Back to regular service for my weekly reviews of online articles. This week, I lean a bit more to politics with pieces on the flaws in the US primary system of nominating candidates, modernity and political identity and Euro-area reform. On the econ side, there are pieces on why investment in cloud services is under-reported, the lower bound on EM monetary policy and some geeky pieces on rates/FX risk premium. Oh and some fun pieces that include which law schools are “under-ranked”. Enjoy.
Structural Economics (5)
The Scandinavian Style of Capitalism Provides a more balanced perspective of the Scandi model and deals with some myths – their tax system is not that progressive (it’s more proportional/flat tax), corporate tax rates have been falling, and they have no minimum wages (but do have unions)
The Rapid Acceleration Towards Peak Oil Demand The developed world has already seen a peak in oil demand, and now many major EM countries are introducing measures to limit the consumption of oil.
The Rise of Cloud Computing: Minding Your P’s, Q’s and K’s Looks at the prices of cloud services. They develop new hedonic prices indexes for cloud services offered by Amazon Web Services (AWS) from 2009 to 2016. These indexes fall rapidly over the sample period. They highlight the puzzle of why investment in IT equipment in the NIPAs has been so weak while capital expenditures have exploded for IT equipment associated with cloud infrastructure. They suggest that cloud service providers are undertaking large amounts of own-account investment in IT equipment and that some of this investment may not be captured in GDP.
Matching in Cities In most countries, average wages tend to be higher in larger cities. Using rich administrative German data for 1985-2014, the authors show that wages in large cities are higher not only because large cities attract more high-quality workers, but also because high-quality workers are significantly more likely to be matched to high-quality plants.
Longer-Run Effects of Anti-Poverty Policies on Disadvantaged Neighborhoods The authors estimate the longer-run effects of minimum wages, the Earned Income Tax Credit, and welfare on key economic indicators of economic self-sufficiency in disadvantaged neighbourhoods. The strongest findings are twofold. First, the longer-run effects of the EITC are to increase employment and to reduce poverty and public assistance, as long as we rely on national as well as state variation in EITC policy. Second, tighter welfare time limits also reduce poverty and public assistance in the longer run; while the effect on public assistance result may be mechanically related to loss of benefits, the effect on poverty is more likely behavioural. They find it harder to draw firm conclusions about minimum wages and welfare benefits
Political Systems (4)
Blame Modern Life for Political Strife Thoughtful account for why partisanship has increased. Argues that a combination of increased narcissism, perceived time scarcity and solitude is causing people to relapse into “tribes” which political parties are reflecting. The cause for this shift includes urbanisation, commuting, entertainment technology and affluence.
Try These 5 Techniques to Make Your Next Political Argument Fruitful (1) provide an alternative explanation, (2) ask people to be sceptics, (3) create an in-group with your opponent, (4) ask for details on how something works, (5) show your message is consistent with prior beliefs.
Euro area reform: An anatomy of the debate A good summary of the latest thinking on needed reforms (reform fiscal rules, better risk sharing, targeted role for market discipline and clarify role of institutions)
Is More Democracy Always Better Democracy? Discusses using open primaries to select party candidates. The articles argues that the old system of two big parties competing for popular support by developing and implementing a cohesive platform works better. Unlike individual candidates, who might stay in power for only a few years, such parties have a vested interest in maintaining a good reputation over the course of decades.
Political Trends (3)
The CIA’s communications suffered a catastrophic compromise. It started in Iran.Discusses a major breach in CIA systems between 2011 and 2013 though to emanate from Iran and possibly China.
The future of pro-EU sentiment in the UK Although voters become more Eurosceptical as they age, recent cohorts are also more pro-European than their predecessors, which will offset at least in part the ageing of the electorate going forward. However, the existence of large nationwide swings in sentiment that have little to do with either seasoning or cohort effects suggests that demographic trends are unlikely to be the decisive determinants of future changes in European sentiment.
More than 3 Million in U.S. Are Raising Grandkids Important demographic shift as grandparents are increasingly taking on the role of parent. This despite the fact that grandparents themselves have health and financial problems. The segment of society which is seeing this shift is generally at the poorer end and the average age of first-time grandparents is in the late forties, so grandparents may not be as old as one imagines.
Financial Markets and Corporates (5)
International yield curves and currency puzzles A technical piece that tries to better understand the link between yield curves and exchange rates. It argues that bond risk premium calculations need to include some measure of FX premium.
Sovereign bond pricing in the euro area: When legal clauses matter Finds that in the Euro-area bonds issued under local law generally have lower yields than those issued under foreign law despite carrying a high risk of restructuring. This is because of their greater liquidity in the market. However in times of crisis, the local law bond yields do rise more than foreign law bonds.
The Exorbitant Tax Privilege Despite being by far the world’s largest net debtor, the United States earns sizable net income from the rest of the world. This has been called the “exorbitant privilege” of the US. However, much of this net income appears to come from a tax privilege as US oil companies pay much lower taxes to foreign oil-producing nations since the first Gulf War and non-oil US companies shifting their foreign profits to low tax havens since the late 1990s
Firm R&D Investment and Export Market Exposure The authors use German firm-level data from the high-tech manufacturing sector. . The results show that R&D investment leads to a higher rate of product and process innovation among exporting firms and these innovations have a larger impact on productivity improvement in export market sales.
Private Equity Indices Based on Secondary Market Transactions Measuring the performance of private equity investments (buyout and venture) has historically only been possible over long horizons because the IRR on a fund is only observable following the fund’s final distribution. The authors use a new approach to evaluating performance using actual prices paid for limited partner shares of funds in secondary markets. These transaction-based indices exhibit significantly higher betas and volatilities, and lower alphas than NAV-based indices more commonly used.
The Expansionary Lower Bound: Contractionary Monetary Easing and the TrilemmaIMF paper argues for the existence of an “Expansionary Lower Bound” (ELB) which is an interest rate threshold below which monetary easing becomes contractionary as capital outflows pick up. Brings into question whether free movement of capital, independent monetary policy, flexible exchange rates are the resolution to the trilemma.
Going the Extra Mile: Distant Lending and Credit Cycles . Consistent with this idea, the authors find a significant cyclical component in the evolution of lending distances. Distances widen considerably when credit conditions are lax and shorten considerably when credit conditions become tighter.
Balancing Financial Stability and Housing Affordability: The Case of Canada IMF paper finds that taxes targeted at a broader-set of homebuyers can be more effective than measures targeted at a smaller subset of homebuyers, such as nonresident homebuyers.
Macroeconomic Effects of China’s Financial Policies . The authors argue that the impacts of China’s financial policies work through transmission channels different from those in developed economies and that a regime switch from one economy to another was driven mainly by regime changes in financial policies.
How China’s ambitious plan to tax global income faces opposition in US, Hong Kong and even Beijing Individuals spending over half of each year in mainland could have worldwide income taxed under new law – but various groups are fighting back.
Climate Change (2)
An Economist’s Guide to Climate Change Science A brief introduction to the physical science of climate change, written to provide essential background for economists and other social scientists. They also highlight some key areas in which economists–including those studying macroeconomics, political economy, and development—can contribute to the debate
Changing temperatures are helping corn production in US—for now The past 70 years have been good for corn production in the midwestern United States, with yields increasing fivefold since the 1940s. Much of this improvement has been credited to advances in farming technology but researchers at Harvard University are asking if changes in climate and local temperature may be playing a bigger role than previously thought. They found that a prolonged growing season due to increased temperatures, combined with the natural cooling effects of large fields of plants, have had a major contribution to improved corn production in the U.S.
Nowcasting New Zealand GDP Using Machine Learning Algorithms The authors train a range of popular machine learning algorithms and nowcast real GDP growth for each quarter over the 2009Q1-2018Q1 period. They find that the machine learning algorithms outperform the traditional statistical models. Would be good to replicate for other countries
Germany’s Unemployment Rate is 3.4 Percent, Not 5.0 Percent Useful reminder on which data sources to use to compare data across countries. Germany’s official unemployment rate of 5% includes part-time workers (who are classified as unemployed). The OECD harmonised measure does not and results in a lower rate of 3.4%
And finally (3)
18 topics badly explained by many Finance Professors Fun piece. Topics include “Where does the WACC equation come from?”, “The term equity premium is used to designate four different concepts” and “Volatility is a bad measure of risk.”
Who Fields the Best Team? A (Better) Measure of the Top Ten U.S. Law Schools by Faculty Impact Takes a “Moneyball” approach to law school rankings and finds that Georgetown, UCLA, George Washington, and Irvine are “under-ranked” and Chicago is “over-ranked”