Finance and Econ From the Web: End Of American Century, Accounting For Digital Economy and Deciphering Fed Dots

Some good articles on politics from Brexit guides to US religiosity to Left populism. On the macro side, I have articles on secular stagnation, nominal GDP targeting and of course Modern Monetary Theory. I have a slew of articles on investing and trading models including on momentum models, FX models and estimates of risk premia. Finally, a shocking stat on the current effective US corporate tax rate (scroll down!).

US Politics

America Is Becoming Steadily Less Religious But  it’s tough to tell exactly why people are answering the question that way…as a 2017 Pew Research survey found that only 22 percent of “nones” listed not believing in God as the most important reason for their lack of religious affiliation. [I wonder whether this is more a tribal identifier than a theological one]

Is this the end of the American century? London Review of Book’s Adam Tooze writes: “ Imagine instead the president and his buggy careening around the five-acre flight deck of a $13 billion, Ford-class, nuclear-powered aircraft carrier engaged in ‘dynamic force deployment’ to the South China Sea. That better captures the surreal revival of great-power politics that hangs over the present. “

Some US Social Indicators Since 1960 includes: “The share of the population receiving Social Security disabled worker benefits was 0.9% in 1960 and 5.5% in 2018.”, “The share of 25-34 year-olds who are high school graduates was 58.1% in 1960, 84.2% in 1980, and 90.9% in 2018.” And “The murder rate was 5.1 per 100,000 people in 1960, rose to 10.2 per 100,000 by 1980, but had fallen backto 4.9 per 100,000 in 2015, before nudging up to 5.3 per 100,000 in 2017..”

Supreme court seems split over curbing federal agencies’ power The issue for the justices involves how courts respond when an agency writes a regulation that is ambiguous. Previous Supreme Court cases from 1945 and 1997 say judges should defer to an agency’s interpretation of an ambiguous regulation if the interpretation is reasonable. But those decisions have since been criticized, particularly by conservatives, as improperly giving agencies and their unelected officials vast lawmaking power. [This is potentially a huge case for how regulations are enforced]

Global Politics

Is Left Populism the Solution? “Left-populists have prioritized a defense of popular over national sovereignty, seeking to restore parts of the heritage lost in the neoliberal 1990s…Yet once “the populist moment” has passed, left-populists tend to face internal party divisions and unbreakable electoral ceilings. “ [Great article on the evolution of leftist movements since the 1970s in Europe]

Francis Fukuyama against mainstream economics Summary of Fukuyama’s views on key economics ideas [Useful for economists]

Maoism: A Global History “Mao therefore was bounced into the Korean War — not as part of a long-term conspiracy, but through Stalin’s self-interested impulses and instinct for playing on Mao’s status-conscious desire to claim leadership of the Asian revolution. “

The Misinformation Age In new book, authors argue: “We need to legally punish people for spreading unlabeled “fake news” and should abandon democratic control of “issues that require expert knowledge.” “

The Brexit Effect: How government has changed since the EU referendum Cabinet collective responsibility has broken down. The two-party system is under threat. Brexit has put the civil service under unprecedented pressure. The devolution settlement has come under challenge. Clashes between Parliament and the Executive are now commonplace. [excellent overview of how the UK political system has been up-ended since the referendum]

UK’s Brexit options — an illustrated guide Useful Dummies guide!

Topical Economic Ideas

Secular stagnation and the future of economic stabilisation Summarises various thinkers views on this from the FT’s Martin Wolf to the political economist Martin Sandbu

GDP-B: Accounting for the Value of New and Free Goods in the Digital Economy The authors derive estimate the welfare contributions of the digital goods and introduce a new metric, GDP-B which quantifies their benefits, rather than costs. They find for example, including the welfare gains from Facebook would have added between 0.05 and 0.11 percentage points to GDP-B growth per year in the US. Overall, Whatsapp has added most value. 

Do Pollution Markets Harm Low Income and Minority Communities? Ranking Emissions Distributions Generated by California’s RECLAIM Program Results suggest trading benefited all demographic groups and generated a more equitable overall distribution of emissions even after controlling for its lower aggregate emissions. Upper-income and white demographics had more desirable distributions relative to low-income and some minority groups under the RECLAIM trading program

Climate Change and the Federal Reserve “In this century, three key forces are transforming the economy: a demographic shift toward an older population, rapid advances in technology, and climate change….some have advocated that central banks use their balance sheet to support the transition to a low-carbon economy, for example, by buying low-carbon corporate bonds (Such “green” quantitative easing is an option for some central banks but not for the Fed, which by law can only purchase government or government agency debt.”

Monetary Economics

Arthur Burns and How Things Fell Apart in the 1970s Useful history lesson on the  much maligned Fed Chair Arthur Burns. 

The NGDP targeting boom “the uptick in the number of popular article mentions began about 2010, and a surge in scholarly articles began two years later.  “

What if Zero Interest Rates Are the New Normal? “In Japan, permanent monetary finance is already occurring, even though the central bank denies it. The challenge is to ensure that it is used only within disciplines such as Bernanke proposed, rather than assuming that pre-crisis normality will return any time soon.”

Risk Management in Financial Institutions Authors find strong evidence that better capitalized institutions hedge more, controlling for risk exposures, both across institutions and within institutions over time. 

The Fed’s Operating Procedure. Very good explanation on how the Fed’s monetary policy actually gets implemented.  

Dot-ology: What can we learn from the dot plot? “For each percentage point projected inflation is above or below the target of 2 percent, the FOMC will move its policy rate a bit more than two percentage points. Policymakers appear to be far less sensitive to the unemployment gap, moving interest rates by only about half a percentage point for each percentage point that projected unemployment moves relative to their estimate of the equilibrium rate” [Good piece arguing Fed dots contain more information than many give them credit for]

Growth and Jobs

Cities, Lights, and Skills in Developing Economies In developed economies, agglomeration (clustering of people) is skill-biased: larger cities are skill-abundant and exhibit higher skilled wage premia. The authors find similar results in Brazil, China, and India. Cleverly, they construct metropolitan areas on the basis of contiguous areas of light in night-time satellite images (rather than official administrative units). 

Local Labor Markets in Canada and the United States Local labor markets in the U.S. and Canada from 1990 to 2011 saw wage levels and inequality rise with city population in both countries, albeit less in Canada. Neither country saw wage levels converge despite contrasting migration patterns from/to high-wage areas. Chinese import competition had a weaker negative impact on manufacturing employment in Canada.

Labor Market Shocks and the Demand for Trade Protection: Evidence from Online Surveys The authors study public preferences for government action in response to layoffs resulting from different types of labor-market shocks: technological change, a demand shift, bad management, and three kinds of international outsourcing. Given a choice of no government action, compensatory transfers, and trade protection, most support trade protection. 

China’s Belt and Road: A Reality Check The Belt and Road makes China a player, but not the biggest nor the most dominant, in the game of international finance.

Markets and Investing

Two Centuries of Momentum Excellent overview of the theory and history of momentum trading strategies. It concludes: “While new studies on momentum are consistently published, the current evidence is clear: momentum is the premier market anomaly.”

Was the Stock-Market Boom Predictable? Robert Shiller writes: “ it is hard to forecast such trends – even the biggest – in the stock market, not only because forecasting is a highly competitive business, but also because spontaneity plays such an important role in human behavior.”

A brief history of forecasting competitions Reviews various forecasting competitions. Many find that simple methods outperform more complicated methods.  

The Time Variation in Risk Appetite and Uncertainty They find that VIX is very informative about risk aversion, whereas credit spreads and corporate bond volatility are highly correlated with economic uncertainty. Their risk premium model outperform standard instruments for predicting excess returns on equity and corporate bonds. A financial proxy to our economic uncertainty predicts output growth significantly negatively.

Monetary Policy and Exchange Rate Returns: Time-Varying Risk Regimes Authors find major non-US central banks tightenings results in dollar strength  vs other currencies. They find that the relation between DM carry and future returns switches switches sign from the pre- to the post-crisis sub-period, while for emerging markets the carry variable is never a significant predictor of returns. Instead, the high profit from the carry trade for emerging market currencies reflects persistent country characteristics

Market Risk Premium and Risk-Free Rate used for 69 countries in 2019: a Survey The paper contains the statistics of a survey about the Risk-Free Rate (RF) and the Market Risk Premium (MRP) used in 2019 for 69 countries.  Required MRP estimates for the US is 5.6%, Japan was 6.1%, China is 7.5%, Germany is 5.7%, UK is 6.2% and Venezuela is 23.7%!

Better Rebalancing Strategy for Static Asset Allocation Strategies “A mechanical rebalancing strategy, such as a monthly or quarterly reallocation towards fixed portfolio weights, is an active strategy. Winning asset classes are sold and losers are bought.  During crises, when markets are often trending, this can lead to substantially larger drawdowns than a buy-and-hold strategy” The authors use trend-following signals to overcome these problems.

Why Are IPOs Oversubscribed?  “It doesn’t seem to make much sense that IPOs are so often oversubscribed when the research shows they tend to underperform the market over the long haul….But this also has to do with the fact that the majority of the returns for IPOs tend to come on the first day of trading…[so there are] plenty of investors who are simply hoping to get a piece of a first-day bounce and flip it for a quick profit.”

Inequality and Taxes

The Trilemma of Welfare, Middle Class Taxes, and Predistribution “you can’t tax the rich to fund the welfare state if the rich are no longer rich.”

Taken for a Ride: How Ambulance Debt Afflicts the Extreme Poor “Bystanders called 911. Police and ambulances arrived… paramedics asked me if they could take my vital signs. However, no one ever warned me about the financial duress that I would face …That burden translated into nearly $4,000 for three ambulance rides between April 2016 and March 2017. “

Tax: in Denmark it is a term of affection In Denmark, you might walk in the door and call out for your “skat” or your “treasure” as a greeting to your family….What is more unusual about the word “skat” is that it can also mean “tax” (in Danish and similarly in Swedish). 

Effective Tax Rates The US The effective [corporate] tax rate has fallen  from around 20% to just over 10%!

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