disqus

so nudgeblog got me started on disqus.  i'm kind of really happy about this, i can track my comments across all sorts of different blogs and keep an RSS of replies.  excellent.

Income inequality and globalization

Stolen directly from marginal revolution: http://www.marginalrevolution.com/marginalrevolution/2009/11/positive-feedback-in-inequality.html

 

Positive feedback in inequality

Here is a very nice summary of some important trends from Arnold Kling.  Arnold buried the lede on this one so a hat tip to Tim Kane at Growthology.

I think that perhaps the most important trend of the past thirty years is the increased importance of cognitive skills relative to physical labor. Obviously, this has been going on for more than just the past thirty years, but during the past thirty years we saw an acceleration. This has had a number of consequences:
1. It changed the role of women. Their comparative advantage went from housework to market work.
2. This in turn, as Wolfers and Stevenson have pointed out, changed the nature of marriage. Men and women look for complementarity in consumption rather than in production.
3. This in turn leads to more assortive mating, with achievement-oriented men looking for interesting mates rather than for good maids.
4. This in turn leads to greater inequality across households. It also fosters greater inequality among children. The children of two affluent parents are likely to have much better genetic and environmental endowments than the children of two (likely unmarried) low-income parents.
5. Inequality is exacerbated by globalization and technological change. If your comparative advantage is basic physical labor, you have to compete with machines as well is with workers from the Third World.
The net result is an economy that has improved considerably for people with high cognitive skills, but which has improved only somewhat for people with relatively low cognitive skills.

I think this is a remarkably interesting area of study.  Paul Krugman did a lot of work on this as well, pointing out that for a specific set of people, economic growth has been significantly more beneficial.

It's most interesting to point out how almost all the people who think this level of inequality is a good thing are those who have the cognitive skills necessary to benefit.  The King always thinks a monarchy is a good idea.

On why I'm glad I have the job I do

http://freakonomics.blogs.nytimes.com/2009/10/19/financial-illiteracy-among-the-young/

Stephen Dubner, from his Freakonomics blog, points to a study showing my generation to be financially illiterate.

Through my peer-reviewed, purely anecdotal data, this seems to be correct.  It's partly because thinking rationally about finance is not intuitive.  Even worse, the math involved makes it a hassle for someone trying to compute it correctly.

I remember through my training class for securities licenses, many of us had difficulty with the concepts involved. 

If the people who did this for a living had difficulty, what can it be like for the rest of the population?

Kicking things off and the dollar's decline

Every nerd needs a blog.  Especially when you can archive interesting things and keep them for reference!

Regardless of how one feels about the dollar's decline in value against other currencies, there are always ways to make money off what happens.  Most people I've heard with opinions on this seem to think they should switch into bonds, thinking the stock market will inevitably tank from mismanagement.  Either that or they switch into commodities, the holy grail of hedging against inflation.

The real answer, and the one nobody wants to hear, is that there isn't a way to predict this very well.  Strategic management involves being prepared for all things, rather than placing big bets on short term moves.

So how does one prepare for inflation, deflation, robust growth, and a W shaped recovery?

Inflation:  commodities, domestic exporting companies (if your currency flows down, your exports go up because they're cheaper for international markets.  See Japan since the mid 70s.), and international equity/debt (especially emerging markets).  Avoiding import-centric companies, fixed rate long term debt, and short term debt of all kinds.

Deflation: fixed rate long term debt, international equity (developed only, not EM),  short term securities, and import-centric equity.  Specifically avoiding emerging markets of all kinds, commodities.

Robust growth: equity.  all kinds of it.  Avoiding short term debt, newly issued long term debt (if interest rates are low, you might get a discount for high interest long term debt already issued).  avoiding short term securities, you'd be on the sidelines of great chances to make money.

W shaped recovery: Almost nothing but a balanced portfolio.  Investing in everything, not equally, but enough to straddle prices in both directions.

So what is the net effect?  Find a strategy that fits your risk profile.  Stick with it.  Don't try to time the market.  And diversify among all sorts of things.

People hate that kind of advice...