1985.

The effort generally has an effect within the first few days or weeks if it is going to have an effect at all.

… operations are more likely to be effective if they are “concerted,” i.e., coordinated among a number of major central banks as they were in 1985 and subsequent years. It is particularly important that the U.S. be one of the countries participating.

… the major effect comes via expectations.

… authorities are not necessarily able to affect the exchange rate for a long period, absent a corresponding change in fundamentals.

In recent years, interventions in foreign exchange markets have mostly been confined to emerging markets.

European Monetary Union: A Status Report

In the NZZ (August 7, 2015), René Höltschi provides an excellent overview over the status of European Monetary Union (EMU).

Issues:

  • EMU combines centralized monetary policy authority with decentralized fiscal powers. This creates the risk that national governments try to free ride.
  • Heterogeneity across Euro Zone member states renders centralized monetary policy difficult. Without national monetary policy instruments, prices and wages need to adjust more in the face of asynchronous business cycles.

Previous solutions:

  • The stability and growth pact was meant to address the first issue. It failed, for political reasons. Markets didn’t impose sufficient discipline either; they anticipated bailouts.
  • Hopes for reduced heterogeneity—as a consequence of EMU—have been shattered.

Reforms so far:

  • During the crisis, member states established rescue funds and agreed on various crisis measures.
  • They pursued a two-pronged strategy. On the one hand, they tried to build on the decentralized approach of the Maastricht treaty. On the other, they aimed at closer integration in the form of banking, fiscal and eventually, political union.
  • Major responsibilities in the area of banking supervision and resolution have been transferred to the European Central Bank. Bail-in procedures have been agreed upon.
  • No major changes occurred in the fiscal policy domain. The “Six-pack” and “Two-pack” measures to strengthen fiscal discipline, coordination and supervision have proved ineffective (e.g., no action against France).

Proposals and discussion:

  • The recent “Five-presidents’ report” distinguishes between short-term (until 2017) and longer-term (until 2025) measures (see below). The report proposes to strengthen the existing framework before moving towards closer integration (Euro treasury, macroeconomic stabilization, fiscal and political union). France and Italy have voiced support.
  • Fiscal union entails a common budget and potentially, a common unemployment insurance. Unity of liability and control would require that fiscal competences are centralized as well. In turn, this would require changes of the European treaties.
  • A further strengthening of banking union, e.g. delegation of banking supervision to a newly created European authority (rather than the European Central Bank), also would require treaty changes.
  • But throughout Europe, there is no desire to delegate powers to “Brussels.”
  • Instead, skeptics like the Bundesbank or the German Council of Economic Experts advocate a bankruptcy procedure for Euro-zone governments: to strengthen discipline and encourage monitoring by financial markets any assistance by the European Stability Mechanism should be preceded by private creditor bail-ins (extensions of maturity, haircuts).
  • Some observers also advocate exit from the Euro zone as an ultima ratio measure. But others argue that this very possibility would undermine the stability of the Euro area.

Five-president’s report:

  • Commissioned in October 2014 by the heads of state and government, the report has been published in June 2015 by presidents Jean-Claude Juncker (European commission), Donald Tusk (European council), Jeroen Dijsselbloem (Euro group), Mario Draghi (European Central Bank) and Martin Schulz (European parliament).
  • In the short term, the report proposes: to improve elements of the previous “six-pack” and “two-pack” reforms, including streamlined coordination and supervision of national fiscal policies;
  • a common backstop for national deposit insurance systems;
  • a European fiscal council serving as watchdog; and
  • independent national agencies to monitor competitiveness.
  • For the longer term, the report proposes: completion of monetary union and fiscal union;
  • macroeconomic stabilization, stopping short of permanent transfers or income equalization schemes; and
  • a Euro zone treasury.
  • Accountability as well as the role of national parliaments and the European parliament in coordinating fiscal policy is to be strengthened. The Euro zone is to be better represented vis-a-vis third parties. Intergovernmental arrangements (for example the European Stability Mechanism) that were created during the crisis are to become integral parts of the EU treaties.

Previous Cohorts’ Household Debt Was Much Lower

In a blog post, May Rostom documents that “secured debt is rising super-fast for the young.”

Over the life cycle, each generation accumulates household debt until reaching age forty or fifty, and repays afterwards. But the level of indebtedness (in real terms) has increased from cohort to cohort, and peak indebtedness has shifted to older age. The amplitude of the income paths has not changed to the same extent—“income growth has been unable to keep up with the pace of house price inflation.” Moreover, while “the younger groups have taken the lion’s share of the increase in debt from 1995-2012, … the biggest winners [when it comes to wealth accumulation] have been the older generations.”

Crime and Punishment

In a blog post, Alex Tabarrok argues that Gary Becker was wrong to argue that an optimal punishment system combines a low detection and punishment risk with a very severe punishment conditional on detection. Tabarrok argues:

We have now tried that experiment and it didn’t work. Beginning in the 1980s we dramatically increased the punishment for crime in the United States but we did so more by increasing sentence length than by increasing the probability of being punished. …

Why did the experiment fail? Longer sentences didn’t reduce crime as much as expected because criminals aren’t good at thinking about the future; criminal types have problems forecasting and they have difficulty regulating their emotions and controlling their impulses. … As if that weren’t bad enough, by exposing more people to criminal peers and by making it increasingly difficult for felons to reintegrate into civil society, longer sentences increased recidivism.

Instead of thinking about criminals as rational actors, we should think about criminals as children. … So what is the recommended parenting approach? … one thing all recommendations have in common is that the consequences for inappropriate behavior should be be quick, clear, and consistent.

Credit Default Swaps

In a set of slides from Deutsche Bank Research (from 2011), Kevin Körner discusses credit default swaps and the sovereign default probabilities implied by these swaps.

The CDS spread amounts to the insurance premium a protection buyer pays to the protection seller; it is quoted in basis points per year of the underlying security’s notional amount; and it is paid quarterly. In the event of a default on the underlying security, the protection seller effectively must pay one minus the recovery rate on the security (the protection seller pays the notional amount and receives the security).

Example: A CDS spread of 339 bp for five-year Italian debt means that default insurance for a notional amount of EUR 1 m costs EUR 33,900 per annum; this premium is paid quarterly (i.e. EUR 8,475 per quarter).

“In equilibrium,” the present discounted value of premium payments (up to the maturity of the underlying security) corresponds with the present discounted compensation payments by the protection seller (up to maturity).

Current data.

Effects of Fiscal Tightening on Growth

In a Peterson Institute policy brief, Paolo Mauro and Jan Zilinsky argue that

the evidence is mixed: Those who hold a prior that fiscal adjustment is harmful for growth may find their beliefs confirmed, whereas those who believe a prior that the link is weak may find the evidence unconvincing (even aside from valid concerns about causality). To the extent that the case of Greece involves unique features beyond large fiscal adjustment, the data reveal that drawing conclusions from empirical associations that include this specific case requires caution.

Policy Priorities of French National-Front Majors

The Economist identifies three main policies that National-Front politicians implement in municipalities after they get to power:

  • Reaffirmation of Christianity,
  • security clamp-downs, and
  • spending cuts.

Residents in towns run by a NF major “are happy with their mayor, citing cleanliness and security as chief reasons.”

Three Trillion Trees

There are about 3 trillion trees on Earth, or roughly 400 per capita, according to estimates published in Science. Nearly half of the trees stand in tropical or subtropical forests. In a typical year, 15 billion trees are cut down. At the start of human civilization, the number of trees was approximately twice as high as today.

Time

In a science brief, The Economist covers the mystery of time.

In 1887, Albert Michelson and Edward Morley found to their surprise that the speed of light traveling in different directions relative to the movement of the earth’s surface is constant. In 1905, Albert Einstein provided an explanation—his special theory of relativity—for the constancy of the speed of light. Time is “malleable, passing differently in different places, depending on how those places are moving with respect to one another. Indeed, at the speed of light, it stops altogether.” In 1915, Einstein argued in his general theory of relativity that space and time are connected and that they interact with mass.

As a consequence of the second law of thermodynamics (temperature differences tend to vanish, Ludwig Boltzmann, 1877) “any system will become more disordered as time passes. That applies as much to two gases mixing as it does to a teenager’s bedroom.” In 1927, Arthur Eddington drew the conclusion that time is unidirectional: There is a fundamental asymmetry between a system moving towards the future (increasing disorder) or the past (decreasing disorder).

Time travel is possible—in particular if one has easy access to “wormholes”—or so it appears. But the grandfather paradox lurks: Can one travel back in time and kill one’s ancestor in order to render one’s one birth impossible …?