Economics & Finance

Chicago Boy WV forwards an AP article that confirms what we all know: equity markets are thin and whippy because volume is down, and volume is down because everyone is waiting for the war.

– This NYT article discusses a report (pdf link) by a pair of economic researchers who think that war in Iraq is likely to have a significant negative effect on world stock markets. This goes against conventional wisdom that markets will rally in response to the war, but (therefore?) I think these guys may be right. It’s noteworthy that the researchers base their inferences on data from Tradesports.com, an Irish online betting exchange that I discussed in previous posts (here and here). The researchers argue that the Tradesports.com contracts may be more reliably predictive than are those on the respected Iowa Electronic Markets:

The Saddam Security is in fact more widely and frequently traded than the typical contract on the Iowa market. Wall Street is over-represented among market participants, and evidence from a variety of sources suggests that these data do in fact reflect underlying war probabilities.

Here’s an article about similar research one of the co-authors did on elections. One of the more interesting sentences:

Wolfers, an assistant professor of economics who as a youth worked for a bookmaker in his native Australia, followed a hunch about the predictive power of betting markets in forecasting the outcome of political elections.

So much for abstract theorizing.

Johnathan Pearce cites Andrew Sullivan’s critical observations about increased federal spending under George W. Bush. Sullivan makes a good point. However, Pearce goes Sullivan one better and decries federal deficits, which are not quite the same issue.

Deficits are actually an important constraint on federal spending. In the ideal world we would have a small and balanced federal budget, but our more likely alternatives are a large federal budget with a deficit or a large federal budget with a surplus. A surplus functions much like a silent tax increase whose proceeds will be spent by Congress (as happened in the 1990s), whereas a deficit leads mainly to additional federal borrowing — which is less destructive to productivity and incentives than are tax increases and may itself create pressure for reduced spending. Surpluses allow legislators to increase spending without incurring the political costs associated with explicit tax increases, while deficits create political pressure to spend less. The question of whether to balance the budget is not trivial, but the main goal should be to reduce the overall level of government spending. Ironically, deficits, because of their negative political consequences, may advance this goal most effectively.

Politicians tend to like surpluses and dislike deficits. That should tell us something.

Professor Bunyip scores some excellent hits, en passant, on a well-known practitioner of the trendy stupidity that is known as “socially responsible investing.” The Prof. is harsh on the lady (there are so many other mediocre fund managers to pick on!), but his points are well taken. When evaluating uses for your money, look at results and not merely stated intentions. If the goals and realities don’t match, look elsewhere. And beware attractive do-gooders who take a big cut for themselves.