Monday, October 8, 2012
Small US investor an anachronism
Financial Review
PUBLISHED: 06 Oct 2012
While the Dow and the S&P indices were stealing all the headlines
over the last decade, a quiet revolution was occurring in the market
that’s gained little attention.
Call it the institutionalisation of the stockmarket. In the past decade the number of retail investors in the stockmarket has dropped steeply.
Company filings show the individual investor has been gradually replaced by ever larger index funds, pensions and quant funds. That has caused a fundamental shift in the balance of power in the stockmarket. And it’s something public companies are only beginning to grapple with.
For years, public companies thought they knew who their shareholders were.
Not any more. High-speed, computer-driven trading by quant funds in particular makes it harder than ever for companies to know who owns them. Often it’s merely a computer program, not a person, picking a stock to buy.
Moreover, the extensive use of derivatives blurs the boundaries of ownership. The owner listed in a share registry may have traded away any economic interest in a particular stock.
Retail investors used to be a pillar of the market, demanding and receiving attention from companies and their advisers. In recent years, though, retail investors have been disappearing from the stockmarket.
Partly that’s because there’s been a shift to mutual funds and index funds and away from individual stock ownership.
In the 1980s one-quarter of US households owned a mutual fund. By the end of the 1990s almost half of all households invested in mutual funds, according to the Investment Company Institute.
The reverse is true about direct stock ownership. In 1999, 25.5 per cent of households owned individual stocks directly. By 2011 that dropped to 20 per cent, according to ICI.
At the same time as more investors have shifted into mutual funds, there’s been a decline in the overall number of Americans who actually hold any stock at all.
Today about 46 per cent of US households have any exposure to stocks, either directly or indirectly, while in 2001 almost 60 per cent of households held stocks.
While individuals have been disappearing, institutions have emerged as the dominant owners of the stockmarket. Institutions include active investment managers, index funds, quant funds, public pension funds, hedge funds and exchange-traded funds.
According to one analysis by Goldman Sachs, in 1998 institutional investors owned 57.1 per cent of the stockmarket. By 2009 that had grown to almost three-quarters.
The composition of institutional investors has also been changing. More institutional shareholders are typically passive investors such as index or quant funds, rather than active fund managers.
There are a number of interesting implications. For starters, households these days have considerably less power to influence public companies than they did in the past.
Holding stock through a mutual fund means there’s an intermediary between the investor and the company. Will the index fund manager have the same concerns about executive compensation, for instance, or any other corporate governance issue as the investor?
As long as the stock meets the index manager’s performance requirement, mightn’t he or she be satisfied with that? But then who’s looking out to make company management better?
Then there are issues for public companies. How do companies talk to and communicate with shareholders when some of them might actually not even be human?
What’s more, the rise of derivatives and other complex securities means companies might not even know who their shareholders are. Two years ago the management of US retailer JC Penny was shocked to learn that two activist investors, Pershing Square Capital Management and Vornado Realty Trust, suddenly owned almost 27 per cent of the company after exercising derivatives positions.
The shift in the balance of power in the market puts more influence in the hands of traditionally passive shareholders. The big question is what they will do with that increased power. Could Vanguard, for instance, the pioneer of index funds, become a more active shareholder?
The CEO of Vanguard hinted earlier this year about a growing focus on corporate governance.
“We continue to be generally optimistic in our assessment of governance practices broadly,” F. William McNabb said. “Nonetheless, the tension among the roles of regulators, shareholders, company directors and executives in corporate governance matters remains a subject of much debate and we believe there is still substantial room for improvement on a number of fronts.”
How all this plays out remains to be seen as institutions adjust to their new, more powerful positions and companies adjust to their new shareholders.
One thing is clear, though. The US stockmarket is now a game of big players. The era of the little investor is long gone.
PUBLISHED: 06 Oct 2012
Anna Bernasek
Call it the institutionalisation of the stockmarket. In the past decade the number of retail investors in the stockmarket has dropped steeply.
Company filings show the individual investor has been gradually replaced by ever larger index funds, pensions and quant funds. That has caused a fundamental shift in the balance of power in the stockmarket. And it’s something public companies are only beginning to grapple with.
For years, public companies thought they knew who their shareholders were.
Not any more. High-speed, computer-driven trading by quant funds in particular makes it harder than ever for companies to know who owns them. Often it’s merely a computer program, not a person, picking a stock to buy.
Moreover, the extensive use of derivatives blurs the boundaries of ownership. The owner listed in a share registry may have traded away any economic interest in a particular stock.
Retail investors used to be a pillar of the market, demanding and receiving attention from companies and their advisers. In recent years, though, retail investors have been disappearing from the stockmarket.
Partly that’s because there’s been a shift to mutual funds and index funds and away from individual stock ownership.
In the 1980s one-quarter of US households owned a mutual fund. By the end of the 1990s almost half of all households invested in mutual funds, according to the Investment Company Institute.
The reverse is true about direct stock ownership. In 1999, 25.5 per cent of households owned individual stocks directly. By 2011 that dropped to 20 per cent, according to ICI.
At the same time as more investors have shifted into mutual funds, there’s been a decline in the overall number of Americans who actually hold any stock at all.
Today about 46 per cent of US households have any exposure to stocks, either directly or indirectly, while in 2001 almost 60 per cent of households held stocks.
While individuals have been disappearing, institutions have emerged as the dominant owners of the stockmarket. Institutions include active investment managers, index funds, quant funds, public pension funds, hedge funds and exchange-traded funds.
According to one analysis by Goldman Sachs, in 1998 institutional investors owned 57.1 per cent of the stockmarket. By 2009 that had grown to almost three-quarters.
The composition of institutional investors has also been changing. More institutional shareholders are typically passive investors such as index or quant funds, rather than active fund managers.
There are a number of interesting implications. For starters, households these days have considerably less power to influence public companies than they did in the past.
Holding stock through a mutual fund means there’s an intermediary between the investor and the company. Will the index fund manager have the same concerns about executive compensation, for instance, or any other corporate governance issue as the investor?
As long as the stock meets the index manager’s performance requirement, mightn’t he or she be satisfied with that? But then who’s looking out to make company management better?
Then there are issues for public companies. How do companies talk to and communicate with shareholders when some of them might actually not even be human?
What’s more, the rise of derivatives and other complex securities means companies might not even know who their shareholders are. Two years ago the management of US retailer JC Penny was shocked to learn that two activist investors, Pershing Square Capital Management and Vornado Realty Trust, suddenly owned almost 27 per cent of the company after exercising derivatives positions.
The shift in the balance of power in the market puts more influence in the hands of traditionally passive shareholders. The big question is what they will do with that increased power. Could Vanguard, for instance, the pioneer of index funds, become a more active shareholder?
The CEO of Vanguard hinted earlier this year about a growing focus on corporate governance.
“We continue to be generally optimistic in our assessment of governance practices broadly,” F. William McNabb said. “Nonetheless, the tension among the roles of regulators, shareholders, company directors and executives in corporate governance matters remains a subject of much debate and we believe there is still substantial room for improvement on a number of fronts.”
How all this plays out remains to be seen as institutions adjust to their new, more powerful positions and companies adjust to their new shareholders.
One thing is clear, though. The US stockmarket is now a game of big players. The era of the little investor is long gone.
A new type of tickle down economics
Around the world, economic policy in
recent years has been based on a simple belief. If you make sure that all the banks
are doing fine, the rest of the economy will eventually follow suit.
That’s what’s behind so called ‘quantative
easing’, the cornerstone of the Federal Reserve’s economic policy since the
financial crisis. And the Fed’s not alone. The Bank of England and the European
Central Bank pursued the same policy in the aftermath of the 2008 financial
panic. The Bank of Japan has done it since 2001.
The policy was born out of necessity.
With official interest rates set near zero, further interest rate cuts don’t do
anything. The theory of quantitative easing is that central banks can stimulate
the economy by printing money to buy longer maturing bonds. The holders, of
course, are primarily banks and other financial institutions.
That is supposed to help in three ways.
First, when banks themselves are in trouble it ensures that they don’t go bust.
Second, putting money in the hands of banks and institutions means they can lend
more to businesses and households.
Third, the central bank offers more
than the otherwise prevailing market rate to induce bondholders to sell. That
sends prices up and pushes down yields on those longer term bonds. If all goes
well, lower long term interest rates result and actors in the real economy see
a greater incentive to borrow and invest.
With employment in the US stalled, the
Fed has now turned to a third round of quantative easing, announcing it will
buy $40 billion a month of mortgage backed securities. Stated more clearly, the
Fed is printing money to buy real estate loans for a little more than they
would otherwise fetch.
It’s worth asking whether putting that money
into banks now is going to boost the economy.
Back in 2008, when the banks were the
source of the problem, quantative easing helped stabilize institutions on the
verge of collapse and averted what looked to be a real disaster.
The second time the Fed embarked on quantative
easing was in 2010 and 2011 when economic growth slowed to crawl speed. At that
time, the biggest effect of the Fed’s policy was on the stock market, sparking
a bull charge upwards from financial crisis lows.
But now the banks are doing very well.
The problem is a lack of hiring.
Economists think the rising stock
market may have had a slight wealth effect, helping to boost consumption at the
higher end. But the number of Americans owning stocks has been falling since
2001 when it reached a peak of nearly 60 percent. Today less than half of
households own any stocks at all, while the vast majority of stock wealth is
concentrated in a small sliver of the population. In contrast, a far greater
wealth effect could come from boosting the housing market where two-thirds of Americans
own their own home.
Whether quantative easing boosts the broad
economy or not hinges on the willingness of banks to lend. If banks get extra
funds from bond sales but don’t lend them out to companies and households, it
won’t help the economy. Companies and homebuyers may want to borrow at those
low, low rates but banks have to agree to take the risk. Big companies can
access stock markets and debt markets on their own, but small and medium firms
and individual homebuyers have few options.
So how willing are banks to lend right
now?
Since the financial crisis, banks have been
cutting their risk. They have lent readily to big companies and the most
creditworthy individuals, but not to anyone else. That leaves out the vast
majority of the population.
According to recent figures from the
Fed survey of senior loan officers, lending standards are easing but only in
the area where banks have already been lending—big companies and high quality
individuals. There’s just one problem. Those companies and individuals have
already borrowed as much as they want at historic low rates. They can’t use any
more money at the moment.
The Fed’s survey shows that there has
been no shift in lending to small and medium firms or consumers with less than
perfect credit. In fact, the Fed reported that standards have tightened on both
prime and nontraditional mortgages. It seems that a lot of people would like to
borrow but are being shut out.
Then where does that leave QE3? So far the Fed’s announcement of QE3 boosted the stock market. Major indicators like the Dow and S&P are trading near record highs. Bond traders may see a windfall as well. But unless banks change their lending standards, it won’t boost the economy.
Quantative easing is the latest in a long line of trickle down economic policies. Tax cuts for the already wealthy and for the corporate sector have not proven particularly powerful ways to stimulate the broader economy. Those policies have led to growing disparity between haves and have nots. Quantative easing looks like more of the same.
Monday, September 24, 2012
Even Republicans are losing faith
Financial Review
PUBLISHED: 22 Sept 2012
America has had no shortage of successful businessmen who think
national politics will be easy. Many people enjoyed watching the
presidential aspirations of Donald Trump. And then there’s Mitt Romney.
Business politicking isn’t for the meek. But that’s small potatoes compared with the real thing. Maybe that’s why Romney has been looking like a rank amateur.
While Americans are divided over who to vote for this November there’s one thing they can agree on: Romney has run a lacklustre campaign.
According to a USA Today/Gallup Poll, almost 60 per cent of Americans expect Obama to win the presidency. Intrade, the widely watched online betting site, tells a similar tale. Romney’s chances of becoming president have been steadily dropping. At present the odds are two to one against him.
The fact that Romney is struggling shouldn’t really come as a surprise. Not long ago we had an agonising series of Republican primaries. From the outset Romney was perceived as a lousy candidate by many within his own party.
The way Romney ultimately gained nomination was essentially brute force: applying more money and more personnel to the process than his rivals could match.
That’s been his current strategy, too. Romney seems to hold an unwavering belief that if he outspends Obama and the economy stays weak, he will win. That’s it, nothing more. He hasn’t offered many specifics, and the vague promises he has made haven’t gained any traction with the public. No matter what has come his way, he’s stuck to that simple strategy. Romney is no improviser.
But Romney’s approach hasn’t worked. In the long presidential campaign, candidates are scrutinised for their political skill, intellect and personal appeal. Time and time again, on those fronts, Romney showed he’s no match for the President. Obama lacks business experience and has a paltry fortune compared to Romney. But when it comes to politics he makes Romney look like a schoolboy.
Remember the last time Barack Obama made a mistake? Most people don’t. It was two years ago, when he was faulted for insulting conservative voters in Pennsylvania when he speculated that bitterness over the economy caused them to cling to their guns or their religion.
Since then Obama has run an absolutely flawless campaign. Romney’s campaign is a different matter, with gaffe after gaffe. It’s reached the point where even other Republicans and fellow conservatives are beginning to distance themselves from him.
The fun started when Romney maintained that “corporations are people”. Trying to elicit sympathy for companies at a time of booming profits and lousy wages didn’t endear him to voters. Then, when he went to London before the Olympic Games to preen over his success in organising the Winter Games in Salt Lake City, he wound up insulting his hosts. A tabloid headline said it all: “Mitt the Twit”. Prime Minister David Cameron helpfully pointed out that organising an Olympics in the “middle of nowhere” is a bit easier than doing it in one of the busiest cities there is.
Next came Romney’s comments relating to the death of Ambassador Christopher Stevens during a violent outbreak in Libya. Before he learnt what really happened, Romney attacked Obama for sympathising with anti-American protesters. There was just one problem. Romney’s assertions were blatantly false.
Polls show a large majority fault him for the unseemly attack while those in the know shuddered at the lack of temperament.
And finally a media storm erupted over a leaked video showing Romney telling a group of $US50,000 donors he doesn’t care about 47 per cent of Americans. “Well there are 47 per cent of people who will vote for the President no matter what … so my job is not to worry about those people,” he assured them. Romney went on to explain that the 47 per cent believe they are victims who are dependent on the government and won’t take responsibility for their lives.
Romney’s claim that those 47 per cent don’t pay income taxes was clearly false since all workers pay payroll tax even if they don’t pay other income taxes. And Romney has paid shockingly low taxes himself, so low he’s too embarrassed to release the details. By putting income taxes front and centre with the public, he hasn’t done any favours for his wealthy constituents who enjoy very low taxes compared with many workers.
Read a lot of news accounts and they’ll say the presidential race is still close. But what becomes apparent when you look closer is that Romney is not only behind but losing. The US electoral college system is winner-take-all in most states. The nationwide popular vote is legally irrelevant.
That’s why candidates spend all their money, energy and time on states that are up for grabs. And lately Romney is having trouble in states he must win to have a chance at the presidency. A key trouble spot is Ohio, where Romney is significantly behind Obama.
A Louisiana political candidate in 1983 famously quipped: “The only way I can lose this election is if I’m caught in bed with either a dead girl or a live boy.” Obama is too smart to make that kind of boast, but it seems to apply nonetheless.
PUBLISHED: 22 Sept 2012
Anna Bernasek
Business politicking isn’t for the meek. But that’s small potatoes compared with the real thing. Maybe that’s why Romney has been looking like a rank amateur.
While Americans are divided over who to vote for this November there’s one thing they can agree on: Romney has run a lacklustre campaign.
According to a USA Today/Gallup Poll, almost 60 per cent of Americans expect Obama to win the presidency. Intrade, the widely watched online betting site, tells a similar tale. Romney’s chances of becoming president have been steadily dropping. At present the odds are two to one against him.
The fact that Romney is struggling shouldn’t really come as a surprise. Not long ago we had an agonising series of Republican primaries. From the outset Romney was perceived as a lousy candidate by many within his own party.
The way Romney ultimately gained nomination was essentially brute force: applying more money and more personnel to the process than his rivals could match.
That’s been his current strategy, too. Romney seems to hold an unwavering belief that if he outspends Obama and the economy stays weak, he will win. That’s it, nothing more. He hasn’t offered many specifics, and the vague promises he has made haven’t gained any traction with the public. No matter what has come his way, he’s stuck to that simple strategy. Romney is no improviser.
But Romney’s approach hasn’t worked. In the long presidential campaign, candidates are scrutinised for their political skill, intellect and personal appeal. Time and time again, on those fronts, Romney showed he’s no match for the President. Obama lacks business experience and has a paltry fortune compared to Romney. But when it comes to politics he makes Romney look like a schoolboy.
Remember the last time Barack Obama made a mistake? Most people don’t. It was two years ago, when he was faulted for insulting conservative voters in Pennsylvania when he speculated that bitterness over the economy caused them to cling to their guns or their religion.
Since then Obama has run an absolutely flawless campaign. Romney’s campaign is a different matter, with gaffe after gaffe. It’s reached the point where even other Republicans and fellow conservatives are beginning to distance themselves from him.
The fun started when Romney maintained that “corporations are people”. Trying to elicit sympathy for companies at a time of booming profits and lousy wages didn’t endear him to voters. Then, when he went to London before the Olympic Games to preen over his success in organising the Winter Games in Salt Lake City, he wound up insulting his hosts. A tabloid headline said it all: “Mitt the Twit”. Prime Minister David Cameron helpfully pointed out that organising an Olympics in the “middle of nowhere” is a bit easier than doing it in one of the busiest cities there is.
Next came Romney’s comments relating to the death of Ambassador Christopher Stevens during a violent outbreak in Libya. Before he learnt what really happened, Romney attacked Obama for sympathising with anti-American protesters. There was just one problem. Romney’s assertions were blatantly false.
Polls show a large majority fault him for the unseemly attack while those in the know shuddered at the lack of temperament.
And finally a media storm erupted over a leaked video showing Romney telling a group of $US50,000 donors he doesn’t care about 47 per cent of Americans. “Well there are 47 per cent of people who will vote for the President no matter what … so my job is not to worry about those people,” he assured them. Romney went on to explain that the 47 per cent believe they are victims who are dependent on the government and won’t take responsibility for their lives.
Romney’s claim that those 47 per cent don’t pay income taxes was clearly false since all workers pay payroll tax even if they don’t pay other income taxes. And Romney has paid shockingly low taxes himself, so low he’s too embarrassed to release the details. By putting income taxes front and centre with the public, he hasn’t done any favours for his wealthy constituents who enjoy very low taxes compared with many workers.
Read a lot of news accounts and they’ll say the presidential race is still close. But what becomes apparent when you look closer is that Romney is not only behind but losing. The US electoral college system is winner-take-all in most states. The nationwide popular vote is legally irrelevant.
That’s why candidates spend all their money, energy and time on states that are up for grabs. And lately Romney is having trouble in states he must win to have a chance at the presidency. A key trouble spot is Ohio, where Romney is significantly behind Obama.
A Louisiana political candidate in 1983 famously quipped: “The only way I can lose this election is if I’m caught in bed with either a dead girl or a live boy.” Obama is too smart to make that kind of boast, but it seems to apply nonetheless.
Monday, September 17, 2012
Labor stats needn’t be such hard work
Financial Review
PUBLISHED: 15 Sept 2012
Since peaking at 10 per cent less than three years ago, unemployment has fallen by almost 2 full percentage points. Yet instead of good cheer, Americans seem more pessimistic.
It didn’t help that the main news story from August’s job numbers was that the drop in joblessness was due to a sharp decline in the workforce. The labour force participation rate – percentage of the adult population employed or actively seeking work – dropped to 63.5 per cent, its lowest level in more than three decades.
Commentators automatically assumed it was due to discouraged workers leaving en masse. Perhaps that’s correct. But official figures don’t break it down in a meaningful way. The drop could be due to any number of reasons; there’s no official way to be sure.
Most accounts of the job figures focused on the bad news – a paltry 96,000 new jobs created last month – and more or less ignored the lower jobless rate. That says a lot about the official “headline” unemployment number: it’s not particularly useful.
The jobless figure comes from a government survey of households. The method dates from 1940. The survey has been updated over the years but relies on a crude binary paradigm. Those who answer the survey are either employed or not; there’s no in-between.
The Bureau of Labour Statistics, which compiles the report, says the basic concepts “are quite simple”. People with jobs are employed. People who are not working for pay and who are looking for a job and available to work are unemployed.
The BLS says being employed means getting paid for anything or earning profit on work done. It also includes pitching in on a family farm or helping out at a family restaurant even if you don’t get paid. People who are not employed and either not looking for work or not available to work are not in the workforce.
Simple, maybe. But way out of date. Those concepts arose in a world long gone where men worked at a job for life, women kept house and kids went to school. Looking back at the 1940 cohort, nearly anyone looking for work in the US that year would find it before long.
The labour market has only become more complex. These days there’s a whole spectrum of work from traditional full-time work, various part-time occupations, moonlighting, freelancing, volunteering, and entrepreneurial roles. A person in a job may not be earning to her potential, and a person out of a job may be very productive.
If the official job numbers tend to include everyone who gets a pay cheque, they’re not an effective measure for what we want to use them for: a guide to national economic wellbeing. The BLS does publish an alternative measure. But they are just additions to the base unemployment number and, therefore, not fundamentally different.
Of most concern is that we’ve come to rely on an official statistic that doesn’t tell us very much. We still have little idea how much unused labour capacity is being wasted and how financial hardship arising from that unused capacity is distributed among the population.
It’s not just the jobless figure though. For instance, the poverty line that we use to set critical policy has been long criticised by economists as needing a complete overhaul to keep up with changes since it was introduced in 1963. The measure assumes an average family spends one third of income on food, yet today that’s more like 12 per cent.
While economists remain stuck in the typewriter age, the rest of mankind is in the middle of the biggest revolution in data and information in history. The cost of acquiring and analysing data has fallen so far, so fast, that it has become possible to measure the economy on a granular level. Many government agencies would like to modernise the major economic measures but often the talent and funding just aren’t there.
Meanwhile, outside government, thousands of economists pore over the same dubious numbers month after month. Private sector economists could devote more time and energy to making innovative measurements of the economy.
A few enterprising economists have done just that. Bob Shiller, Karl Case and Allan Weiss devised a national housing price index. Introduced just in time to capture the housing bubble, the Case-Shiller index provided invaluable help in understanding the extent and impact of the housing crash.
Today’s digital economy needs and deserves better economic data. Developing better ways to measure economic performance may be the single biggest opportunity in economics today.
PUBLISHED: 15 Sept 2012
Anna Bernasek
It should have been good news that the US jobless rate fell last
month from 8.3 per cent to 8.1 per cent. Surprisingly, that message
landed with a thud.Since peaking at 10 per cent less than three years ago, unemployment has fallen by almost 2 full percentage points. Yet instead of good cheer, Americans seem more pessimistic.
It didn’t help that the main news story from August’s job numbers was that the drop in joblessness was due to a sharp decline in the workforce. The labour force participation rate – percentage of the adult population employed or actively seeking work – dropped to 63.5 per cent, its lowest level in more than three decades.
Commentators automatically assumed it was due to discouraged workers leaving en masse. Perhaps that’s correct. But official figures don’t break it down in a meaningful way. The drop could be due to any number of reasons; there’s no official way to be sure.
Most accounts of the job figures focused on the bad news – a paltry 96,000 new jobs created last month – and more or less ignored the lower jobless rate. That says a lot about the official “headline” unemployment number: it’s not particularly useful.
The jobless figure comes from a government survey of households. The method dates from 1940. The survey has been updated over the years but relies on a crude binary paradigm. Those who answer the survey are either employed or not; there’s no in-between.
The Bureau of Labour Statistics, which compiles the report, says the basic concepts “are quite simple”. People with jobs are employed. People who are not working for pay and who are looking for a job and available to work are unemployed.
The BLS says being employed means getting paid for anything or earning profit on work done. It also includes pitching in on a family farm or helping out at a family restaurant even if you don’t get paid. People who are not employed and either not looking for work or not available to work are not in the workforce.
Simple, maybe. But way out of date. Those concepts arose in a world long gone where men worked at a job for life, women kept house and kids went to school. Looking back at the 1940 cohort, nearly anyone looking for work in the US that year would find it before long.
The labour market has only become more complex. These days there’s a whole spectrum of work from traditional full-time work, various part-time occupations, moonlighting, freelancing, volunteering, and entrepreneurial roles. A person in a job may not be earning to her potential, and a person out of a job may be very productive.
If the official job numbers tend to include everyone who gets a pay cheque, they’re not an effective measure for what we want to use them for: a guide to national economic wellbeing. The BLS does publish an alternative measure. But they are just additions to the base unemployment number and, therefore, not fundamentally different.
Of most concern is that we’ve come to rely on an official statistic that doesn’t tell us very much. We still have little idea how much unused labour capacity is being wasted and how financial hardship arising from that unused capacity is distributed among the population.
It’s not just the jobless figure though. For instance, the poverty line that we use to set critical policy has been long criticised by economists as needing a complete overhaul to keep up with changes since it was introduced in 1963. The measure assumes an average family spends one third of income on food, yet today that’s more like 12 per cent.
While economists remain stuck in the typewriter age, the rest of mankind is in the middle of the biggest revolution in data and information in history. The cost of acquiring and analysing data has fallen so far, so fast, that it has become possible to measure the economy on a granular level. Many government agencies would like to modernise the major economic measures but often the talent and funding just aren’t there.
Meanwhile, outside government, thousands of economists pore over the same dubious numbers month after month. Private sector economists could devote more time and energy to making innovative measurements of the economy.
A few enterprising economists have done just that. Bob Shiller, Karl Case and Allan Weiss devised a national housing price index. Introduced just in time to capture the housing bubble, the Case-Shiller index provided invaluable help in understanding the extent and impact of the housing crash.
Today’s digital economy needs and deserves better economic data. Developing better ways to measure economic performance may be the single biggest opportunity in economics today.
Tuesday, September 11, 2012
Words may be action enough for ‘invisible man’ Fed
Financial Review
PUBLISHED: 08 Sept 2012
A week ago, America’s economic glitterati gathered at a resort in Wyoming with the spectacular backdrop of the rugged Grand Teton mountain range.
The Jackson Hole conference, hosted each year by the Federal Reserve Bank of Kansas City, brings together an elite group of central bankers, policymakers, academics and Wall Street economists. It’s America’s answer to Davos, and those who get invited feel very much on the inside of the power elite.
The Federal Reserve chairman is the star, and his address is eagerly anticipated, sometimes revealing a new insight, idea or even policy move. Papers presented by other guest speakers fuel discussions, and new ideas can at times percolate out of the two-day symposium. This year’s meeting was named “The Changing Policy Landscape”.
So what exactly came out of Jackson Hole, 2012? Zilch. At least as far as the Fed is concerned, the policy landscape may change but policy remains the same.
Fed chairman Ben Bernanke spoke about monetary policy since the financial crisis. He extolled the virtues of non-traditional monetary policy tools, namely quantitative easing, whereby the Fed bought up stacks of bonds from institutions and investors. But he stuck to an almost wooden script, announcing no actions but promising that the Fed was ready to do something if needed.
It’s been the same story since the last major round of quantitative easing ended a year and a half ago.
Yet, even as Bernanke spoke, the signs of a weakening economy were evident. Just before his speech, the Commerce Department said second-quarter growth figures for the US economy were revised down to an annual 1.6 per cent from the previously estimated 2.4 per cent. Since then the August data has been weak. New home sales slowed sharply and manufacturing, the lone bright spot post-crisis, contracted for the third month in a row.
The problem is the more Bernanke says the Fed is standing by, the less reassuring he gets. Could somebody remind him of the old adage that actions speak louder than words? With Europe collapsing and the US in stagnation, the Fed is the invisible man of the global economy.
Bernanke knows that by law he has a dual mandate: to promote price stability and full employment. Price stability isn’t a problem, but employment is far from where it should be. Setting aside economics entirely, there’s a legal requirement for Bernanke to act that he’s been simply ignoring.
And when you consider the economics, continued Fed inaction borders on the reprehensible.
Labour economists recognise that an extended period of high unemployment results not only in a short-term, dead-weight loss of economic output, but a long-term destruction of skills and earning potential that will haunt the economy for years. The US needs action now.
Some observers call for a third round of quantitative easing, a so-called QE3. But with $US2 trillion in bonds already sitting on the government’s books, others are concerned about the costs. That’s because when the Fed bought those bonds it printed the money to pay for them out of thin air. As a result the Fed isn’t lifting another finger.
It doesn’t have to be this way. There are other potentially far less expensive tools. To take one example, a paper presented at Jackson Hole by Columbia University economist Michael Woodford argues the Fed could nudge the economy without spending any money at all.
Woodford analysed the options central banks have for boosting the economy when interest rates sit about as low as they can go, near the so-called “zero bound”. He focuses on two areas.
The first he calls forward guidance. By that he means explicit statements by the Fed about the outlook for future monetary policy. The second he calls balance sheet actions. That’s when the central bank changes the size or composition of its balance sheet, for example through quantitative easing.
Woodford suggests that the more effective approach is to change future inflationary expectations. The Fed could help the economy by making an explicit promise to hold off on interest rate increases even after a stronger recovery takes hold.
That would signal that while inflation remains low now, the Fed will tolerate a bit more once the economy gets going. Woodford reasons that this would actually be more effective than further quantitative easing.
The beauty of Woodford’s argument is it doesn’t cost anything. If the Fed embarks on a publicity campaign to change inflationary expectations and it doesn’t work, the Fed can change its tune. Isn’t that exactly the role of the Fed chairman, to communicate with the public?
Whether you buy Woodford’s argument or not there are surely things the central bank can be doing instead of sitting on its hands. With so much destruction caused by high unemployment, it’s past time for the Fed to take the lead.
PUBLISHED: 08 Sept 2012
Anna Bernasek
A week ago, America’s economic glitterati gathered at a resort in Wyoming with the spectacular backdrop of the rugged Grand Teton mountain range.
The Jackson Hole conference, hosted each year by the Federal Reserve Bank of Kansas City, brings together an elite group of central bankers, policymakers, academics and Wall Street economists. It’s America’s answer to Davos, and those who get invited feel very much on the inside of the power elite.
The Federal Reserve chairman is the star, and his address is eagerly anticipated, sometimes revealing a new insight, idea or even policy move. Papers presented by other guest speakers fuel discussions, and new ideas can at times percolate out of the two-day symposium. This year’s meeting was named “The Changing Policy Landscape”.
So what exactly came out of Jackson Hole, 2012? Zilch. At least as far as the Fed is concerned, the policy landscape may change but policy remains the same.
Fed chairman Ben Bernanke spoke about monetary policy since the financial crisis. He extolled the virtues of non-traditional monetary policy tools, namely quantitative easing, whereby the Fed bought up stacks of bonds from institutions and investors. But he stuck to an almost wooden script, announcing no actions but promising that the Fed was ready to do something if needed.
It’s been the same story since the last major round of quantitative easing ended a year and a half ago.
Yet, even as Bernanke spoke, the signs of a weakening economy were evident. Just before his speech, the Commerce Department said second-quarter growth figures for the US economy were revised down to an annual 1.6 per cent from the previously estimated 2.4 per cent. Since then the August data has been weak. New home sales slowed sharply and manufacturing, the lone bright spot post-crisis, contracted for the third month in a row.
The problem is the more Bernanke says the Fed is standing by, the less reassuring he gets. Could somebody remind him of the old adage that actions speak louder than words? With Europe collapsing and the US in stagnation, the Fed is the invisible man of the global economy.
Bernanke knows that by law he has a dual mandate: to promote price stability and full employment. Price stability isn’t a problem, but employment is far from where it should be. Setting aside economics entirely, there’s a legal requirement for Bernanke to act that he’s been simply ignoring.
And when you consider the economics, continued Fed inaction borders on the reprehensible.
Labour economists recognise that an extended period of high unemployment results not only in a short-term, dead-weight loss of economic output, but a long-term destruction of skills and earning potential that will haunt the economy for years. The US needs action now.
Some observers call for a third round of quantitative easing, a so-called QE3. But with $US2 trillion in bonds already sitting on the government’s books, others are concerned about the costs. That’s because when the Fed bought those bonds it printed the money to pay for them out of thin air. As a result the Fed isn’t lifting another finger.
It doesn’t have to be this way. There are other potentially far less expensive tools. To take one example, a paper presented at Jackson Hole by Columbia University economist Michael Woodford argues the Fed could nudge the economy without spending any money at all.
Woodford analysed the options central banks have for boosting the economy when interest rates sit about as low as they can go, near the so-called “zero bound”. He focuses on two areas.
The first he calls forward guidance. By that he means explicit statements by the Fed about the outlook for future monetary policy. The second he calls balance sheet actions. That’s when the central bank changes the size or composition of its balance sheet, for example through quantitative easing.
Woodford suggests that the more effective approach is to change future inflationary expectations. The Fed could help the economy by making an explicit promise to hold off on interest rate increases even after a stronger recovery takes hold.
That would signal that while inflation remains low now, the Fed will tolerate a bit more once the economy gets going. Woodford reasons that this would actually be more effective than further quantitative easing.
The beauty of Woodford’s argument is it doesn’t cost anything. If the Fed embarks on a publicity campaign to change inflationary expectations and it doesn’t work, the Fed can change its tune. Isn’t that exactly the role of the Fed chairman, to communicate with the public?
Whether you buy Woodford’s argument or not there are surely things the central bank can be doing instead of sitting on its hands. With so much destruction caused by high unemployment, it’s past time for the Fed to take the lead.
Wednesday, September 5, 2012
Standardised results fail to pass the good education test
Financial Review
PUBLISHED: 01 Sept 2012
As September dawns, the “back to school” season begins in America.
Millions of families prepare their offspring for new schools and new
classes in the coming academic year.
So how is the American school system doing? The answer isn’t particularly reassuring. Formerly the most admired education system in the world, US education seems costly, inefficient and increasingly ineffectual compared with other systems.
Education is a big business. Americans spend more than $US600 billion a year on public elementary and secondary education. Meanwhile, survey after survey shows American students on average are slipping in educational attainment compared with the rest of the world, at least as far as standardised tests can measure.
The centrepiece of American education reform to date has been to link teacher evaluations to student test scores. In 2009, $US4.35 billion worth of federal grants went to states with teacher evaluation systems based on student test performance.
So popular is the idea of measuring teachers based on student test scores that the Obama administration is hoping to spread the use of standardised tests to the university level.
The idea is to use the standardised tests as a way to compare results to costs at colleges. Over the past 30 years the cost of college education has soared in the US. College remains a major financial challenge for many families, leaving many wondering if it’s really worth the expense.
Standardised testing has broad support. In addition to President Barack Obama, even fierce opponents such as conservative Republican governor of New Jersey Chris Christie believe it’s a great idea.
Christie just signed a teacher tenure reform bill tied to student test scores. Now when teachers are evaluated for tenure after four years, student test scores will be taken into account. Although the actual weight of test scores is still to be determined, Christie wants test scores to count for half of a teacher’s tenure evaluation.
In neighbouring New York, after a two-year fight, the state passed a new teacher evaluation system in February. School districts can link up to 40 per cent of a teacher’s pay to student test scores.
The appeal is that test scores are simple. They can be easily ranked and applied to teachers and schools as well as students. They seem objective. But while measurement is crucial in business and economics, you have to measure the right things, the right way.
Consider how reliable standardised tests actually are as an indicator of future performance. On that score standardised tests have plenty of flaws. Often they don’t accurately represent what students know or understand. They certainly can’t measure a student’s interest or engagement in a subject. And standardised tests tend to promote narrow, literal interpretations over nuance and creativity.
As standardised tests gain currency with students, teachers and schools, the school curriculum becomes dominated by test preparation. Unfortunately teaching to the test rather than teaching other intellectual skills students need to grow and develop can actually limit or hinder academic achievement.
There are some unintended consequences. For one, cheating seems to have become more widespread. With so much now riding on the results, Americans have experienced cheating scandals involving not only students at our best schools but even teachers and administrators as well.
And then there’s the business of test marking and scoring. In the US that’s a $US700 million market dominated by a handful of big companies: Harcourt Educational Measurement, CTB/McGraw-Hill, Riverside Publishing (a Houghton Mifflin company), and NCS Pearson. Recently Rupert Murdoch’s News Corp announced plans to enter the market. These companies not only supply tests but also test-preparation materials, curriculum content and teacher evaluation. It’s a self-reinforcing market where sales of one service lead to sales of the others.
There’s no doubt teachers need to be evaluated in the job. High-performing teachers need challenge and reinforcement, and low-performing teachers need to improve or move on.
But standardised test scores are a poor substitute for thorough supervision. They are far too narrow a measure to form a true picture of teacher performance.
There are other ways to do it. In fields where education is crucial, for example law or medicine, standardised test results are used to weed out the most unprepared or ill-equipped students. But individual evaluations by knowledgeable professionals are the gold standard for determining who are the top law and medical students, as well as the top schools and teachers. Beyond a threshold, test scores aren’t particularly important in these professions.
So while Americans struggle to reform their education sector, they haven’t spent enough time answering a basic question: what does a good education consist of? Without that answer, all the testing in the world won’t do much good.
PUBLISHED: 01 Sept 2012
Anna Bernasek
So how is the American school system doing? The answer isn’t particularly reassuring. Formerly the most admired education system in the world, US education seems costly, inefficient and increasingly ineffectual compared with other systems.
Education is a big business. Americans spend more than $US600 billion a year on public elementary and secondary education. Meanwhile, survey after survey shows American students on average are slipping in educational attainment compared with the rest of the world, at least as far as standardised tests can measure.
The centrepiece of American education reform to date has been to link teacher evaluations to student test scores. In 2009, $US4.35 billion worth of federal grants went to states with teacher evaluation systems based on student test performance.
So popular is the idea of measuring teachers based on student test scores that the Obama administration is hoping to spread the use of standardised tests to the university level.
The idea is to use the standardised tests as a way to compare results to costs at colleges. Over the past 30 years the cost of college education has soared in the US. College remains a major financial challenge for many families, leaving many wondering if it’s really worth the expense.
Standardised testing has broad support. In addition to President Barack Obama, even fierce opponents such as conservative Republican governor of New Jersey Chris Christie believe it’s a great idea.
Christie just signed a teacher tenure reform bill tied to student test scores. Now when teachers are evaluated for tenure after four years, student test scores will be taken into account. Although the actual weight of test scores is still to be determined, Christie wants test scores to count for half of a teacher’s tenure evaluation.
In neighbouring New York, after a two-year fight, the state passed a new teacher evaluation system in February. School districts can link up to 40 per cent of a teacher’s pay to student test scores.
The appeal is that test scores are simple. They can be easily ranked and applied to teachers and schools as well as students. They seem objective. But while measurement is crucial in business and economics, you have to measure the right things, the right way.
Consider how reliable standardised tests actually are as an indicator of future performance. On that score standardised tests have plenty of flaws. Often they don’t accurately represent what students know or understand. They certainly can’t measure a student’s interest or engagement in a subject. And standardised tests tend to promote narrow, literal interpretations over nuance and creativity.
As standardised tests gain currency with students, teachers and schools, the school curriculum becomes dominated by test preparation. Unfortunately teaching to the test rather than teaching other intellectual skills students need to grow and develop can actually limit or hinder academic achievement.
There are some unintended consequences. For one, cheating seems to have become more widespread. With so much now riding on the results, Americans have experienced cheating scandals involving not only students at our best schools but even teachers and administrators as well.
And then there’s the business of test marking and scoring. In the US that’s a $US700 million market dominated by a handful of big companies: Harcourt Educational Measurement, CTB/McGraw-Hill, Riverside Publishing (a Houghton Mifflin company), and NCS Pearson. Recently Rupert Murdoch’s News Corp announced plans to enter the market. These companies not only supply tests but also test-preparation materials, curriculum content and teacher evaluation. It’s a self-reinforcing market where sales of one service lead to sales of the others.
There’s no doubt teachers need to be evaluated in the job. High-performing teachers need challenge and reinforcement, and low-performing teachers need to improve or move on.
But standardised test scores are a poor substitute for thorough supervision. They are far too narrow a measure to form a true picture of teacher performance.
There are other ways to do it. In fields where education is crucial, for example law or medicine, standardised test results are used to weed out the most unprepared or ill-equipped students. But individual evaluations by knowledgeable professionals are the gold standard for determining who are the top law and medical students, as well as the top schools and teachers. Beyond a threshold, test scores aren’t particularly important in these professions.
So while Americans struggle to reform their education sector, they haven’t spent enough time answering a basic question: what does a good education consist of? Without that answer, all the testing in the world won’t do much good.
Subscribe to:
Posts (Atom)
