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Politics and Short Termism

August 3, 2015

What is an asset that pays $1 immediately worth? $1 obviously. If it cost less than that, people would buy it and make money, and if it cost more, no one would buy it.

What is an asset worth $1 a year from now worth? Well, that depends on a lot of things: Time preference, alternative investments, risk of default, etc. But fundamentally, the value of the asset is based on the payout in the future, and the relative value of future money compared to money today.

For some reason, when it comes to stocks, many people’s heads turn to mush. If you know amount of all dividends and stock buybacks, so you can calculate the present value of the stock precisely. Dividend payments from this year get added to dividend payments one year in the future, plus payments two years in the future, all the way up until the company goes bankrupt. The value of any stock is the amount that people expect the company to pay out in the future, discounted by the amount of time until those payments happen, the risk that a company will go bankrupt, and a risk that their profit will go down. Adding a resale market doesn’t change things because the new buyers can also calculate present values.

The thing that is bad about short termism is not the short term profitability, it’s the long term losses. But if everyone knows the long term profits are going down, the asset price will adjust accordingly. If the stock’s price goes down as a result on short termism, CEOs will be punished for their poor performance and there is no systemic problem.

So what do you need for short termism to actually be a problem? There need to be people who are tricked by it to sell to. Investor A knows the company’s profitability will decrease because of short termism, but Investor B does not, so Investor A sells the stock to Investor B at a high price. This is a game of cat and mouse and in the real world, sometimes companies pull off the deception, and sometimes they do not. Companies which do short term strategies a lot go out of business and are replaced by other companies, so short termism is unsurprisingly, a short term only strategy.

Enter the politicians. Capitalism bashing is popular, especially when you attack something that sounds evil and no one understands. Bonus points if your solution has literally nothing to do with the problem. In this case, the proposed solution is to give CEOs more independence from boards of trustees. Of course several CEOs have jumped on board in support as well. But boards are comprised of primarily long term investors. You don’t get a seat on the board if you are running a month long short operation, you get a seat if you’ve held stock for a fair amount of time or hold a large fraction of the stock. These are precisely the sorts of people who DON’T want short termism. Even if you did get a majority stake in a company, if you do a bunch of short termist stuff, who exactly are you going to sell your shares to? Private equity firms were accused of this sort of behavior, but when investigated, it turned out not to be true. If you have a reputation for short termism, you must take extra care not to do it so that you can convince people to buy the stock from you eventually. Doing short termist policies is not a long term strategy! In any event, giving CEOs more independence will likely result in more short termist polices, not less.

Kevin Erdmann:
“Isn’t it funny how so many people hold these two opinions in their heads at the same time:
1) Wall Street is just focused on the next quarter and they push corporations to have short term motives.
2) There was a stock market bubble 15 years ago built around bidding up prices to unprecedented levels for an entire basket of firms which had never been profitable and had no near-term plans for being profitable.”

Assorted Links

August 3, 2015

1. What’s the Most Important Supreme Court Case No One’s Ever Heard Of?

2. The automation myth.

3. If education were covered like sports.

4. Low oil prices are lasting a long time. Political arrangements can change drastically in response to relative price shifts. Reading stuff like this makes me want to reread Structure and Change in Economic History.

5. The saddest thing I have seen in a long time.

One Million Views Giveaway

July 28, 2015

1 millionth view

UPDATE: THE GIVEAWAY IS OVER. I have selected all of the winners.

Today marks the 1 millionth view on my blog, which is a huge milestone. As a celebration, I will be giving away some rare Warframe items, since Warframe is the primary reason I’ve gotten so many views. I will email the winners 1 week after this post, and hand out the prizes through Warframe’s trading system.

There will be 3 prizes:

1st prize: 250 Platinum + 3 items of your choice from the list below

2nd prize: 100 Platinum + 2 items from the list below

3rd Prize: 50 Platinum + 1 item

Arcane Helmets:
Aura Trinity
Aurora Frost
Avalon Excalibur
Cholera Saryn
Chorus Banshee
Coil Mag
Espirit Vauban
Essence Loki
Flux Nova
Gauss Mag
Pulse Volt
Scorpion Ash
Storm Volt
Vanguard Rhino

Prime Sets:
Frost Prime
Mag Prime
Braton Prime
Burston Prime
Latron Prime
Sicarus Prime
Dakra Prime
Reaper Prime

Rare mods (2 per pick):
Accelerated blast
Arrow mutation
Barrel diffusion
Blaze
Berzerker
Bleeding willow
blind rage
Burdened Magazine
Coiling Viper
Constitution
Continuity
Coolant Leak
Critical Deceleration
Crossing Snakes
Decisive Judgement
Dual Rounds
Efficient Transferral
Enemy Sense
Energy Channel
Fired up
Firestorm
Fleeting Expertise
Flow
Focus Energy
Fortitude
Frigid Blast
Frostbite
Guardian (not gold, but rare)
Hammer Shot
Handspring
Heavy Trauma
Hell’s Chamber
Hollow Point
Hollowed Bullets
Hunt
Hyperion Thrusters
Ice Storm
Intensify
Iron Phoenix
Jagged Edge
Lethal Torrent
Magnum Force
Malicious Raptor
Master Thief
Metal Auger
Morphic Transformer
Narrow Minded
Natural Talent
Pistol Ammo Mutation
Pistol Pestilence
Power Throw
Quick thinking
Ravage
Rage
Reflex Guard
Rending Strike
Retribution
Rifle Ammo Mutation
Sanctuary
Seeker
Seeking Force
Seismic Palm
Shotgun Ammo Mutation
Shred
Sniper Ammo Mutation
Split chamber
Spoiled Strike
Stabilizer
Stalk
Steady Hands
Streamline
Stunning Speed
Sundering Strike
System Reroute
Tainted Clip
Tainted Mag
Tainted Shell
Thunderbolt
Tranquil Cleave
Toxic Barrage
Transient Fortitude
Undying Will
Unleashed
Vicious Spread
Vigor
Vile Acceleration
Vital Sense
Volcanic Edge
Whirlwind
Wildfire

It’s all about that Target

July 24, 2015

It’s fairly common to see someone waxing about macroeconomic policy and describe a desired central bank action without any reference to a policy target. Some examples: “The Fed shouldn’t do any QE”, or “The Fed should raise interest rates” (of course no mention of when and by how much).

Monetary policy, like all human action, is a purposeful activity. You do it so that some goal is achieved. The purpose of macroeconomic policy is to hit one, and only one, target. The central bank can either make policy looser or tighter. If policy becomes looser, prices will go up, and vice versa. They can only hit one target, since if two prices move in different directions, they have to pick one.

Example
Suppose your target is the price of apples. Both apples and oranges cost $1. If the price of oranges goes up to $1.20, and you try to get it to go back to $1, you’ll have to lower the price of apples by 20% as well. The relative prices won’t change and you’ll have abandoned your apple price target. You can target the average price of apples and oranges if you like, but it has to be one thing that gets targeted.

Obliviousness to the Facts
Before saying that monetary policy should be looser/tighter make sure inflation isn’t already at an all time high/low. If deflation is higher than it’s ever been, and expected inflation is lower than it’s been since the Great Depression, maybe it’s not a good time to demand even more contractionary policy. For some reason, when inflation is high, people call for more inflation. When deflation is high, they call for more deflation. I have no idea why this is, but it happens.

In any event, beware of any pundit who expresses a policy preference without a target. Sometimes monetary policy is wrong and needs to change, but we get nowhere if we just advocate a policy without specifying what that policy should actually achieve.

Assorted Links

July 23, 2015

1. Ordoliberalism

2. Reintroducing ex-prisoners to society

3. A few good existential comics:
http://existentialcomics.com/comic/1
http://existentialcomics.com/comic/51
http://existentialcomics.com/comic/88

I have been reading all of them lately.

4. The drug war is driving domestic spying.

5. Interfluidity on price stickiness

Algorithms, Prices, and Economic Calculation

July 14, 2015

This post is in response to this article by Adam Gurri, which is a response to this article by Adam Ozimek.

Ozimek’s article is a somewhat disjointed list of firms that use algorithms to price things, and some observations on other examples of when markets work pretty well. It’s pretty short, so perhaps he just didn’t have enough space to fully develop the argument, but I’m not sure what he was going for.

The idea that you could run Uber without markets is so distant from reality that neither of the Adams even consider it. The non-market Uber would not just algorithmically compute prices, it would try to actually allocate rides to specific people at specific times, potentially years in advance. Central planning is not about coming up with a single price, given an environment where all other prices are determined by competitive markets. That’s easy. It’s about coming up with all prices, quantities, and allocations simultaneously. That’s the vision Hayek and Mises were refuting, not the idea that companies should set prices according to supply and demand via algorithm.

A Firm is not the market. Algorithms are a pricing strategy. Yes, it’s better that Uber’s price goes up when it rains, but algorithms can’t replace markets, because they require the context of a market to work. For example, Uber’s algorithm would have spit out higher price if not for Lyft. The reason Uber gains so much benefit from algorithmically pricing its product is precisely because their main competitors, taxis, don’t vary their prices at all. They are the margin, and as such, they must react more than if everyone varied their prices a bit less.

Gurri approvingly quotes Harry Collins: “[Algorithmic pricing] only works because the surrounding social organism makes up and ‘repairs’ its deficiencies.” Exactly right. Without the price system to transmit the information necessary to feed into the algorithm, it would not have the raw information necessary to make a reasonable calculation. Customers need the prices of alternative goods to decide whether they want to spend their money on Uber rides. Drivers need not only to consider the wages of alternate jobs, but also the subjective value of their leisure time.

Firms are islands of central planning. They don’t operate as markets, because of the transactions costs of using price signals. Firms have always used algorithms to allocate resources within themselves, this is nothing new to the computer age, it’s just that our algorithms are better today. I don’t think make or buy decision is as critical to the debate as Gurri implies, but it is an important part. The totality of the victory of the free market side of this debate is demonstrated by the fact that slight variations of their vision is considered a refutation, whereas the socialist side is not considered at all since it is too absurd.

Assorted Links on Greece

July 6, 2015

1. Greece rejects the bailout terms.

Probably on the whole good news, but as with anything, there are good aspects of this and bad aspects. Greece needs to reform. They need to balance their budget and reduce the amount of corruption. Voting yes would have helped them do that. However, they also need to default and get a clean start.

2. Yanis Varoufakis has stepped down as finance minister. He doesn’t seem too bothered.

3. Interview by Die Zeit with Piketty. I don’t like Piketty much, but this interview is fan-f’n-tastic. Nearly every line is quotable. The German culture surrounding debt is really terrible and it’s fun to see someone call them out.

4. Switching currencies would be hard. If Greece leaves the Euro, the natural question is “who is next”?, with possible answers of Italy, Spain, or Portugal. If any of those leave, the pressure on the remaining countries will increase. Without southern Europe the whole currency devaluation and unified market justification reasons for the Euro will be gone. What is the point if it’s just going to be Belgium, France, and Germany still in?

The Euro is not even close to being the optimal currency zone. The ECB have shown themselves to be completely inept. I see no reason why defaulting should result in leaving a currency zone per se. In the U.S., States and municipalities can default without leaving the dollar. Why not Europe? Should the Euro exist? Probably no. Should now be the time for Greece to leave? Also no. It would create too much chaos. Changing currencies should be done with careful planning and fairly long transitional periods. The U.K. is looking pretty darn prescient these days.greek debt copared

6. Scott Sumner comments.

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