Relevant and even prescient commentary on news, politics and the economy.

Are Markets Better Described as Robust than Efficient?

by J Tzimeskes  

Are Markets Better Described as Robust than Efficient?

Something that I think all of us with private sector jobs experience in our day to day lives is just how incompetent a large number of private businesses are. These may be our customers, suppliers, or another division. Yet, somehow, these businesses thrive despite not really having a good grasp of basic administrative procedures, financing, or sometimes even customer service.

Despite this, we often write and speak of private sector actors as if they are brilliant and efficient individually, despite the experiences of our everyday lives.* We simply assume as a result of mere market success that a business or individual has ability and competence. This isn’t surprising, the just world hypothesis is a powerful cognitive bias which leads us to believe that the system as a whole must be more just than what our individual experiences would lead us to conclude. However, there is no property of the market system which should lead to this belief.

What’s more notable is how little this impacts how we think about the market system as a whole. After all, given an immortal, perfectly rational, and omniscient central planner even the worst designed communist system would work beautifully. What’s remarkable about the market system is that it should lead to ever increasing levels of productivity and efficiency even if the individual actors are all completely incompetent. Competition and creative destruction should lead businesses to be ever better even if they only differ due to random variation alone.

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Bifurcated Monetary expansion and low inflation…

Low inflation continues to be a concern in Europe and the US, especially in Europe. Central bankers project that inflation will rise as the economy gets closer and closer to full employment. Yet, what is behind low inflation?

I refer to the work of Michael Pettis who is a professor of finance at Guanghua School of Management at Peking University in Beijing. He puts low inflation in China within the context of financial repression.

“…why is it that what seemed by most measures to be an extraordinary surge in money creation did not also result in significant wage and consumer price inflation?

The answer, I will argue, has to do with the nature of money growth in financially repressed economies. Because the Chinese financial system is so severely repressed, money growth in China cannot be compared to money growth in a market-based financial system. Monetary growth is effectively bifurcated and affects producers and consumers in very different ways.

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Reader comments on monetary policy and inequality

I posted a question to our readers…

How should monetary policy change if reducing inequality was seen as the most important priority?

An assessment of the comments…

The real issue of monetary policy’s effect on inequality its purpose to generate a “wealth effect” which will increase spending. A few things were said about the wealth effect.

Dannyb2b: “The central bank needs to be reformed. No reforms, no solution IMO. The fed just needs to be tweaked so that it interacts with different counterparties… Buying assets through OMO’s or QE is very uneven or imbalanced because it works through increasing wealth of existing asset holders and assets are concentrated. Asset holders have a lower MPC than broader public so the effect is limited… The solution I see is to create a wealth effect that affects all people by transferring new assets (money) to all when targeting inflation or growth or whatever. Average people have a higher MPC meaning less money needs to be expanded to realize changes in gdp or inflation.”

He is explaining the problem with monetary policy creating inequality. It is true that the wealth effect has helped the economy recover through increased consumption. However, consumption by capital income is at a very level while consumption by labor is very low. So consumption by the rich, which is created by the wealth effect, is being praised as a success of monetary policy. Yet, the resultant inequality is becoming a side effect greater than the original disease. (source for increasing capital consumption)

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China’s Place in the Global Economy

by Joseph Joyce (is a Professor of Economics at Wellesley College and the Faculty Director of the Madeleine Korbel Albright Institute for Global Affairs and maintains his blog at Capital Ebbs and Flows)

China’s Place in the Global Economy

Last week’s announcement that China’s GDP grew at an annualized rate of 7.4% in the first quarter of this year has stirred speculation about that country’s economy. Some are skeptical of the data, and point to other indicators that suggest slower growth.  Although a deceleration in growth is consistent with the plans of Chinese officials, policymakers may respond with some form of stimulus. Their decisions will affect not just the Chinese economy, but all those economies that deal with it.

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A bit More on the Phillips Curve

I have been playing with the Livingston survey economic forecasts and, in particular, with the median forecast of CPI inflation over the following 6 and 12 months. The survey was conducted each June and December since June 1946. For some reason, the data are available in two files one with forecasts made December 2003 and earlier and the other with forecasts made June 2004 through December 2013. To avoid the risk of data snooping (and from laziness) I downloaded and analysed only the pre-2004 data. Yesterday, I downloaded the 2004-2013 forecasts (of the CPI December 2004 through December 2014).

Here I look at Livingston Survey median inflation forecasts and nominal wage growth, following up on these posts (which describe the other data I used).

Here I add the newly downloaded inflation forecasts and show that since 1990 nominal wage growth has not been associated with Livingston forecast inflation (at least once unemployment is taken into account).


A graph and some regressions after the jump

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Now all the criminals in their coats and their ties
Are free to drink martinis and watch the sun rise
While Rubin sits like Buddha in a ten-foot cell
An innocent man in a living hell
That’s the story of the Hurricane
But it won’t be over till they clear his name
And give him back the time he’s done
Put him in a prison cell but one time he could-a been
The champion of the world. Bob Dylan 1975 Rolling Thunder Tour

Bob Dylan and Hurricane Carter collaborated on this song about Hurricane Carter who was wrongfully convicted for murder with the testimonies of two other thieves by an all white jury. In 1976, he was released briefly, then convicted again, and returned to prison for another 9 years. U.S. District Judge H. Lee Sarokin, who wrote that Carter’s prosecution had been “predicated upon an appeal to racism rather than reason, and concealment rather than disclosure” released Carter permanently from prison November 1985. Former boxer Rubin ‘Hurricane’ Carter dies at age 76

After his final release, Rubin “Hurricane” Carter “became the first executive director of the Association in Defence of the Wrongly Convicted, serving in the post between 1993 and 2004. He became highly respected as an activist for the wrongly convicted, and his work personally impacted many attorneys.”

Hurricane died at 76 years of age.

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For once my forecasts concerning forecasts weren’t false

Hostages to fortune

Recently, I wrote a note on expected inflation in the USA. One of the two sources of data I used was the Livingston survey of expert forecasters. I used the median forecasts of the CPI 6 and 12 months ahead from the start of the survey in 1946 through 2003, when the survey format was changed. Forecasts from June 2004 though December 2013 are stored in a separate file which I did not download. The survey is conducted each June and each december, so there are twenty data points outside of the sample which I analyzed. This note discusses 40 numbers, forecasts CPI inflation over the following 6 and 12 months made in June and in December of 2004 through 2013.

Based on forecasts made through 2003 and on TIPS break evens, I made some predictions.

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Question for our readers…

I am watchng the video of Paul Krugman on Bill Moyers. Mr. Krugman is seeing things about inequality that he hadn’t seen before Piketty’s book. So he is now seeing that inequality is a huge problem now and into the future. Inequality is the one major problem in the economy.


How should monetary policy change if reducing inequality was seen as the most important priority?

And please do not say “Helicopter drops of money”. You must use the tools available to central banks. The one stipulation is that your answer must reduce inequality, irregardless of the side effects. Think like a doctor giving medicine for the main illness knowing that there may be unpleasant side effects, like losing hair in chemotherapy.

Write your answers in the comments below…

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