The New York Times reported on an analysis of returns on the endowments of the Ivy League schools over the last decade. It found that all the schools’ endowments lagged a portfolio that was 60 percent stock index funds and 40 percent bond funds. (The gap with index funds would be even larger if the mix were 70 percent stock, 30 percent bonds.)
The Ivies invest heavily in hedge funds, which typically charge fees equal to 2 percent of the money invested plus 20 percent of returns over a benchmark. It seems that this pattern of investment is not doing very well for the schools, although some of the richest people in the country run hedge funds.
On the plus side for these schools, by promoting upward redistribution, they are creating more opportunities for their economics, sociology, and other programs, that try to design policies to reduce inequality and increase mobility.
The New York Times reported on an analysis of returns on the endowments of the Ivy League schools over the last decade. It found that all the schools’ endowments lagged a portfolio that was 60 percent stock index funds and 40 percent bond funds. (The gap with index funds would be even larger if the mix were 70 percent stock, 30 percent bonds.)
The Ivies invest heavily in hedge funds, which typically charge fees equal to 2 percent of the money invested plus 20 percent of returns over a benchmark. It seems that this pattern of investment is not doing very well for the schools, although some of the richest people in the country run hedge funds.
On the plus side for these schools, by promoting upward redistribution, they are creating more opportunities for their economics, sociology, and other programs, that try to design policies to reduce inequality and increase mobility.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
Okay, that’s not exactly what it said. Instead, the headline of an article on the protests in France told readers “Unrest in France hinders Macron’s push to revive economy.”
The policies in question include ending a wealth tax on the rich, cutting retirees’ Social Security benefits, and a series of measures designed to reduce the power of unions. While it is possible that Macron has taken these steps because he really does believe that this is the best way to boost economic growth, it is also possible that he has taken these steps because he wants to give more money to rich people.
In this respect, it is worth noting that Macron is a former investment banker. Therefore he is likely to be very rich and to have rich friends.
Okay, that’s not exactly what it said. Instead, the headline of an article on the protests in France told readers “Unrest in France hinders Macron’s push to revive economy.”
The policies in question include ending a wealth tax on the rich, cutting retirees’ Social Security benefits, and a series of measures designed to reduce the power of unions. While it is possible that Macron has taken these steps because he really does believe that this is the best way to boost economic growth, it is also possible that he has taken these steps because he wants to give more money to rich people.
In this respect, it is worth noting that Macron is a former investment banker. Therefore he is likely to be very rich and to have rich friends.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
Right, I meant “patents,” but the logic is the same. When you have a government intervention that raises the price above the free market price then you provide a lot incentive for gaming and corruption. The NYT had a very good piece on this topic just last week. Of course the tariffs on clothes that were being evaded/avoided in that piece were just 10-25 percent. By contrast, patent monopolies raise the price of drugs by the equivalent of several thousand percent. Therefore the incentive for corruption is correspondingly larger.
The NYT gives us the latest example in an article on Actelion Pharmaceuticals agreeing to a $360 million settlement in a case being investigated by the Justice Department. The accusation is that the company, which makes a drug to treat a rare lung condition, was making payments to a patient assistance charity as a way of giving kickbacks on its drug.
This is a mechanism that drug companies can effectively use to entice patients to use their drugs. If they give the money to an intermediary like the charity allegedly used in this case, the charity can then use the money to give patients a discount on the company’s drug. This can increase their sales without a general price reduction.
There would be no incentive for this sort of corruption if drugs were sold in a free market. Unfortunately there are not powerful interest groups to oppose patent monopolies as there are with tariffs on clothes, so we don’t see this sort of analysis in major media outlets.
Right, I meant “patents,” but the logic is the same. When you have a government intervention that raises the price above the free market price then you provide a lot incentive for gaming and corruption. The NYT had a very good piece on this topic just last week. Of course the tariffs on clothes that were being evaded/avoided in that piece were just 10-25 percent. By contrast, patent monopolies raise the price of drugs by the equivalent of several thousand percent. Therefore the incentive for corruption is correspondingly larger.
The NYT gives us the latest example in an article on Actelion Pharmaceuticals agreeing to a $360 million settlement in a case being investigated by the Justice Department. The accusation is that the company, which makes a drug to treat a rare lung condition, was making payments to a patient assistance charity as a way of giving kickbacks on its drug.
This is a mechanism that drug companies can effectively use to entice patients to use their drugs. If they give the money to an intermediary like the charity allegedly used in this case, the charity can then use the money to give patients a discount on the company’s drug. This can increase their sales without a general price reduction.
There would be no incentive for this sort of corruption if drugs were sold in a free market. Unfortunately there are not powerful interest groups to oppose patent monopolies as there are with tariffs on clothes, so we don’t see this sort of analysis in major media outlets.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
An NYT article on the stock market’s plunge also noted that the yield curve, defined as the gap between the interest rate on 10-year Treasury bonds and two-year notes, is close to being inverted. The interest rate on 10-year bonds was just 0.12 percentage points higher than the interest rate on 2-year notes. The piece points out that an inverted yield curve has historically been associated with a recession in the near future.
While I would not rule out a recession (we will have another recession someday), I am less impressed by this signal than the NYT. The longer-term rates tend to follow the expected path of the short-term rate with a longer yield providing a greater premium since the holder of a long-term bond suffers a substantial capital loss if the price goes down.
For example, if I’m holding a 10-year Treasury bond and the interest rate increases from 3.0 percent to 4.0 percent in a relatively short period of time, the price would fall by close to 9.0 percent. To cover that risk, I will want a premium over the short-term rate. The same logic applies to a 2-year note, except that the potential loss from a rise in interest rates is much smaller so the necessary premium is much smaller.
However, the risk in this story is that the Federal Reserve Board will raise interest rates. Currently, the federal funds rate is at 2.25 percent. While there is a good chance the Fed will raise rates by 0.25 percentage points at its meeting this month, Fed Chair Jerome Powell has made it clear that he thinks we are near the end of a cycle of rising rates. For this reason, holders of longer-term debt have less reason to fear that short-term rates will rise much from their current level. Therefore, they are not demanding large risk premiums.
Historically, we have reached this point where investors no longer saw much risk of further rate hikes after a period of aggressive rate increases by the Fed. In 1989, the peak of the federal funds rate was almost 4.0 percentage points above its cyclical low. In the mid-1970s, it was more than 8.0 percentage points, and in 1980 the federal funds rate peaked more than 14.0 percentage points above the low for the cycle.
When the Fed engages in an aggressive round of rate hikes, it is reasonable to bet we will see a recession. In this case, the Fed has been much more modest in its rate increases. While there is little doubt that the rate hikes are having an effect in slowing the economy — housing has been hit hard and the rise in the dollar is causing the trade deficit to rise — these sources of weakness do not seem sufficient to throw the economy into a recession, even if the yield curve does invert.
Note: I had earlier put the loss on a 10-year Treasury bond from a rise in the interest rate at 8.0 percent. Joe Emersberger corrected the mistake.
An NYT article on the stock market’s plunge also noted that the yield curve, defined as the gap between the interest rate on 10-year Treasury bonds and two-year notes, is close to being inverted. The interest rate on 10-year bonds was just 0.12 percentage points higher than the interest rate on 2-year notes. The piece points out that an inverted yield curve has historically been associated with a recession in the near future.
While I would not rule out a recession (we will have another recession someday), I am less impressed by this signal than the NYT. The longer-term rates tend to follow the expected path of the short-term rate with a longer yield providing a greater premium since the holder of a long-term bond suffers a substantial capital loss if the price goes down.
For example, if I’m holding a 10-year Treasury bond and the interest rate increases from 3.0 percent to 4.0 percent in a relatively short period of time, the price would fall by close to 9.0 percent. To cover that risk, I will want a premium over the short-term rate. The same logic applies to a 2-year note, except that the potential loss from a rise in interest rates is much smaller so the necessary premium is much smaller.
However, the risk in this story is that the Federal Reserve Board will raise interest rates. Currently, the federal funds rate is at 2.25 percent. While there is a good chance the Fed will raise rates by 0.25 percentage points at its meeting this month, Fed Chair Jerome Powell has made it clear that he thinks we are near the end of a cycle of rising rates. For this reason, holders of longer-term debt have less reason to fear that short-term rates will rise much from their current level. Therefore, they are not demanding large risk premiums.
Historically, we have reached this point where investors no longer saw much risk of further rate hikes after a period of aggressive rate increases by the Fed. In 1989, the peak of the federal funds rate was almost 4.0 percentage points above its cyclical low. In the mid-1970s, it was more than 8.0 percentage points, and in 1980 the federal funds rate peaked more than 14.0 percentage points above the low for the cycle.
When the Fed engages in an aggressive round of rate hikes, it is reasonable to bet we will see a recession. In this case, the Fed has been much more modest in its rate increases. While there is little doubt that the rate hikes are having an effect in slowing the economy — housing has been hit hard and the rise in the dollar is causing the trade deficit to rise — these sources of weakness do not seem sufficient to throw the economy into a recession, even if the yield curve does invert.
Note: I had earlier put the loss on a 10-year Treasury bond from a rise in the interest rate at 8.0 percent. Joe Emersberger corrected the mistake.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
My friend, Jared Bernstein, laid out the case for a pause in the Fed’s interest rate hikes at its meeting this month. I agree with pretty much everything Jared said, but want to push one point a bit further.
Jared raises the argument made by the more hawkish types that we have well-anchored inflationary expectations that we don’t want to risk losing by allowing inflation to accelerate. This line is given as a rationale for hiking interest rates in a context where inflation even now is under the Fed’s 2.0 percent target. And, this target is, of course, an average, meaning that to be consistent with the target we must have some periods with inflation above 2.0 percent.
Note how the threat we are supposed to fear has been pushed back. It is not actual inflation, that we are supposed to fear, or even potential inflation, which we have no reason to expect to jump in response to modest further reductions in the unemployment rate, it is now expectations that we should worry will become unanchored. This is getting pretty far removed from anything we see in the real world and very much into metaphysical land.
While there is nothing wrong with metaphysical speculation in many contexts, this is not one of them. We know that higher interest rates will slow the economy and keep people from getting jobs. The losers in this story are the most disadvantaged in society, blacks, Hispanics, people with less education, and others who face discrimination in the labor market.
To my view, the Fed has an absolute duty to push the unemployment rate as low as it can go until we see real evidence of inflationary pressures. Any honest economist has to admit we don’t know what this level is. Just five years ago, the median estimate at the Fed was 5.4 percent. That clearly was wrong. I would have said something like 4.0 percent, but even this now looks too high.
The unemployment rate looks likely to get still lower in the months ahead, probably crossing 3.5 percent and likely getting lower. Can it hit 3.0 percent? I don’t know, but let’s see what happens if we try. The potential benefits are enormous and the downsides are shall we say, speculative.
My friend, Jared Bernstein, laid out the case for a pause in the Fed’s interest rate hikes at its meeting this month. I agree with pretty much everything Jared said, but want to push one point a bit further.
Jared raises the argument made by the more hawkish types that we have well-anchored inflationary expectations that we don’t want to risk losing by allowing inflation to accelerate. This line is given as a rationale for hiking interest rates in a context where inflation even now is under the Fed’s 2.0 percent target. And, this target is, of course, an average, meaning that to be consistent with the target we must have some periods with inflation above 2.0 percent.
Note how the threat we are supposed to fear has been pushed back. It is not actual inflation, that we are supposed to fear, or even potential inflation, which we have no reason to expect to jump in response to modest further reductions in the unemployment rate, it is now expectations that we should worry will become unanchored. This is getting pretty far removed from anything we see in the real world and very much into metaphysical land.
While there is nothing wrong with metaphysical speculation in many contexts, this is not one of them. We know that higher interest rates will slow the economy and keep people from getting jobs. The losers in this story are the most disadvantaged in society, blacks, Hispanics, people with less education, and others who face discrimination in the labor market.
To my view, the Fed has an absolute duty to push the unemployment rate as low as it can go until we see real evidence of inflationary pressures. Any honest economist has to admit we don’t know what this level is. Just five years ago, the median estimate at the Fed was 5.4 percent. That clearly was wrong. I would have said something like 4.0 percent, but even this now looks too high.
The unemployment rate looks likely to get still lower in the months ahead, probably crossing 3.5 percent and likely getting lower. Can it hit 3.0 percent? I don’t know, but let’s see what happens if we try. The potential benefits are enormous and the downsides are shall we say, speculative.
Read More Leer más Join the discussion Participa en la discusión
