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

Watch the Parking Meters

The big news on the blogosphere today concerns parking meters in Chicago.

Matt Yglesias is thrilled. Kevin Drum less so. Drum writes

A private company has agreed to give City Hall an upfront payment of almost $1.2 billion to run Chicago’s parking meter system for the next 75 years.

75 years seems a wee bit excessive to me, and will almost certainly bite Daley in the ass when Morgan Stanley, which put together the winning consortium, packages up the parking meter revenue, securitizes it, rolls it into an asset-backed CPMO (collateralized parking meter obligation), puts the super-senior tranche into an off-balance-sheet vehicle, hedges the rest via a CDS-backed synthetic CDO, and then resells the whole thing within 12 months to a sovereign wealth fund in Dubai for $5 billion.

From vehicles which aren’t on the curbe to vehicles which aren’t on the balance sheet in the bat of an eye.

My honest reaction is “Huh wha why would Morgan Stanley put a super-senior tranche ino an off balance-sheet vehicle?

I think I’ve been trying to learn about contemporary finance too fast. After the jump, I will use my very new knowledge of what the H a super senior tranche is to explain why I would guess that Morgan Stanley kept them on its balance sheet.

Felix Salmon explained what the super senior tranche is (as did ??? in comments here)

OK so the idea of tranches is that one can make highly (say AAA) rated instruments out of lowly rated instruments by pooling them and then selling claims of different seniority on the pool. A security which pays in full unless, say 15% of the underlying BB rated securities default will be AAA rated even if it pays zero if 16% of the underlying securities default. So will a security which pays in full unless 16% of the underlying securities default. What a waste. That means there are tranches worth more than the lowest value security that barely scrapes an AAA rating.

Those tranches are called “super senior” because they are senior to AAA. Sometimes they were informally called AAAA rated. This is nonsense. The lowest value “super senior” tranche isn’t even the senior tranche. The point is that, since there are a finite number of ratings, instruments with the same rating have different default probabilities. Also, due to the miracles of modern finance, the value of a fixed income estimate is not closely approximated by the default probability. That would be the case if the value of all instruments in default was drawn from the same distribution. As Lehman Brothers bond holders now know, the’re not your fathers defaulted bonds (they are now worth 10 cents on the dollar). In this example a tranche which combined the (pays in full if only 15% default and pays zero if 16% default) tranche and the pays if only 16% default tranche would have a default probability equal to the (pays in full if only 15% default and pays zero if 16% default) tranche, but it would be worth more compared to its face value. The fact that instruments with the same risk of default have different values is another reason that instruments of a range of value have the same ratings.

The innovation lead to the translation from AAA, which means at least as valuable as the least valuable AAA rated security to “AAA” which means the least valuable AAA rated security.

Now it is possible for tranching to be profitable even if the ratings agencies estimate default probabilities perfectly. The reason is that different firms face different regulations. For example, European banks have capital controls which depend on “risk adjusted” capital. To a European banker the ratings matter even if he or she doesn’t believe them. The capital controls have been binding, that is they would leverage more if they were allowed to. Thus they are eager for assets which are barely AAA. They are more risky than average AAA rated instruments and pay higher yields. However, for the Basel II regulations they count as if they were average AAA rated securities.

From 2004 until now (or at least until recently) Morgan Stanley did not face binding capital controls. Therefore they care about actual risk, not Basel rules weighted risk. This means they want the top ends of ratings intervals, including, I would guess the top end of AAA, on their balance sheets where they don’t waste valuable legal rights to increase leverage.

Comments (0) | |

synthetic bonds

By Robert Waldmann

Felix Salmon explains how to make a synthetic bond.

you buy a synthetic IBM five-year bond instead, taking advantage of the much more liquid CDS market. Essentially, you take the $100 million that you were going to spend on IBM bonds, and you put it into a special-purpose entity called, say, Fred. (In reality, it’ll be called something really boring like Synthetic Technology Invetments Cayman III Limited, but Fred is easier to remember.) First, Fred takes the $100 million and invests it in 5-year Treasury bonds.

Next thing, Fred goes out and sells $100 million of credit protection on IBM in the CDS market, using the $100 million of Treasury bonds as collateral. The buyer of protection will pay $1.5 million per year (150 basis points) to Fred, and in return Fred promises to pay $100 million to the buyer in the event IBM defaults, less the value of IBM’s bonds at the time. The buyer knows that Fred is good for the money, because it’s already there, tied up in Treasury bonds.

He ends with teaser which frustrated super senior blogger Kevin Drum

“That’s the story of the super-senior tranche, and will have to wait for another day.”

Given this story about the use of CDSs, I understand why Felix Salmon is convinced that they are not financial WMDs and why he is so angry that AIG was allowed by counterparties to issue CDSs without posting collateral. I also think that the story is very different from CDS reality.

Over at his blog, I asked Felix Salmon three questions

1) Why wouldn’t interest rate swaps serve just as well ?

2) Why set up Fred when Fred’s assets must be worth more than Fred’s liabilities so there is no obvious point limited liability 100% share ownership of Fred.

3) Also if 100% collateral is posted, how can the notional value of CDSs be greater than the US national debt ?

update: The title was supposed to be a joke “Frederal reserves” but Blogger appears to automatically correct misspelled titles.

Felix Salmon explains thing to me in a comment, which I pull back after the jump.

After the jump, I explain why I find these questions challenging

1) If I want to be long IBM bonds and Own Treasury bonds I can make a synthetic IBM bond with interest rate swaps can’t I ? I think the cash flows with my counterparty are exactly the same, if neither of us goes bankrupt. Thus, I think that the immense popularity of CDSs must be based either on bankruptcy law (related to the super senior tranche ?) or on accounting standards and capital requirements, or both.

2) Why set up a a special purpose entity. I mean that has to cost something. They are set up for a reason, either to limit liability or to make balance sheets look better.

3) Clearly not every dollar in CDS was collateralized 100% by US debt. There isn’t enough US debt. I think it must be true that most were only partially collateralized. AIG might be an extreme case, but I think it just must be true that CDSs were used to leverage up and not just to synthesize bonds.

OK now my efforts at answers. Remember I am very ignorant and mostly guessing.

On bankruptcy law, you have to realize that it’s not your father’s bankruptcy code.
Bo Peng explains

Generally speaking, in bankruptcy code, derivatives counterparty claim[s] can go right through Chapter 11 protection and force liquidation. Chicago Fed in fact had a research paper in 2004 (thanks to Seeking Alpha reader emrald) analyzing the original rationale behind and the unintended consequences — cliche of the month? — of this exceptional treatment of derivatives.

oh my.

I think this means that if Fred’s parent (I’ll call it Zeke) goes bankrupt, Fred’s counter-party gets to grab the T-bills and no bankruptcy court can stop it. This would not be automatic from the definition of CDS, but Zeke and Fred’s counter-party would both benefit from writing the contract that way.

Now if equity in Fred is counted as one of Zeke’s assets and Zeke has a binding capital constraint, a fast one has been pulled. These assets are not part of the pool split up among creditors in the case of bankruptcy, because Fred’s losses (value of collateral minus value of the CDS) go 100 cents on the dollar to the counter-party. Also if equity in Fred appears on Zeke’s balance sheet, then Zeke’s creditors may be mislead. If they assume that all equity in special purpose entities is quite likely worthless now, then a whole lot of crisis can be explained.

Clearly not all CDSs were used to make sythetic bonds. For one thing Lehman brothers had liabilities including CDSs on its balance sheet (OK its 10-Q report). For another they were listed at fair market value which was vastly below notional value until recently. Now it seems to me clear that if firms can goose their equity to debt ration they will and clear that CDSs are very useful for that purpose so long as they are not 100% collateralized.

I’d guess that Fred wouldn’t own Treasury securities equal to 100% of notional value, but rather a lower ratio with a trigger that if the market price CDS reached ninety something percent of the value of the collateral, the collateral could be seized immediately. This means Fred could suck money out of Zeke or Zeke would have to lose 100-ninety something suddenly. Now a totally unexpected actual default would not be insured by Fred (which would go bankrupt). That is, this use of the CDS market would be to take opposite bets on the CDS price, not to insure risk. But, I mean we know that was going on.

OK finally my guess as to what “the super senior tranche” is. I think this refers to the money counterparties can seize immediately from a firm in Chapter 11 — the little exception to the bankruptcy code. Since not quite everyone knows about this, it is an excellent way to dilute the positions of bond holders which, ex ante, profits both parties which wrote the financial derivative contract.

Felix answers.

Hi Robert — I really was just trying to explain synthetic bonds, not anything about the larger CDS market. And synthetic bonds are really a very small part of the CDS market.

I’m not sure how you could possibly create a synthetic IBM bond using interest-rate swaps alone — where would you get the credit-risk component from?

As for Fred’s structure, it’s worth remembering that these are synthetic bonds we’re talking about here — and the whole point of a synthetic bond is that it can be bought and sold in the secondary market, just like a normal bond. You can’t talk about “Fred’s parent” because no one ever needs to know who Fred’s shareholder(s) might be.
Felix

So Felix notes that he was just talking about synthetic bonds, not claiming that making them was the main use of CDS. I should have said that I thought his example hinted at a reason for his calm views about CDSs, since the example he had in mind was of a very safe use. I was over psychoanalyzing a blog post, since the example was an answer to a question.

Felix also says that the purpose of the special purpose entity is that Zeke can sell Fred, Fred’s assets on Zeke’s books would have to be packaged into a SPE (Fred) for sale. It’s still not so clear to my why st up the SPE immediately. I mean the story began with Zeke wants to buy IBM bonds, so Zeke creates Fred whose shares are, in effect, IBM bonds. Then Zeke sells Fred, apparently immediately (why pay to set up the SPE in advance of selling its shares ?).

Comments (0) | |

What’Swap: Accounting for Financial Innovation

Robert Waldmann

has become interested in Credit Default Swaps. I’m not just wondering whether they played a major role in destroying the world financial system or were just along for the housing bubble, MBS, CDO ride. I also wonder whether the acronym for the plural should be CDS or CDSs or even CDSes. I’m glad to see I’m not the only one.

But more even that that, I wonder why credit default insurance is called a credit default swap when the contract is as asymmetric as a financial contract can be. I have no information on the history of the term and will just speculate. I assure the impatient reader that this post is not totally pointless (as far as I know) and leads to a practical proposal for regulatory reform.

After the jump, I will argue that the main motivation for the invention of new financial instruments was to evade relax capital requirements, that this relaxation was reasonable in the case of interest rate swaps, that it was unreasonable in the case of credit default swaps and that credit default swaps should be recorded in balance sheets as if they were interest rate swaps (which they are in disguise).

I will start with interest rate swaps, which are clearly swaps. In an interest rate swap contract to entities agree to exchange a constant times interest paid on one bond during the term of the interest rate swap contract for a constant times interest paid on another bond during that period. For old timers, it is as if they were buying and selling coupons not bonds. Why would they do that ?

First it is possible to construct an interest rate swap using a portfolio of older assets, bonds, bond futures, short positions on bonds and short positions on bond futures. Instead of buying interest paid on a bond this year I can buy the bond and sell short the bond a year from now.

My first claim is that the new instruments exist, because if they appear in balance sheets total assets and total debt are smaller numbers — that is for accounting and regulatory reasons. This is not the most common explanation for the existence of interest rate swaps. The explanation is that corporate bonds are not liquid, that is, the market for them is thin (or illiquid in financial operator speak). This means that if I send huge orders for bonds and short orders for bond futures to the double auction market, I will pay a huge price for the bonds and get a low price for the futures. Thus it is better for each of two firms for them to negotiate a bilateral deal with an agreed price and quantity. This gets us as far as “swap” but doesn’t explain why these contracts are written as exchanges of interest payments and not as exchanges of bonds and bond futures. So far, it seems that it would make no difference.

If the firms are banks with binding capital requirements it makes a huge difference. A huge long position in a bond is a huge asset and a huge short position in the futures is a huge liability. A position recorded as a portfolio of bonds and bond futures would imply that a huge amount of wealth must be set aside to satisfy capital requirements. If it is recorded as a much smaller position in interest paid on bonds, then banks are not required to have so much idle capital to satisfy capital requirements.

In this case the new accounting is reasonable. The risk in holding a long term bond for, say, a year is almost entirely in its price at the end of the year. So long as the issuing firm doesn’t default in the course of the year, (nominal) interest payments are safe. The the long position in the bond and the short future position are an almost perfect hedge. The two sources of risk cancel. It would make no sense to evaluate the total riskiness of the position at the sum of the two risks as if two almost perfectly correlated positions were uncorrelated.

Now with an acute sense of how existing regulations have nothing to do with portfolio theory or 20th century risk management, regulatory authorities were willing to the innovative accounting.

The next step is almost logical. If interest paid on a bond is scheduled interest (a known constant) minus losses due to default, one could rephrase an interest rate swap as a credit default swap. I pay you the interest paid on Bond A and you pay me the interest paid on bond B = I pay you a constant (which can be negative) plus losses due to default on B and you pay me losses due to default on A. Now that we already have the constant, there is no reason to make the positions in both bond A, so an interest rate swap becomes two credit default insurance contracts. I think this is why credit default insurance is called a credit default swap.

OK so still there is no change in possible financial transactions. CDSs like interest rate swaps are redundant assets which can be created out of portfolios of bonds, futures on bonds and short positions of them. So what is the point ?

Well the accounting innovation has become an accounting innovation squared. As the interest rate swap meant that the value of the bond at the end of the term no longer appears as an asset, the CDS means that scheduled interest payments no longer appear as an asset. The CDS appears in balance sheets at its fair market value, not as a large position in a bond and a short position in cash (or debt of the firm which bought the credit default insurance if its required payments are spread out over time). By introducing interest rate swaps and CDSs into accounting, firms have managed to rewrite immensely huge positions in bonds etc to merely huge positions in interet rate swaps to merely tens of billions in CDSs.

Now this second bit of innovative accounting is totally unreasonable. The part which no longer appears in accounts, the scheduled interest rate, is not an apparent source of risk which is hedged. It is the safe part. Writing a CDS is a way of bearing all the risk with a very small number recorded as the value of liability.

In the case of interest rate swaps, firms had a way to hedge risk which was not automatically recognized as such by accountants and regulators. So they changed the accounts so that large apparent risks which cancelled didn’t appear.

With credit default swaps, firms found a way to describe the exact same transaction so that the numbers on their balance sheets were different and so that their required capital was smaller.

Now it is fairly easy to argue financial market innovation is socially useful, but few people would argue with a straight face that we need more innovative approaches to accounting. However, it appears that many people were willing to argue that innovative accounting *was* innovative finance. They convinced Gramm and Clinton went along (who was his treasury secretary at the time ?).

Now to me the reform is obvious. My proposed regulation follows.

People can trade what they want, but accountants must write accounts based on standard assets. New assets can be accepted into accounting only once their risk to value ratio is determined by the Basel III standing committee (Oh and the USA participates in Basel III). CDSs are not standard assets and CDS positions must be rewritten as interest rate swap positions.

An exception to the above shall be allowed. If a firm really insists on putting an unrated asset into its accounts, then it can. However, the number written as “liabilities” must be the present value of the maximum conceivable payments on its position and the number written as “assets” must be the present value of the minimum possible payments it will receive.

Believe me, bankers will find a way to express most new assets as portfolios of standard Basel III acceptable assets.

I admit that, under this plan, an authenticly genuinely new non-redundant instrument will be rated as extremely risky until diplomats and bureaucrats are convinced that it isn’t. I consider that a feature not a bug.

Comments (0) | |

The Relative Efficiency of Public and Private Health Care

Tilman Tacke and Robert Waldmann

A health care system is efficient when an increase in spending results in significant improvements in the health of a population. We test the relative efficiency of public and private health care spending in reducing infant and child mortality using cross-national data for 163 countries. There are two remarkable findings: First, an increase in public funds is both, significantly correlated with a lower mortality and significantly more efficient in reducing mortality than private health care expenditure. Second, private health care expenditure is in all estimations associated with higher, not lower, mortality, although this association is often not statistically significant. The results suggest that, holding total health care expenditure constant, a potential decrease in total infant mortality in the 163 countries from 6.9 million deaths (2002) to 4.2-5.3 million deaths for completely publicly financed health care systems, but an increase to 9.0-10.0 million deaths for completely privately financed health care. We can explain some of the gap by geographies and socioeconomic factors such as HIV prevalence, sanitation standards, corruption, and income distribution. However, the estimated difference in the efficiency of public and private health care is statistically significant in all regressions.

Tables and figure after the jump

novtiltable1

tilfigure1

Photobucket

Photobucket

Table 4 reports how the coefficients of interest change when another variable is
added. All regressions summarized very very briefly in table 4 are regression 3 in table 1 with one other variable added.

Photobucket

Photobucket

Comments (1) | |

Jonathan Zasloff is being very interesting over at the Reality Based Community.

Robert Waldmann

I guess I should give permalinks although they are consecutive posts.

In random order, he asks who should be on the energy team. I have already expressed my view on this issue. I think the Reality Based Community should be the energy team.

He asks “Where is Joe Stiglitz ?” I add what about Paul Krugman. Look the problem is simple, Stiglitz is not a team player. You ask and Summers is he a team player ? The answer is clear — yes if the team is an administration. If you hire Stiglitz he *will* embarrass you later by resigning and criticizing you.

OK now the big one. Appealing to evangelicals and reducing the abortion rate. Here, I think, Zasloff creates a false dilemma.

Consider Gilgoff’s prescription:

For Obama to break the overwhelming Republican dominance of evangelicals in 2012, he’d likely have to deliver on a classic evangelical issue — for instance, pushing legislation aimed at reducing demand for abortion.

Maybe. Congressman Tim Ryan of Ohio has sponsored an act that would work to reduce … abortions by providing better prenatal care and adoptions services to pregnant moms. Several observers, most notably EJ Dionne, have praised the bill and said that Obama should support it (which I think he will).

But the problem is that that might not be the best way to reduce abortions.

If one if to believe the Alan Guttmacher Institute, which studies these things (although it also has a strong pro-choice bias), the most effective way to reduce abortions is the provision of contraception. The government could for example ensure that contraception is covered under Medicaid, or even mandate that it be part of any health insurance policy.

So ? Why do we have to choose ? The Ryan bill provides assistance to people in need. Even if one were not just pro-choice but pro-abortion one should support it. One should not allow the best to be the enemy of the good (and lose votes too).

Most importantly, there is no need to put all abortion reduction regulation into one bill. Increased access to contraception can be presented as a public health issue (for condoms) and a gender justice issue (for all other contraceptives).

The religious right will be against it in any case. There is no way to convince them by noting that the policy will reduce the number of abortions.

So a bill to help mothers sold as a measure to reduce abortions and used to win evangelical votes and a separate bill sold as a public health/women’s rights issue which will also reduce the number of abortions if it is passed over the objections of prominent evangelicals (although I would guess supported by most evangelicals whose reproductive rate shows that they would expect to personally benefit if they think you can take from insurance companies with no problem as I bet they do).

Sometimes you can build a coalition by joining policies each of which is supported by one group. Sometimes its better to build two coalitions by pretending that closely related policies are separate.

I’d say that, this time, it is a no brainer.

Comments (0) | |

Kevin Drum asks the Romers some questions

Robert Waldmann

Tries to answer.

Drum summarizes better than Waldmann

Last year Christina and David Romer wrote a paper that attempted to quantify the effect of tax changes on economic growth. I read it at the time and didn’t understand it. I read it again a few minutes ago and I still don’t understand it. So my question is: Can you please explain your paper titled “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks”?

Here’s my understanding of what the paper says. Basically, the Romers looked at every tax measure enacted since 1945 and classified them into two groups. The first group they call endogenous. These are tax changes made in response to current or future economic conditions, including responses to spending changes or recessions. Since the effect of these tax changes is difficult to separate from the effects of the events being responded to, they are discarded.

The second group they call exogenous. These are tax changes designed either to reduce a deficit or to raise long-term growth. Since they aren’t motivated by current or future economic conditions, their effect on the economy is untainted by external factors.

The Romers use this second group to calculate the effect of tax changes on economic growth without confounding factors, and their conclusion is that a tax increase of 1% of GDP reduces output three years later by nearly 3%.

Then he says he doesn’t trust any methodology based on interpreting what people say — too subjective.

He also asks

Fifth, can it really be true that a 1% tax increase produces a 3% GDP reduction over the long term? European countries tend to have total tax rates that are upwards of 15% higher than ours, which should mean their GDPs are 45% lower. For the most part, however, GDP per hour worked in Europe is only modestly lower than ours.

Hmmm slipped in that “per hour worked” didn’t he. Obviously the Romers are looking for effects via aggregate demand not productivity. However, a broader analysis would make the point much more strongly. The tax burden is a higher share of GNP in rich countries than in poor countries and is not significantly correlated with slower growth (I’m always going back to Easterly and Rebello 1993 which is getting a bit long in the tooth).

However, that’s not what the Romers are talking about at all. Basically 3 years is not long run.

I am an economist and immediately perceive the paper to be a vindication of Keynes not of Laffer. I think your key question is the Europe question. The effect appears to be at a Laffable level. However, what they are really discussing is the medium term effect of budget deficits.

Europe has high taxes, but doesn’t have high budget deficits.

Now the Romer’s would not propose huge tax cuts. That is because, they assume that the long run effect of budget deficits on GNP is zero (increased demand just ends up as increased inflation) or negative (if deficits crowd out investment).

Roughly 3 years is not at all the long run.

In fact, the long run effects of deficits on growth appear to be negative (and large). This is based on comparing growth in different countries.

Now as to the methodology, the Romers are highly respected, but no one really trusts anyone to make subjective decisions in a way that doesn’t lead to bias. I think that this paper, like a similar paper on monetary policy, is likely to convince no one.

Comments (0) | |

Citibank Like S&P assumed house prices can’t go down

Robert Waldmann

reads

Eric Dash and Julie Creswell who argue that Citibank took insane risks holding CDOs on its books, because of a failure of the fixed incomes risk management team, reckless ‘short termism’ and two amazing mistakes. The two alleged mistakes are that they trusted the ratings agencies and that they assumed that the national average house price would certainly not decline. These are actually similar mistakes as at least one rating agency, S&P, making the same insane assumption about house prices.

They write:

when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.

Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure.

The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times.

and

C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.

and finally

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person [who worked in the CDO group] said,

This is amazing. It’s not as if no one with an Op-Ed column in the New York Times was discussing the possibility of a national housing downturn. I can’t believe that this was an honest oversight. The anonymous source doesn’t say either ““I just think senior managers got addicted to the revenues and arrogant about the risks they were running. As long as you could grow revenues, you could keep your bonus growing.”

Wow.

Brad Delong argues that 43 billion is a small part of Citibanks problems. He is talking about market capitalization not book equity which matters given capital requirements. I mean also not a tiny part, and 43 billion here 43 billion there and soon your talking real money.

Comments (0) | |

USA a Center Left Nation

Robert Waldmann

Matthey Yglesias points to an old mediamatters.com report which attempts to demolish the center right nation claim. I think the report is a precious resource as it collects the relevant data. Previously I found myself wasting a lot of time searching pollingreport.com.

I have some thoughts on the report after the jump.

update: also my effort to find the relevant definition of the center.

Ah, I thought, a challenge—can I interpret “center right nation” so that it makes sense to warn Democrats that the USA is a center right nation ? I must find a definition of a center which isn’t well to the left of any point to which the Democrats might overstretch.
OK how about the point X where the fraction of Republican representatives to the left of X is equal to the fraction of Democratic representatives to the right of X ? Not ideal. By that definition the center moved right in 2006 and 2008 as moderate Democrats beat moderate Republicans in swing districts, but it will do well enough to make the claim “America is a center right nation” even wrong.

The claim then becomes that more US citizens self identify as Democrats than as Republicans, their views on policy are to the right of X. I am quite sure that this is not true—on tax progressivity, the minimum wage, universal health insurance, environmental protection, the war in Iraq, should government do more, and does the government have a responsibility to take care of people most citizens are to the left of X. On the death penalty (if you assume that Democrats who claim to support it are lying) and AFDC (if you remember what it was and who was President when it became TANF), due process rights and overwhelmingly creationism vs natural selection most US citizens are to the right of X. In other words, if the Democrats abandone decades old policy positions, they might end up too far left for the median voter.

By my definition the USA was a center left country from at the latest 1996 through the present except maybe for a year or two after 9/11. However, I thought, with great effort and in a spirit of bipartisanship, I can interpret Republicans claims so they are meaningful albeit false.

Then I read this
http://thinkprogress.org/2008/11/20/boehner-center-right/

BOEHNER: … I think the Congress is still a center-right Congress.

OK back to the drawing board.

Now my report on the report

The report is excellent and shows that the authors put a huge amount of work in it. In contrast this comment is off the top of my head. I will try to get the relatively interesting stuff up here at the top.

When asserting the bogosity of the center right nation claim, I have repeatedly found myself wasting time scrolling past irrelevant data at pollingreport.com looking for the relevant poll which shows that adult Americans have progressive views on the key issue under dispute. The report, which I just hotlisted, is a precious resource getting the relevant data in one place and not mixing it with ten times as many polls on whether you approve of how George Bush is handling an issue.

However the mass of data presented is considerable less than the mass of relevant data. In particular, media matters has cherry picked. On abortion, for example, there is a huge amount of polling data. Polls on “If a woman should be allowed to have an abortion if chooses to have one for the following reason (list of reasons) show only a minority saying yes for all reasons. This shows that there are people who must have contradictory views — who support Roe vs Wade in the abstract but disagree with it when the questions get specific http://www.pollingreport.com/abortion.htm.

I think what is needed is for conservatives with integrity (not as rare as flying pigs) to attempt a counter-report following the outline of the media matters report, but picking different polls with slightly different wording for each issue heading. Then, comparing the reports, interested readers could decide who had made a more convincing case. I don’t doubt that I personally would conclude that media matters is right and if the center is half way between Dems and Reps the US is a center left to left nation. But, you know, debate is really useful. Pity there are so few reality based conservatives with whom mediamatters et al can debate.

[there should be another “There’s more” jump here but I don’t know how to nest them.

As a regular reader of pollingreport.com and also of liberal blogs, I can’t say I was generally surprised by the data reported by mediamatters. I was surprised by the results on crime and punishment.

Nor am I generally surprised by pundits making claims about what Americans think which are inconsistent with polling data, although I thought everyone knew that a majority supports gun control (which majority loses to the minority which includes many people who care passionately and are organized by the NRA as well as reality based critics claims for the effectiveness of gun control such as you and … birds chirp … well you must know some others).

I did object to the text above the data on protectionism. I was going to comment dilating on the theme “What’s progressive about nationalist xenophobic hostility to the interests of workers in poor countries” until I got to the paragraph after the data which noted that opposition to free trade is not necessarily based on progressive motives. I am still pissed that one of those ideology self tests said I was socially liberal but not egalitarian, because my views on trade are based on concern for the interests of the poorest people in the world who sure aren’t US workers.

Comments (0) | |

Dynamically Inconsistent Preferences and Money Demand (repeat)

Emanuele Millemaci and Robert Waldmann

This paper focuses on two main issues. First, we find that, on average, households’ discount rates decline. This implies dynamically inconsistent preferences. Second, we calculate an indicator of the degree of dynamic inconsistency that may help us to understand how households overcome their self-control problems. We use a micro data set containing households’ reports on the compensation for receiving hypothetical rewards with delays. We find that individuals with more severely dynamically inconsistent preferences on average hold a statistically significantly lower share of their total wealth in checking accounts. A possible interpretation is that subjects use pre-commitment strategies to limit their temptation to consume immediately.

Please download a pdf of the whole paper

old longer abstract after the jump

OK so there is this wonderful underused dataset from CentER via Luigi Giamboni (warning pdf).

It includes a question on what return people would demand in order to wait 3 months for cash and in order to wait 12 months (no cash really changed hands so it is just a survey not an experiment). One can calculate an annual required interest rate from the answer two the wait three months question. Very often this was much higher than the required annual rate. This means that respondents had dynamically inconsistent preferences. That means (in English) that, given their stated preferences, they would like defend the interests of their 12 months later selves by preventing their 9 months later selves from spending as much as said 9 months later selves would like to spend. If one has dynamically inconsistent preferences one would like to tie one’s future hands.

A sophisticated agent who knows that he or she has dynamically inconsistent preference will find ways to restrict his or her future choices. For example, people with weight problems go to fat farms, People pay for residential drug treatment, drug addled (but not completely addled) celebrities hire dissenablers to prevent them from using drugs etc etc.

If one is worried about future consumption one’s desire for liquidity may actually be negative for some levels of liquidity. I might want to tie my money up in a non liquid asset, say a house, because otherwise I won’t be able to keep myself from spending it. Cash and the balances of checking accounts are very liquid and people with spending problems may rationally choose to hold an unusually small fraction of their wealth as checking account balances.

Why lo and behold the computer says this is true. The coefficient of a household money demand equation on the dynamic inconsistency index is negative and statistically insignificant.

Who ever would have thunk ? Well I would have for 24 years by now, but I never found the data to test the hypothesis.

Comments (0) | |

Obama’s Cabinet

Robert Waldmann

has some concern that, having been elected President of the USA with a brown skin and middle name Hussein, Barack Obama is looking for a real challenge. He is known to be much interested in “Team of Rivals” wants Hillary Clinton to be Secretary of State and Joe Lieberman to impartially investigate whether he is putting America firs.

Based on the idea that Obama wants a cabinet of rivals, I make the following predictions

State Hillary Clinton
Defence John McCain
Attorney General Eric Holder (already announced sigh I was expecting David Addington)
Treasury Douglas Holtz-Eakin
HHS Charles Krauthammer MD
Intelligence Director Steve Clemons
Labor Mark Penn
Interior Ralph Nader
Energy Sarah Palin
Commerce Glenn Hubbard
Vetarans Saxby Chambliss
Transportation Ted Stevens
Education Pat Robertson president of Liberty University
HUD Newt Gingrich
Homeland Security Michelle Malkin
Agriculture Tony Harper
UN John Bolton

update: My dream Cabinet after the jump

State Juan Cole (I mean it)
Defence Richard Clarke (don’t ask why I want him in defence and I won’t tell)
Attorney General Glenn Greenwald (this is absolutely serious)
Treasury Brad DeLong (or Paul Krugman if DeLong is not available)
HHS George Mitchell (total hero of the Clinton failed reform effort)
Intelligence Director Valerie Plame
Labor Larry Katz (been there done that — sortof)
Interior Richard Waldmann (he’s my brother)
Energy Michael O’Hare (really the whole RBC community)
Commerce Merge with Treasury
Veterans Max Cleland
Transportation Duncan Black
Education Claudia Goldin
HUD Atrios (OK so I cheated).
Homeland Security Abolish the department
Agriculture Jim Hightower
UN Zalmay Khalilzad
(holy mother of Allah, I agree with Bush on something)

Comments (0) | |