Wednesday, July 23, 2014

Japan Update: We've Waited, Let's See


A few months ago, Stephen Williamson posted this unfortunate picture.


It turned out that the large drop in inflation that he thought was evidence in favor of his views on monetary policy was actually the result of an accidental misuse of Japan data (as I pointed out in this post and in the comments on his blog).  He corrected the mistake and adopted a wait and see attitude, "Thus, the Bank of Japan seems to have had some difficulty in producing inflation - but this time may be different. Given that the Bank seems intent on holding the short-term nominal interest rate at zero (essentially), I don't see it, but I'm curious to see how the data unfolds."

Well, we've waited a bit and can see a little more.  Let's update the graph:



Wow!  It's almost directly opposite of the original.  Japan yoy inflation is up close to 4%.  What liquidity trap?

It's interesting to note that way back in April of 2013, we noticed that markets were predicting a rapid rise in the second year of Abeonomics.  The market predicted .35% for year one (until April 2014) and then 2.3% the following year.  Well, the market estimate was obviously low.  Inflation actually averaged about 0.89%, but we may be seeing that the dynamics of back loaded inflation is substantially correct.  Now will the BOJ be able to hit their target?  What is their target?

Learn This Simple Trick To Know How To Legally Kill Dudes

By Robert H.

This is a weird contradiction I have noticed:

1. Among military and International Humanitarian Law lawyers, there is pretty widespread agreement about the standard for how to judge whether civilian casualties are excessive.  Where there are disagreements, it is over application.  But,

2. Among laymen, there not only isn't agreement about the standard by which to judge civilian casualties, almost no one adopts the standard universally agreed to by lawyers and policy makers.

So, elaboration: Under international law and most national laws, if you want to attack a military target but think you are going to hurt civilians or damage their property in the process, the main test is the Principle of Proportionality.  If the damage that will likely be done to civilians is clearly not proportional to the military advantage you will gain from the attack, it's illegal.  There is a lot to fight over within that definition -- how do we define military advantage, what's proportional, do we judge attacks on a granular or broad level (ie, do we ask "was the air offensive proportional" or "was each air strike proportional") -- but everyone from the IDF lawyers approving gaza air strikes to peacenick UN officials denouncing those same air strikes agree on the basic framework.

No laymen seem to, though.   Instead laymen seem to

1. Obsess over casualties -- especially deaths -- at the expense of property damage or the destruction of materiel.  A pro-war type will treat an attack that blows up a city block as presumptively reasonable and acceptable, provided the block was evacuated ahead of time, despite the fact that damage to civilian property is explicitly weighed in the proportionality analysis.  Just so, a pacifist type will often look at the civilian/combatant casualty ratio rather than taking a more holistic view of "military advantage."  This is in error: an air strike that kills a civilian but blows up a cache of long-range rockets and launchers may yield a higher military advantage than a strike that kills a civilian and a low-ranking Hamas militant while doing no other damage, even though the second strike has a much more favorable civilian/combatant casualty ratio.

2. Adopt extreme positions.  I can't count the number of times I've heard arguments that amount to "any attack that kills civilians is wrong" or "when your enemy hides among civilians, being touchy about civilian casualties just rewards and encourages that behavior, so bomb 'em all."

3. Effectively ignore the other side of the balancing test.  Most of these errors focus on the civilian side of the equation at the expense of the military side: Anti-war types wax eloquent for op-ed after op-ed about all the damage being done to civilians without even trying to articulate what military advantage is being gained.  Alternatively, pro-war types will talk about all the precautions being taken to avoid civilian casualties without going on to argue that civilian casualties are not only low, they are proportional to the military advantage gained.  All that said, you occasionally see people ignore the civilian side in favor of the military advantage side -- "we have to do this to enhance our security/protect ourselves/defeat Hamas" without adding "also it will likely result in bringing us close enough to effecting that goal to be worthwhile when weighed against the harm to civilians."

Anyways, maybe all that is boring, but it strikes me as genuinely weird.  If I ask some random laymen what genocide is or whether it's right to use chemical weapons, I bet they could come close to articulating the international consensus.  If I ask laymen whether it's right to use landmines, they would probably disagree with each other because there isn't an international consensus.  But in the weird world of collateral damage you've got all kinds of international consensus but no lay-understanding.  Weird!

Friday, June 27, 2014

Is The New York Ban On Tiger Selfies Constitutional?

By Robert H.

No. New York’s ban on Tiger Selfies is almost certainly not constitutional.

What is a Tiger Selfie?

It is a picture of yourself posing next to a live, unrestrained (though probably stoned) tiger.  Men in New York use them to attract women because we are a squalid culture  that  hoards and sleeps and feeds and knows not God.

Why is it unconstitutional?

Because it is a content based ban on speech.  The government actually has a lot of freedom to restrict when and where and even how you say things.  “No protests in the park without a permit,” for example.  It has way, way less authority to ban speech based on the *content* of the speech. "No protests against gay rights in the park without a permit." 
In this case, pictures are a kind of speech, “men posing with tigers” is the content of that speech, and banning it puts the government in hot water.

So New York Can’t Do This?

Maybe they can!  If you narrowly tailor your content-based restriction to promote a compelling government interest, the Courts will uphold a content based ban on speech.

Wait, “We Don’t Want Tigers Tortured and Idiots Mauled Over Dating Profiles” Isn’t a Compelling Government Interest?

It Probs is!  But the law may not be sufficiently narrowly tailored.  Here's why:
The Supreme Court very recently struck down a law banning depictions of animal cruelty.  Essentially, the law didn't let you have a photo or video of an animal being hurt or killed if it would be illegal for you to hurt or kill the animal that way in the same jurisdiction the video existed in.  So, for example, a video of someone crushing a marmoset was illegal in a city where it was illegal to crush marmosets.  The Court’s reasoning in striking the law down was that it was overbroad -- it effectively constrained lots of legitimate activity.  So, for example, imagine you go Marmoset hunting in a state where that is legal, film it, and take the video to a city where it is *illegal* to hunt marmosets.  Even though the activity being filmed was totally legal when and where you did it, even though it isn't the more morally objectionable depictions of animal cruelty the law was targeting, you are now guilty under the statute.

This looks analogous to that.  If Siegfried wants to take a picture with his pet tiger in a state where it is legal to have pet tigers, that activity seems perfectly legitimate to me, even if he later takes the picture to New York.  And while it's true that there probably isn't a whole heck of a lot of legitimate "men by tiger" depictions out there, the ratio of "legitimate" to "bad" "men with tiger pictures" seems A. hard to prove, and B. likely to mean you are taking out roughly as much legitimate as illegitimate speech. 


So why might it still be constitutional?


Because the law is complicated and stuff.  More specifically, there may be relevant laws I have missed and courts may find the analogy to the animal cruelty case weaker than I do and I haven't even read the law so what do I know.  This isn't a brief to the Supreme Court, here I'm just winging it. 

Wednesday, June 4, 2014

Incentives Matter

By Robert H.

I have read about 1000 articles and blog posts about how lopsided POW exchanges will incentivize and aid terrorists (see here), but exactly zero about how they will incentivize soldiers and marines.  Aren't the troops homines economici too!?

I can think of two big possible effects:

1. Troops will realize that the military will expend excessive rescources recovering them if captured, and become sloppier about avoiding capture.  This will be bad.

2. Troops will realize the military will expend excessive rescources recovering them if captured, and so fight longer and more bravely in situations where they risk capture.  This will be good.

Obviously these are two sides of the same coin.

I think there are similar trade offs if you look at the "no one left behind" philosophy more broadly:

1. Troops and civilians will realize their lives could be thrown away to save one possibly undeserving person, or even just to recover their body.  This will deject them.

2. Troops and civilians will realize that their fellows will throw their lives away in great numbers for them, even if it's just to recover their body.  This will fortify them against their worst fears and build unit cohesion.

Obviously, I'm not in a position to know whether the net effect of these policies on troop morale is positive, but it's pretty clear that military leadership has thought it was positive since at least 1942*, and purposefully inculcated a "we will not abandon you, even at seemingly irrational cost" propaganda line in order to encourage harder fighting.  And civilians seem to know about and accept this philosophy, if saving private Ryan is any judge.

So why does this "it will incentivize the troops" stuff fall off the radar when people argue about whether the cost for POW exchanges is excessive?  Isn't "we will pay an excessive cost to bring you back if you get captured" something we spend a lot of time and effort trying to credibly promise?

****

*At the outbreak of the war, the ethos seemed to be "we will never have to do anything to rescue you from a pow camp because you will never get captured because you will fight to the death, damn it."  See MacArthur's disappointment in the surrender of the troops at Bataan, or how most of the troops on Wake Island assumed they would fight to the death.    

Wednesday, May 21, 2014

Why Is Only Shakespeare Allowed To Create New Words?

by Charlie Clarke

Shakespeare created many new English words, including really brilliant words like amazement, laughable, lonely, majestic, suspicious and bloody.  The great English writer saw the words we didn't even know we needed and wasn't afraid to experiment.  I'm having trouble finding a list of words that Shakespeare coined that are now defunct, partly because the word defunct was itself invented by Shakespeare.  For instance, he tried unhair twice, "Like balls before me; i'll unhair thy head."  It doesn't seem to have caught on (though Scrabble will accept it).

So when did lovers of English become haters of new words?  Here is Paul Krugman:
1. How can we incentivize students to stop using “impact” as a verb?
2. How can we impact their writing in a way that stops them from using the word “incentivize”?
3. Can we make it a principal principle of writing that “principle” and “principal” mean different things, and you have to know which is which?
I have no problem with Krugman's distaste for "impact" as it doesn't seem any more useful than affect, and point three is just a usage error.  But why do so many old people hate the word incentivize?  Incentivize is a useful word.  The antineologists (not a word, should it be?) seem to prefer encourage or motivate, but they are hardly interchangeable.  Incentivize means "to motivate with incentives" or "to motivate with concrete financial rewards."  A coach motivates his players, but the GM incentivizes them.  Why insist the GM encourage them with incentives?  If the new CEO should do a better job incentivizing employees, no one would confuse that with more heartfelt speeches.

Why not insist that MacBeth's hands be covered with blood, rather than bloody.  They could be bloodstained, except that too was invented by Shakespeare.  Why do antineologists only seem to care about the creation of modern words, and when did they decide the words we had were enough?

I don't suggest we accept every new word or even every word that becomes popular, but I would like less discussion of words we dislike and more discussion of why we dislike them.  Innovation in language can be useful and new words that become popular may be useful, even beautiful. 

Wednesday, May 7, 2014

Liquidity Level or Liquidity Risk

Liquidity has been a pretty hot topic of finance research in the last 10 years and a lot of good work has been done.  Unfortunately, sifting through it can be a little confusing as liquidity can mean a lot of different things in different contexts.

Let's call the liquidity level of a stock, how hard it is to buy and sell.  Can you go to the market and sell as much as you want without moving the price?  Is the price pretty similar whether you want to buy or sell?  Liquidity tends to be measured by either how much trades are moving the price or how large the bid ask spread is.

Let's contrast that with liquidity risk.  We can think of total market liquidity as the average of all the liquidity levels of each individual stocks.  Sometimes the market as a whole is very liquid and sometimes not so much.  The stock market crash of 1987 and the latest financial crisis are examples of large liquidity events.  The average market liquidity dramatically fell.  Liquidity risk is usually measured by a stock returns covariance with total market liquidity.  That is run a regression of market liquidity and stock return.  That estimate (beta) is the stock's liquidity risk.

So, if you are a portfolio manager, which do you care about.  Well, the liquidity level of a portfolio may matter if your strategy requires a lot of turnover and trading, a high liquidity level will make your strategy more expensive.  But if you are worried about liquidity events, events where you may have to sell when the market is tanking, then you really care about liquidity risk.

A recent paper by Lou and Sadka shows that it's liquidity risk that mattered in the financial crisis of 2009:


The liquid stocks that have low liquidity risk do as well as the illiquid stocks with low liquidity risk, and the high liquidity risk stocks do worse than the low liquidity risk stocks whether the stocks tend to be liquid or not.

High liquidity risk stocks become more illiquid when the market becomes more illiquid.  Even if usually they have a lot of liquidity, that liquidity dries up in bad times.

Sunday, April 27, 2014

Is Limited Government Possible?

By Robert H.

I'm not sure many non-lawyers give much thought to the above question, but think about it: the American government is, formally and officially, one of unlimited powers.  If you can get a constitutional amendment passed, you can do anything.* Them's the rules.

For other governments, this is not true.  The German Basic Law has an eternity clause which says that human dignity is inviolable, human rights are great, and this clause can never ever be amended or changed.  Them's their rules.

Now this is a big formal difference, but is it a big practical difference?  And even if it is, does this track what we mean by "limited government?"  For example, when Americans say they want a more limited government, do they mean they want an eternity clause?  Or do they mean they want more rules that can only be changed with supermajority votes?  And if they mean the latter, why don't they just say, "I want more supermajoritian consensus in government?" and argue for that?  And how do they intend to *get* their limits?  Amending the constitution?  That, again, means they are just advocating for supermajoritarian governance.

So, in contrast to libertarian laymen, libertarian lawyers tend to focus less on what formal "limits" should be placed on government (balanced budget amendment!) and more on what processes, procedures, checks, and government/constitutional structures could lead to smaller government (for example, Ilya Somnin's focus on foot voting).  Questions like this are why.  When you dig down into it, saying "government should be limited" is most meaningful when you are really saying "I want these practical, process checks on government."  Otherwise you're just saying "here's a policy I think is great and everyone should be forced to adopt.  Don't ask me how we'll force the issue."

*Ok, you can't deny a state its equal suffrage in the senate or end slavery before 1808, but come on.