Scope and Banking

Posted on by

A reader recommended this post by Jeff Carter.

The days of the one stop shop that Sandy Weil envisioned when he built Citigroup ($C) are gone.

I have always believed that there are diseconomies of scope. Companies with many lines of business are difficult to manage effectively, in my view.

In the case of banking, I thought that the “financial supermarket” fad of the 1980s was silly. Consumers are fine having separate vendors for credit cards, checking accounts, and stock portfolios.

I have to say, though, that it is not just banks that defy my prejudice against multiple business lines. Amazon has branched into all sorts of unexpected businesses, such as renting Web servers. Google is another example of a company that is not strictly bounded in what it businesses it will try.

Some possibilities:

1. I am correct, and whenever you see a company with many lines of business, whether it’s a bank or a tech firm, it represents the CEO’s ego gain and the shareholders’ wealth loss.

2. I am somewhat correct, but the diseconomies of scope are actually quite small. Six lines of business can be managed almost as effectively under one organization as under six totally separate entities.

3. I have it wrong. There actually are tremendous fixed costs to developing a good decision-making structure, and CEO talent is scarce. These super-managers, or management super-cultures, can handle a sixth line of business more effectively than other managers can handle a first.

Medicare Spending by Age Group

Posted on by

Timothy Taylor writes,

on a per capita basis, Medicare costs are rising faster for those at later ages. In 2000, for example, Medicare typically spent about 2.4 times as much for a 90 year-old as for a 65 year-old. By 2011, it was spending about 2.8 times as much

There is much more at the link. He cites a Kaiser Family Foundation analysis.

Something to bear in mind is that the mix of ages within Medicare can change. If you get an increase in “young old” in a given year, then average spending could decline, even though on a lifetime basis Medicare spending is not falling, and may even be rising.

Annual Physicals vs. Evidence

Posted on by

Ezekiel Emanuel writes,

Those who preach the gospel of the routine physical have to produce the data to show why these physician visits are beneficial. If they cannot, join me and make a new resolution: My medical routine won’t include an annual exam.

He cites controlled experiments showing that the Null Hypothesis is true for the routine physical exam.

Not surprising, really. Ask Robin Hanson.

Pointer from Jason Collins.

Robin Hanson, Manorialist

Posted on by

Robin Hanson writes,

I’d predict that if there were many for-profit cities most people would be okay with them, as they’d be reluctant to move to worse-run non-profit cities.

This reminds me of Spencer Heath, whose descendant wrote,

Spencer Heath once reasoned that if a new town were developed under unified ownership and its land parceled among the occupants by means of long-term land leasing rather than subdivided in fee, we would have an entrepreneurial community in principle very much like a hotel carried out-of-doors and writ large. In light of both the size and the complexity of many contemporary hotels, Heath’s suggestion that hotels might be viewed as prototypes of cities of the future is far more credible today than when he wrote sixty years ago. The MGM Grand in Las Vegas promotes itself as a self-contained city, and it does approach a truly generalized community. It includes shopping malls, professional offices, convention facilities, restaurants and cafes, chapels, theaters and art galleries, medical services, a security force, a monorail station, and the list goes on. It is significantly larger — counting room guests, service staff and visitors — than was the city of Boston at the time the United States gained its independence from England.

He terms this manorialism. What Hanson proposes is a way of getting from here to there–of having cities sell their land and the right to enact rules to a private buyer.

Hanson writes as if the current owners of a city are those who currently own its property. That does not take into account the teachers’ union, which acts as if it owns the county where I live. Given the political power that the union exercises, it could hold hostage any sale of the sort that Hanson contemplates.

Babies and Marriage: One Pattern, Two Explanations

Posted on by

The WSJ reports

For every 1,000 unmarried U.S. women ages 15 to 44 in 2013, there were 44.3 births, down 2% from 2012 and 7% from 2010, CDC data show.

In contrast to unmarried women, birth rates for married women increased 1% in 2013 from 2012 to 86.9 births. In fact, they’re up 3% since 2010, after declining 5% between 2007 and 2010. (The absolute number of births among married women in 2013, 2.34 million, remained slightly below 2010’s 2.37 million.)

That piece, and this one, view this as a change in behavior, as if a constant group of married women decided to have more children, and a constant group of unmarried women decided to have less.

However, there is another possible explanation. Suppose that the two constant groups are “planners,” meaning women who only have children once they are married, and “non-planners,” meaning women who are willing to have children while unmarried. Also, suppose that among planners the rate of child-bearing is highest between years 3 through 10 of marriage. What happens if the marriage rate declines among planners because of a weak economy? Because they are unmarried and will not have children, you will see an increase in unmarried women not having children. Because the proportion of new marriages (where couples are not ready to have children) drops, you will see a bit of an uptick in married women having children. No fundamental change in behavior, just a decline in marriage rates among planners due to the recession.

I am not claiming that this is the explanation. But I need to see better quantitative analysis to rule it out.

Ignoring Hotelling, Ignoring Standard Macroeconomics

Posted on by

Rabah Arezki and Olivier Blanchard write,

Futures markets suggest that oil prices will rebound but will remain below the level of recent years.

Pointer from Mark Thoma.

Futures markets are bound to tell you that oil prices will remain near current levels, with a tendency to rise. If not, there is an arbitrage opportunity. If futures prices were far below spot prices, then producers would pump lots of oil and holders of inventories would try to sell every drop as soon as possible, until current prices fell. If futures prices were far above spot prices, then producers would cap wells and holders of inventories would fill every storage tank to the brim, until current prices rose.

I find the Hotelling model of resource pricing persuasive. In that model, the futures price and the spot price do not contain independent information. The relationship between the two is governed by storage cost and the rate of interest.

Then there is this:

central banks’ forward guidance is crucial to anchor medium-term inflation expectations in the face of falling oil prices.

This statement confused me on many levels.

1. The drop in oil prices that is already behind us would not seem to cause a downward shift in medium-term inflation expectations. The quoted phrase seems to equate the future with the past and levels with rates of change.

2. Elsewhere in the article, the authors point out that for oil importing countries, a drop in oil prices will boost aggregate demand. Well, from a conventional macroeconomic standpoint, that is the end of the story. There is no reason at all for monetary authorities to think that all of a sudden they need to counter the deflationary impact of an increase in aggregate demand. That is an oxymoron.

The Returns to College Going Forward

Posted on by

Nick Bunker writes,

Intuitively, then, increasing the supply of educated workers should reduce inequality as it would increase wages among a broader supply of more educated workers. But that assumes the demand for educated workers will continue to rise. Problem is, recent research finds that the demand for skilled labor appears to be on the decline.

Pointer from Mark Thoma.

Let us think about the “race between education and technology” idea. The Goldin-Katz story is that the high school movement helped produce a work force that could earn decent incomes in the industrial era. This is a nice just-so story, but note that in the late 19th and early 20th centuries the just-so story was that industrialization was reducing the demand for skills, replacing the craftsman with the assembly-line worker.

But let us suppose that more education is needed to enable the typical worker to keep pace with changes in technology. That is, suppose we buy that there is a race between education and technology. In that case, I am pretty sure that education has to lose that race.

Change in technology is being led by Moore’s Law. The core components of computers get twice as good every couple of years. Maybe that is slowing down a bit. But even so, it is much faster than the rate of improvement in steam engines in the 19th century or electric motors in the 20th century.

As an indicator of faster technological change, look at how much more quickly smart phones achieved mass adoption in comparison with personal computers.

As an indicator of how hard it is for humans to keep up, look at computers and chess. Twenty years ago, the world’s biggest computer could not have beaten the human world champion. Now, you could to it with a laptop. Maybe even a smart phone.

The metaphor of a “race” suggests that the two participants are capable of moving at the same speed. But if you compare Moore’s Law with the highest feasible rate at which me might increase educational attainment, you realize that the two speeds are hopelessly different. Either we come up with some radical, paradigm-shifting way of improving human learning capacity (genetic engineeering? implants? Diamond Age primers?) or the machines are certain to win.

Nassim Taleb Quote Bleg

Posted on by

I remember Taleb saying something to the effect that risk in financial markets is like a lion (or tiger?) hunting, in that it will find the weakest prey. Can anyone find such a quote? I have tried basic Google searches and searches through my blogs, but without success.

Peter Wallison and the N-word

Posted on by

He says,

By 2008, before the financial crisis, there were 55 million mortgages in the US. Of these, 31 million were subprime or otherwise risky. And of this 31 million, 76 % were on the books of government agencies, primarily Fannie and Freddie. This shows where the demand for these mortgages actually came from, and it wasn’t the private sector. When the great housing bubble (also created by the government policies) began to deflate in 2007 and 2008, these weak mortgages defaulted in unprecedented numbers, causing the insolvency of Fannie and Freddie, the weakening of banks and other financial institutions, and ultimately the financial crisis.

Remember what the Washington Post Style section proclaimed on January 1st. Narrative is out. Facts are in.

Of course, in addition to the Freddie and Fannie securities, there were lots of private-sector securities backed by risky mortgages. My contention is that this boom was fueled by risk-based capital rules, which stated that once these loans were packaged into securities, divided into tranches, and blessed by rating agencies as AAA, banks could earn three times the return on such mortgages as could be earned by originating and holding an old-fashioned, low-risk mortgage.

Reset Your Clock to 2003

Posted on by

The WSJ reports,

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said Tuesday rock-bottom borrowing costs in the bond market are not a positive vote on the economic outlook.

My reaction:

1. This is another echo of 2003-2004, when Fed officials were equally puzzled by low long-term rates. I was even more puzzled than they were back then, and I am even more puzzled than they are now.

2. The conventional wisdom is that the bond markets watch the Fed, because the Fed has magical control over everything. To me, it seems more realistic to have the Fed watching the bond markets for clues about the economy. The Fed is actually powerless to alter the consensual hallucination.

3. I remember when Tyler Cowen described blog readers as like followers of a TV show or comic strip. They have cumulative knowledge of your blog, so that you can refer implicitly to what you have written previously, and they enjoy little inside jokes. Twitter has changed that. Now I have a lot of one-off readers, who leave comments that show that they know absolutely nothing of my previous writing. They have no context for my thinking on macroeconomics, and so they just decide that I am an ignoramus. I have gotten advice from people to make my blog post headlines more Twitter-friendly. In fact, I am reconsidering whether I want to get any traffic at all from Twitter. In the long run, I think I will like what I write more if I ignore the one-off reader population.