Immigration

If you've seen the news, or even just alive, you've probably heard about the refugee crisis that's unfolding over in Europe with asylum seekers. You may have also heard that country's that are seen as genuinely progressive are only allowing a few refugees in, and even still are deterring them from going over. Some of you may think that the governments are doing it for xenophobic reasons, rather than rational ones. And you may be right, I sort of hold that view when it comes to some of the rhetoric leaders have given.
With the attacks in Paris, xenophobic rhetoric has been popular on the stump. Some of it is quite scary to be honest, Donald Trump (who is not unfamiliar with crazy remarks) revived the debunked story about Muslims cheering the world trade center collapse on 9/11 and said he would favor a registry of Muslims (he has since backtracked from that position) and was even criticized by the populist outsider Ted Cruz who has of up to this point supported everything he has said.
Immigration will probably get more attention as long as Syria keeps its people fleeing to safety.

Whats up with all this volatility?

I did a paper for a behavioral economics course and though it might be an interesting read for you all.
Some context; the assignment is about Robert Shillers lecture at yale here and how it applies to the volatility we've seen in the market.

            Shillers’ lecture on behavioral finance began with a somewhat known but unknown revelation that what humans really seek is being praised, but not just that, we seek to be worthy of their praise. Although he didn’t say it in this lecture, I think this idea applies to the financial industry because taken it prima facie one could make the case that the returns fund managers earn is irrelevant. What managers (and all of us) really want, is for us to be infamous for timing the market, seeing things others can’t, and accomplishing extraordinary things that only others could dream of. If we link this to the another claim Shiller made from Khaneman and Tsevarsky’s Prospect Theory, that losses of one degree are “felt” more strongly than gains of the same degree, I would make the claim that the market volatility that has been experienced the last 2 weeks is due to the ego that the agents within the financial institutions hold and the expectations they believe their clients may have of them. No financial manager wants to be the one that to ride the market all the way to the bottom, even if they believe that the rapid decrease in value from equity markets is far from the true fundamental value they can realistically imagine that their clients will look at the short-term loss in value and immediately blame the manager. There would be capital calls, news reports, and social stigma from the investment community, because no one wants to be affiliated with them. This imagination would cause funds to sell a portion of their liquid assets; because these funds have huge capital holdings this causes massive drops in indexes. This creates a vicious cycle where the investors will continue to sell because they see everyone else is continuing to sell. In some cases they may completely forget about looking for value, and instead focus on avoiding the loss of value.   

            One could also make the claim that the volatility we see may be due to a lack of liquidity from market participants. The evidence being that market participants are “anchored” to a specific price that they want to sell at. Thaler writes in his book that most humans want to at least break even and will anchor themselves to the price they bought it at. This lack of volume decreases the number of buyers or sellers in a marketplace and results in the seller reducing their ask price to pay for the buyers liquidity premium.

Are we Econs?

Anyone with an interest in economics should get to know the name Richard Thaler. He is after all considered the founder of behavioral economics. 

One of the claims he makes is that people don't really act like classical economics says we should act. Everyone in the world acts like humans. But in textbooks we all act like "Econs" people that seek to act rationally and optimize utility at every step of their decision making process. In later blogs I'll take issue at some of the tests he does while I read one of his books. So look forward to more posts!

Animals spirits

I just finished reading Robert Shiller and George Akerlof's book "Animal Spirits" and I think there were some good theories for you to digest.
The first one is what they call "Money Illusion". It was actually developed by Keynes back in the 30's, and as he explained it, economic agents never look at their income as compared to the basket of goods they purchase, instead they just look at the nominal value as if prices never change. The idea can sometimes be seen quite often in the real world. I've seen more often than not that someone who just received a raise of 3% is overly excited for the anticipated increase in income. With inflation at 2% their real raise was only 1%! If there was no inflation and the raise given was 1% they certainly wouldn't be that as happy as the 3% even though they are actually the same.
The best example they gave was during the great depression when prices fell 28% and the economy needed a wage cut the labor unions enthusiastically rejected any claim that the wage cut would be "fair". As one politician put it, "if prices fell by 28% wouldn't a 25% wage cut be better than no wage at all"? But they declined because they had money illusion.
They also define animal spirits as the reason to why there's a boom and bust cycle in a natural economy. When the economy is expanding it's because the Bulls are out. Producers are spending more on capital goods because they believe someone will buy them, consumers are buying goods because they believe they'll get a raise, banks are lending more and requiring less collateral because they believe asset prices will rise, and investors are investing more because the economy is booming an no one can fail.
Then reality snaps back in and the bears start coming out. Producers hold growth, consumers spend less, banks lend less and investors invest less because there's no way anyone will be able to pay them back.
Animal spirits can be seen almost anytime when you look at a financial news network. One of my favorite examples is Jim Cramer. I guarantee if you watch him any day you'll think hes been possessed by one of those animal spirits.

What's up with Donald Trump

It's rare that your blogger writes about politics and I assure you when I do I will try to be very fair in my assessment to all sides of the story. That being said, I've noticed that Donald Trump has been getting a lot of attention in the media, and decided that it may be interesting to analyze his economic policies, specifically immigration and the relationship with mexico.

First one that's been the most talked about is his stance on immigration. He has said that he would stop the flow illegal immigrants, make mexico build a wall and pay for it themselves, put sanctions on mexico, and fine mexico 100,000$ for each immigrant that they "knowingly" send over. 

Whether the government should limit the number of immigrants coming into the country will always be hotly debated. One side of the argument is that if we allow too many low skilled workers, it will create a surplus of their cheap labor and drive down wages for unskilled workers and blow up income inequality.Its the most popular argument for trade unions and protectionists. The other side is that the argument claims the first argument falls into what economists the "lump of labor" fallacy. The idea being that wages can only fall if  ceteris paribus holds which it never does.They claim that immigration may even cause wages to rise with the increase in wealth of that area. 

The rest of his arguments are humorous at best I'm afraid. If Mr. Trump were to storm into the Mexican parliament and demand that they pass a bill to build a wall across the entire border, and pay a fine of around 1 Trillion dollars to the U.S, it wouldn't go very well. 

First of all, our allies in other countries would start to think of America as a bully and trying to subvert another independent countries democracy. Think of how some countries and academic institutions are speaking about Germany's actions toward  Greece only the U.S. doesn't have a reasonable claim to Mexicos debt. 

Second his demands that they pay the fine and build the fence would throw the country into a sovereign debt crisis and would create an incentive for the government to just inflate away the debt, hurting savings in the process.

Third, levying sanctions on a trade partner would be a violation of NAFTA and the WTO could penalize the U.S. Not to mention it would hurt its credibility in the current TPP talks and any other future trade pacts as well. 
An economic future for america with a trump president would look very dismal, there might be some who would favor it, (Labor Unions in manufacturing would love a 25% tariff on Chinese goods), and conservatives on the far right would admire anyone who attacks immigration on Mr. Trumps level.
The economist did a great piece on Mr. Trump here that might explain why a real estate mogul would enter into politics in the first place.

The inevitable fall of the euro?

There's been a lot of attention with the Euro lately, mainly because of Greece, and its caused a lot of economists to come out and renew their claims that ANY currency union without a fiscal Union is doomed to fail. Why is that? As John Cochrane points out in his blog here, a fiscal union doesn't have to be mandatory to get an efficient currency union. When Detroit declared bankruptcy, politicians in Washington didn't rush to decide if they should kick Detroit out of the dollar.
Is he right? Are the similarities between cities in the US the same as countries in Europe?
Some obvious differences are labor mobility and the political culture. Labor mobility in the sense that if any region in the US goes into an economic slump and people lose their jobs, they can move anywhere else in the US to find the same job or a different one. With Europe their tends to be a lot of frictions that could really deter mobility. An example being that if France goes into an economic slump, its workforce can't all move to Germany. After all doing something like that requires them to learn German, and adapt to their culture all of which increases the moving costs that it deters or at the very least slows down their movement.
Does that mean its doomed to fail? I say probably not.
One reason is that the worry that labor would move less frequently can be not as big as some economists believe. The OECD published a report here that shows that mobility right now may be even stronger than the US.  In fairness the data shows greater mobility in the newly joined eastern countries, while the rest of the Eurozone shows the same little-to-no mobility it has for the past few years.
Second is that the single currency union wasn't created as an economic program to stimulate growth. It was a political and strategic project meant to put an end to Europe's countless wars with itself. No country would presumably want to go to war with another country that it shared a currency, and had strong trade ties with.
But that won't stop some economists from predicting the end of the single currency. In the end nobody knows for sure. 

What's up with these weird sounding words?

I was thinking about a way to improve the performance of economics students and decided that definitions might be a good way to help them. So if your a student wondering what the heck your professor is talking about in class. This post may help you.
First one is "utility" this is by far the most used word in economics. You'll hear it from your first intro class to your phd asset pricing program. It doesn't mean anything super fancy, or something that must be "utilized" it's merely the measurement for someone's happiness. That's it! Nothing fancy at all just think that if I'm happier I'm getting more utility.  A variation that different professors might use are "welfare" it's pretty much the same thing and has nothing to do with food stamps.
Next is one that will confuse even the brightest graduate students. Some economists might say a phrase like "stochastic dynamic general equilibrium" when referring to some sort of economic activity. To explain it I'll break it down.
Stochastic means random. Some of you that are physicists might have heard of stochastic calculus and it sort of has the same meaning here.
Dynamic just means that things change.
And general equilibrium is basically where it all ends up. 
An analogy that I heard yesterday from David Zetland (who has his own blog here) was soccer.
The stochastic part are the random things that happen in the game.
The dynamics come in when because a player did something another player is going to do something. And if the first player had done something different then the second player would have done something different too. 
General equilibrium is where it ends up being whether it's 0-0, 1-2 or whatever the score is. 
So next time someone asks you if you know what stochastic dynamic general equilibrium means just say "yeah it's like soccer".
Optimization is also something you may hear in your intro classes. It the process of achieving your maximum utility.It can also be called acting optimally. 
Marginal is one that every economist should know. It's like a physicist not knowing the definition of mass. It just basically means adding one more of something. An extra unit of output or an extra hour of studying. It can mean adding another of anything. 
There are other words that get used a lot as well. Such as interest rates, money, discounting. These are for more specific economists so I won't articulate them here. 
If there is anything else you think I should mention feel free to write a comment.