We all like to think that we are individuals. We like to think that we grow and that our tastes develop and mature. We begin to appreciate different things in life, and among other behaviors, our spending habits change.
But what would you say if I told you that your maturing tastes didn’t cause your maturing consumption patterns? Indeed, what if it’s the other way around? Maybe, you’re just a bumbling ball bearing bouncing about and pinging off of various stimuli in a very predictable fashion. What if the prices that you face changed over the course of the past two decades, adjusting your optimal bundle of consumption, and then you contrived reasons for your new behavior in an elegant post-hoc fashion.
Have you *really* taken a liking to whole wheat bread and pasta over the past decade because your tastes have developed? Or maybe it’s because you found that scrumptious New York Times recipe that turned you away from potatoes and toward rice. Whether it’s a personal experience, a personal influence, or a personal development, we like to think about ourselves as complex organisms with a narrative that makes sense of the way in which we interact with the world.
On the other hand, we have price theory. Price theory still accepts that you are special and that you have preferences. Then, it asserts that your preferences remain fixed and that your changes in behavior are merely responses to changing costs and benefits that you perceive in the world. Maybe you’re not any more inclined to eat healthily than you were previously, but the price ratio of whole wheat bread to white bread is 10% less than it use to be. Maybe your east-Asian inspired recipe didn’t cause you to spurn potatoes, but instead the price ratio of rice to potatoes fell by 20%.
Thinking about one of my older papers today, since I just heard it won the Eckstein award for best paper in the Eastern Economic Journal in 2019 & 2020.
One big selling point of the Affordable Care Act was that by offering more non-employer-based options for health insurance, it would free people who felt locked into their jobs by the need for insurance. This would free people up to leave their jobs and do other things like start their own businesses. Did the ACA actually live up to this promise?
It did, at least for some people. The challenge when it comes to measuring the effect of the ACA is that it potentially affected everyone nationwide. If entrepreneurship rises following the implementation of the ACA in 2014, is it because of the ACA? Or just the general economic recovery? Ideally we want some sort of comparison group unaffected by the ACA. If that doesn’t really exist, we can use a comparison group that is less affected by it.
That’s what I did in a 2017 paper focused on younger adults. I compared those under age 26 (who benefit from the ACA’s dependent coverage mandate) to those just over age 26 (who don’t), but found no overall difference in how their self-employment rates changed following the ACA.
In the 2019 Eastern Economic Journal paper, Dhaval Dave and I instead consider the effect of the ACA on older adults. We compare entrepreneurship rates for people in their early 60’s (who might benefit from the availability of individual insurance through the ACA) with a “control group” of people in their late 60’s (who are eligible for Medicare and presumably less affected by the ACA). We find that the ACA led to a 3-4% increase in self-employment for people in their early 60’s.
Why the big difference in findings across papers? My guess is that it’s about age, and what age means for health and health insurance. People in their 60s are old enough to have substantial average health costs and health insurance premiums, so they will factor health insurance into their decisions more strongly than younger people. In addition, the community rating provisions of the ACA generally reduced individual premiums for older people while raising them for younger people.
In sum, the ACA does seem to encourage entrepreneurship at least among older adults. At the same time, our other research finds that the employer-based health insurance system still leads Americans to stay in their jobs longer than they would otherwise choose to.
But perhaps the best paper of this sort is a 1974 article on the Journal of Political Economy by Alan Blinder, titled “The Economics of Brushing Teeth.” It is, as you might guess, a paper that is somewhat tongue-in-cheek (tongue-in-teeth?), but the paper carefully follows the formal style you would expect from a JPE paper in 1974. I recommend reading the paper in full, and I can assure you that it is not at all like pulling teeth. But if you prefer not to look a gift horse in the mouth, here are a few favorite parts.
The paper is, of course, full of tooth-related puns, even in the footnotes, such as this acknowledgment: “I wish to thank my dentist for filling in some important gaps in the analysis.”
There are also plenty of jokes about human capital theory, jokes that only an economist could love, such as: “The basic assumption is common to all human capital theory: that individuals seek to maximize their incomes. It follows immediately that each individual does whatever amount of toothbrushing will maximize his income.”
Another section manages to poke fun at both sociologists and economists. In reference to a fake paper (no, there is no Journal of Dental Sociology), Blinder chastises the fake sociologist for misattributing a change in brushing patterns (assistant professors brush more) to advancing hygiene standards over time. No! It must be about maximizing income: “To a human capital theorist, of course, this pattern is exactly what would be expected from the higher wages received in the higher professorial ranks, and from the fact that younger professors, looking for promotions, cannot afford to have bad breath.”
And what good is a paper without a formal model of teeth brushing? This is the kind of model that many young economists cut their teeth on in graduate school.
I keep reading about how inflation has peaked (even peaked many months ago) and so any minute now the Fed will relent on raising interest rates, and will in fact start reducing them. Every data point that seems to support an early Fed pivot and a gentle “soft landing” for the economy is greeted with optimistic verbiage and a rip higher in stocks.
Except – – other meaningful data points regularly appear which show that inflation (especially core inflation) is remaining stubbornly high. The Personal Consumption Expenditures (PCE) Index is the Fed’s preferred way to track core inflation. It did peak in early 2022, and is falling, but very slowly and fitfully. Just when it seems like it is about to cascade downward, along comes another uptick. The latest report for 02/24/23 showed the PCE index (excluding the volatile categories of food and energy) increasing 0.6 percent during the month of January, which translated to a 4.7 percent year-on-year gain. That was considerably higher than the 0.4 percent monthly gain (4.3 percent year-on-year) that economists expected.
The chart below illustrates the chronic tendency of the economists at the Fed to lowball the estimates of future inflation. Each of the ten bars depicts quarterly projections of what inflation would be for 2023, starting back in September 2020 (first, green bar). No one in the craziness of 2020 could be held particularly responsible back then for accurately projecting 2023 conditions. But the Fed embarrassed themselves badly into late 2021 by airily dismissing inflation as “transitory”, due mainly to supply chain constraints that would quickly pass. (See towards the middle of the chart, yellow Sept 2021 and blue Dec 2021 bars projecting a mere 2.2% inflation for 2023.)
Only as of December 2022 did estimates of inflation jump up to 3.1% for 2023, and that estimate will surely get revised upward even further.
Many factors probably went into this systematic failure on the part of the Fed economists. There are probably political reasons for erring on the rosy optimistic side, which I will not speculate on here.
One factor in particular was mentioned in the Minutes of the Jan 31/Feb 1 Fed meeting that I thought was significant:
A few participants remarked that some business contacts appeared keen to retain workers even in the face of slowing demand for output because of their recent experiences of labor shortages and hiring challenges.
Jeremy LaKosh notes regarding this feature, “If true across the economy, the idea of keeping employees for fear of facing the labor force shortage would represent a fundamental shift in the employment market. This shift would make it harder for wage increases to mitigate towards historical norms and keep upward pressure on prices.”
This all rings true to my anecdotal observations. In bygone days, when business slowed down, factories would lay off or furlough workers, with the expectation on all sides that they would call the workers back (and the workers would come back) when conditions improved. However, employers have had to struggle so hard this past year to find willing/able workers, that employers are loath to let them go, lest they never get them back. I have read that even though homebuilders are not sure they can sell the houses they are building, they are so worried about losing workers that they are keeping them on the payroll, building away.
Other inflation data points show big decreases in prices for goods (and energy), but not for services. Wages, of course, are the big driver for service costs.
So the inflation story in 2023 seems to come down largely to a labor shortage. This is a large topic cannot be fully addressed here. I will mention one factor for which I have anecdotal support, that the enormous benefits (stimulus money plus enhanced unemployment) paid out during 2020-2021 set up a large number of baby boomers to leave the workforce early and permanently. Studies show that this is a major factor in the drop in workforce participation rate post-Covid. Maybe some of those folks had not planned ahead of time for such early retirement, but they got a taste of the good life (NOT getting up and going to work every day) in 2020-2021 along with the extra cash to pad their savings, and so they decided to just not return to work. That exodus of trained and presumably productive workers has left a hole in the labor force which now manifests as a labor shortage, which drives up wages and therefore inflation and therefore interest rates, which will eventually crater the economy enough that struggling firms will finally lay off enough workers to mitigate wage gains.
I wonder if this unhappy scenario could be staved off with increased legal migration of targeted skilled workers from other countries to alleviate the labor shortage. Dunno, just a thought.
The US government is great at collecting data, but not so good at sharing it in easy-to-use ways. When people try to access these datasets they either get discouraged and give up, or spend hours getting the data into a usable form. One of the crazy things about this is all the duplicated effort- hundreds of people might end up spending hours cleaning the data in mostly the same way. Ideally the government would just post a better version of the data on their official page. But barring that, researchers and other “data heroes” can provide a huge public service by publicly posting datasets that they have already cleaned up- and some have done so.
That’s what I said in December when I added a data page to my website that highlights some of these “most improved datasets”. Now I’m adding the Behavioral Risk Factor Surveillance Survey. The BRFSS has been collected by the Centers for Disease Control since the 1980s. It now surveys 400,000 Americans each year on health-related topics including alcohol and drug use, health status, chronic disease, health care use, height and weight, diet, and exercise, along with demographics and geography. It’s a great survey that is underused because the CDC only offers it in XPT and ASC formats. So I offer it in Stata DTA and Excel CSV formats here.
Let me know what dataset you’d like to see improved next.
The minimum wage is one of the most studied topics in economics, and also something that is frequently discussed on this blog from many different angles. For someone that isn’t an expert in this area, it can be hard to keep track of all the most recent, cutting-edge research on the topic.
Here’s a brand-new paper in the literature with an important finding: raising the minimum wage increases crime. Specifically, in “The Unintended Effects of Minimum Wage Increases on Crime” the authors find that 16-to-24-year-olds commit more property crimes after a minimum wage increase. For every 1% increase in the minimum wage, there is a 0.2% increase in property crime. That implies a doubling the minimum wage would increase property crimes for this age group by 20%. Here’s a figure from the paper showing this increase in crime:
What is the mechanism by which the rising minimum wage increases crime? Here the authors move into examining one of the central questions of the empirical minimum wage debate: the labor market. The authors do find evidence that employment decreases for this same age group following an increase in the minimum wage. Again, a figure from the paper:
The results in this paper add one more element to the cost-benefit calculus of the minimum wage. But I think the results are also interesting because they seem to point in the opposite direction of a paper co-authored by fellow EWED blogger Mike Makowsky. His paper “The Minimum Wage, EITC, and Criminal Recidivism” found that increasing the minimum wage made it less likely that former prisoners would commit another crime. I would be interested to hear Mike’s thoughts on this paper!
This post is to share some observations that may be helpful to readers who, like me, were rudely surprised by the simultaneous steep decline in both bonds and stocks in the past year.
Bonds and Stocks Are No Longer Inversely Correlated
Back in the day before routine, massive Federal Reserve interventions, say before the 2008 Great Recession, there was a more or less routine business cycle. In an expansionary phase, GDP would increase, there was greater demand for loans, company profits would rise and so would stock prices and interest rates. When interest rates go up, bond prices go down. When the cycle rotated to the recessionary downside, all this would reverse. Stocks would go down, interest rates would decline and investors would flee to bonds, raising their prices.
Thus, bonds served as a good portfolio diversifier, since their prices tended to move inversely to stocks. Hence, the traditional 60/40 portfolio: 60% stocks, 40% bonds, with periodic rebalancing between the two classes.
This approach still worked sort of OK from 2008-2021 or so. The Fed kept beating interest rates lower and lower, and so bond prices kept (fitfully) rising. But at last we hit the “zero bound”. Short- and long-term interest rates went to essentially zero in the U.S. (and actually slightly negative in some other developed countries). Rates had nowhere to go but up, and so bond prices had no place go but down, no matter how stocks performed.
Trillions of dollars of federal deficit spending to pay out various COVID-related benefits in 2020-2021, along with supply chain interruptions, ignited raging inflation in 2022, which the Fed belated addressed with a series of rapid rate hikes and reductions in its bond holdings. The end of easy (nearly no-interest) money and the prospect of a recession knocked stock prices down severely in 2022. However, the rise in both short term and long term interest rates also cratered bond prices. The traditional 60/40 portfolio was decimated. Thus, in an inflationary environment with active Fed intervention, bonds are much less useful as a portfolio diversifier.
Both the stock and bond markets seem to be now driven less by real-world considerations and more by expectations of Fed (and federal government) reactions to real-world occurrences. Pundits have noted the “bad news is good news” effect on stock prices: if GDP dips or unemployment rises (which used to be considered recessionary bad news), the markets cheer, assuming that if any real economic pain occurs, the federal government will flood us with benefits and the Fed will lower rates and buy bonds and otherwise facilitate the renewed deficit spending. (See The Kalecki Profit Equation: Why Government Deficit Spending (Typically) MUST Boost Corporate Earnings for an explanation of why deficit spending normally causes a rise in corporate profits, and hence in stock prices.)
In 2022, there was practically no place to hide from investment losses. Petroleum-related stocks furnished one of the few bright spots, but that was partly a function of economies recovering that year from COVID lockdowns. There is no particular reason to believe that petroleum stocks will rise in the next market downturn. Oil and gas stocks, along with gold and other commodities, might offer a certain degree of diversification, but none of these can be assumed to normally rise (or even stay steady) when the general stock market falls.
Managed Futures Funds as Portfolio Diversifiers
It turns out that there is one class of investable assets that does tend to rise during an extended market downturn, while typically rising slowly or at least staying level during stock bull markets. That is managed futures funds. These funds observe pricing trends across a wide range of commodities and currencies and bond markets, and buy or sell futures to try to profit. If they (or their algorithms) guess right, they make steady, small gains. If there is a new, strong trend that they can buy into, they can make a lot of money quickly. Such was the case for most of 2022. It was obvious that the Fed was going to raise rates heavily that year, which would drive up interest rates and the value of the dollar versus other currencies, and would crush bond prices. The managed futures funds shorted the Euro and bonds, and made a ton of money January-November last year. Investors who held these funds were glad they did. Charts to follow.
The first chart here shows the total returns for the S&P 500 stock index (blue) and a general bond fund, BND (purple), for the past three years, ending Feb 13, 2023. (Ignore the orange curve for the moment). This chart captures the short but very sharp drop in stock prices in early 2020, as COVID lockdowns hit, but government aid was promised. Bonds did not greatly rise as stocks fell then, although after a bit of wobble they stayed fairly steady in early 2020. However, when stocks slid down and down during most of 2022, bonds went right down with them (purple drawn-in arrow), giving no effective diversification. Both stocks and bonds rose in early 2023, showing what is now a positive correlation between these two asset classes.
The next chart (below) omits the bonds line, showing just the blue stocks curve and the orange curve, which is for a managed futures fund, DBMF. The drawn-in red arrows show how DBMF only dipped a little during the COVID crash in early 2020, and it rose greatly in 2022, as stocks (blue arrow) collapsed. This shows the power of managed futures for portfolio diversification.
There was a surprising break in futures trends in November, 2022, as markets suddenly started pricing in an early Fed pivot towards easing in 2023, and so interest rates rose, and bonds and the U.S. dollar tumbled. All the managed futures funds took a sharp hit Nov-Dec 2022; some of them recovered better than DBMF, which kept drifting down for the next few months. Without getting too deep in the weeds, DBMF is an exchange-traded fund (ETF) with favorable fees and taxation aspects for the average investor. However, its holdings are chosen by observing the recent (past few weeks) behavior of other, primary managed futures funds, and trying to match the average performance of these funds. Some of these other, similar funds are EBSIX, PQTNX, GIFMX and AMFNX. These are mutual funds, rather than ETFs, with somewhat higher fees and higher minimum purchases, depending on which “class” of these funds you go with (A, C, or I).
This average matching technique is good, because the performance of any single one of the major managed futures funds can be really good or really any particular year. Some of these individual funds have done consistently horribly, so you’d be in bad shape if you happened to pick one of those. But the average of all those funds, as quantified by a relevant index, does OK and so does DBMF. However, as observed by Seeking Alpha author Macrotips Trading, because of its backwards-looking matching methodology, DBMF can be appreciably slower than other funds to adjust its positions when trends change. KMLM is another managed futures ETF, which tends to be more volatile than DBMF; higher volatility may be desirable for this asset class.
One Fund to Rule Them All
A recommended application of these managed futures funds is to replace maybe a third of your 40% bond holdings with them. Back testing shows good results for say a 15 managed futures/25 bonds/ 60 stocks portfolio, which is periodically rebalanced.
What if there was a fund which combined stocks and managed futures under one wrapper? There is one I have found, called REMIX. It has an “institutional” class, BLNDX, with higher minimum purchase and slightly lower fees, which I have bought into. The chart below shows the past three years of performance for the hybrid REMIX (orange) compared to stocks (blue) and the managed futures-only fund DBMF. We can see that REMIX stayed fairly flat during the COVID blowout in 2020, and it rose along with stocks in 2021, and went roughly flat in 2022 instead of dropping with stocks (see thick drawn-in yellow arrows). The performance of REMIX is actually better than a plain average of stocks (blue curve) and DBMF (purple), so this is an attractive “all-weather” fund. A similar hybrid (multi-asset) fund is MAFCX, which has higher fees but perhaps slightly higher returns to date. MAFCX buys stock (S&P500) futures rather than the stocks themselves, which is a leveraged play – – so for $100 investment in MAFCX you get effectively $100 worth of managed futures plus $50 worth of stock investment.
Managed futures put in an outstanding performance in 2022 because there was a well-telegraphed trend (Fed raising interest rates) in place for many months, which allowed them to make easy profits at the same time that stocks were crashing. But we cannot assume that managed futures will always go up when stocks go down. That said, managed futures will likely be reasonable diversifiers, since they should at least stay roughly level when stocks go down. The trick is to not grow impatient and dump them if their prices stagnate during a long bull stock market phase. Holding them in the form of a multi-asset fund like REMIX may help investors hang in there, since it should go up in a bull market (due to its stock component), while offering protection in a bear.
For instance, below is a five-year chart of a managed futures fund ( EBSIX, purple line ), the S&P 500 stock index (blue line), and a multi-asset fund that combines stocks and managed futures ( MAFIX, orange line. This is the institutional version of MAFCX). The charting program did not account properly for the Dec 2022 dividend of MAFIX, so I extended its curve with a short red line at the right-hand side to show what it should look like if plotted on a consistent total return basis.
With perfect hindsight, I chose a managed futures fund (EBSIX) which has performed among the best over the years; many other such funds would have looked far worse. There was a period of nearly two years (mid-2020 -early 2022) when this fund lagged far behind stocks. It was only when the 2022 catastrophe arrived that the managed future fund EBSIX proved its worth and shot up. The multi-asset fund MAFIX, which is similar to REMIX but with higher fees, basically kept up with stocks in their bull phase, then held more or less steady for 2022, and ended much higher over five years than either SP500 or the plain EBSIX.
The key lesson, the thing I would impart to any aspiring bloggers, content creators, or newsletter proprietors, is that the cornerstone of internet success is not intelligence or novelty or outrageousness or even speed, but regularity. There are all kinds of things you can do to develop and retain an audience — break news, loudly talk about your own independence, make your Twitter avatar a photo of a cute girl — but the single most important thing you can do is post regularly and never stop.
Granted, “work hard and keep doing the thing you’re doing” is probably above-replacement advice for any kind of entrepreneurial activity. But it’s particularly true for online content creation. As Yglesias suggests, the internet and feed-based social platforms have constructed an insatiable demand for content, so if you can produce content mechanically, without requiring expensive resources (such as time, wit, or subject-specific knowledge), you’re in an excellent position to take advantage. But most importantly, this demand is so insatiable that there is currently no real economic punishment for content overproduction. You will almost never lose money, followers, attention, or reach simply from posting too much.
That is from an excellent post by Max Read. It is fairly short and has some good examples, so I recommend reading the whole thing. Tyler Cowen made a similar point back in 2019:
There’s a certain way in which on the internet you can’t be overexposed. There’s just a steady stream of you, it feels like being overexposed compared to the standards of 1987 or whenever, but in fact it’s not and people are picking and choosing. And you end up just dominating a particular space in a particular kind of way. And I think most older people have not made that transition mentally to understanding how you should exist intellectually on the internet.
Of course, this is also part of Joy’s idea with this site and why we write every day:
It’s just time to start writing more. This is a model that I have learned from Tyler Cowen, and most writers I admire write every day whether or not they have time for it. David Perell has tweeted that writing and thinking are the same thing. Thus, if you are a thinker, writing is not a waste of time. Writing is the thing you are doing anyway in your muddled head.
Tyler Cowen is skeptical about the possibility of a pure land-value tax, even though it has many theoretical benefits. In particular, Cowen points to a host of what we might call “Public Choice NIMBY” issues. In the real world, the same political forces that drive all of the current urban planning issues would either prevent it from being implemented at all, or prevent it from actually being implemented the way Henry George would have wanted.
I grant all these objections, but I do note that there have been multiple YIMBY successes in recent years, particularly in California where NIMBY forces are probably the strongest in the country. Still, if Cowen is mostly correct, are there any real-world options that offer some of the benefits of a LVT? In short, the main benefits are that the deadweight loss of the tax is very small, and that land is more likely to be used for its highest-valued use (which in many cases will mean more density, though this intersects with zoning policy).
Yes. For the clearest example, look to Pennsylvania. Cities are allowed to implement what is called a “split-rate property tax.” It does not only tax land, as a pure LVT would do, but instead taxes land at a higher rate than improvements. A ratio around 5:1 is typical (meaning land is taxed at 5 times the rate of improvements), though some cities have been as high as 26:1.
I live in southwest Florida where it is quite tropical. We don’t have four seasons. We mark the passage of time with the rainy season for 8 months and the dry season for 4 months. We also mark time with ‘season’. Season is when the snow-birds – those who live in places further north – migrate to and occupy Florida for about 4-5 months. During those times the roads are more crowded and the grocery store customers are less friendly. We can also mark the passage of time with mosquitos. January has fewer mosquitos. The rest of the year we know not to go outside at dusk.
Therefore, we have the Collier Mosquito Control District. This little government entity does several things. But I want to focus on spraying. On some nights, more so during the rainy season, the CMCD flies airplanes and sprays our inland bodies of water that are susceptible to mosquito infestation. Let’s put aside for the moment any alleged negative human health effects that spraying might cause.