Subsidies for economists?

My colleagues Gary Becker and Jim Heckman have an interesting OpEd in the Wall Street Journal, arguing for Federal funding for economists. I respectfully disagree.

Yes, economic research is a public good. And, yes, they point to some good examples of good research that was supported by the Federal Government. That does not prove the research would not have been produced without Federal support.

We would demand a much higher standard of proof from, say, the Sugar Farmers of America, asking for continuation of their tariffs, on the grounds that saving the American Family-run sugar farm is a crucial public good that will vanish without support. Or any of the other supplicants from the federal government, all of whom make public interest arguments on behalf of their subsidies and tax brakes. 

We need a grand bargain. I give up mine, you give up yours. If economists pushing for the grand bargain are the first to say, "you give up yours, but we're an important public good," we're hardly credible.  At a minimum, we need a uniform standard of proof of just who is a public good that really would not be produced without Federal support.

The largest subsidy for economic research -- other than the tax exempt status of our employers -- is the National Science Foundation. They give grants to economists. But they don't pay for the one thing that would generate more research -- they won't buy out teaching. Instead, we operate under the fiction that the university pays us for 9 months, and the NSF can then pay "summer salary." (The NIH, which supports some of the research cited by the OpEd, will buy out teaching as they do for real scientists.) One might defend this as a prize for good past research, which is how it works out in practice. Might.

Is this producing important research that would not be done otherwise?  I've received a few NSF grants in the past. I can tell you the answer. I enjoyed the money. The institutions that took 60% "overhead" enjoyed the money. But I would have written exactly the same papers exactly as fast without it. (I don't apply for NSF grants any more. Given my views on others taking federal money, even though the institutions I work for would appreciate the overhead, it seems inconsistent to do so.)

Is there really not enough economic research being done? Research is not a good of which there is simply "more" or "less," like, say domestically-produced corn-based ethanol. It's "good" and "bad." There is a tremendous amount of it. And mostly "bad."

An economist, looking at the way economic research is funded, would say this is a system designed to produce lots and lots of not very innovative papers. 

Ask a few scientists, after a few beers, about how much faster human knowledge increased in the "war on cancer," the massive funding for HIV research, or now global warming. More federally directed research, is not necessarily better.

An economist looking at this system would also predict swift capture, and that the result of Federal support of research would be that lots of research comes to conclusions supportive of the Federal Government and its agencies. How many papers supported by the Federal Reserve are critical of the Fed? How many of the huge volume of health - policy studies even consider market-based approaches that don't have a huge role for federally sponsored health policy research? Is it just a coincidence that the kind of research that ends up being most critical of the Federal government is supported by private foundations, think tanks, and universities that don't take of federal money?

There are other mechanisms. Adam Smith did not have a Federal grant. Most of us support research by teaching, an activity that produces at least some externalties towards research. Private foundations support economic research, and would do so a great deal more if the Federal government did not. Yes, many private foundations have political goals. But they recognize that research is more credible if it's a-political, and as long as there is competition, all voices can get supported.  Having to convince a wider audience of the importance of our work might produce a lot better writing.  I want to see fewer papers and more second drafts!

And what's good for the goose is good for the gander. Many economists look down disdainfully at what our social science and humanities colleagues call research. They view it as jargon-ridden, highly politicized, intellectually shoddy waste of good trees  (or, now, bits). Well, nothing in Jim and Gary's column would not apply fairly to everything done in the academy.  Their panels of experts can write reports, hand out money, and plead public goods as well as we do.

I do agree heartily on support for data. For the moment, the Federal Government does have a unique role in creating and supplying economic data. We can't study what we can't measure. This really is a public good, reasonably well created managed, and starved for resources. But most of our data sources are decades old, and have not been adequately re-thought or expanded in that time.  Especially with the internet, there is more and more private collection and supply of data, but for the moment it cannot supplant the Federal government.

Here I think there is a middle ground where we agree. Economics is not, yet, "big science" requiring massive infrastructure to produce research. Economic data collection is "big," and best directed by researchers not government officials. Data can be sold, so it's not a pure public good. But I'm willing to go with the idea that not enough good data is produced. Much of the research Jim describes as success is really massive data collection. But much of the federal research subsidy to economists does not go to creating new, publicly useful data sets. So, I think we can agree on research support for researchers to produce new data, but we don't need support to analyze that data. Fortunately, for now, that just needs an office, a computer, and some free time

All Quite In The Western Front.

Nothing much to say really. Today was a nothing happened kind of day. In the morning when the futures were down about 5 points, I sent out tweets that it is not the real deal. We may still have to wait for few more days to see some action.

I have initiated some short position yesterday and they are almost unmoved or in small red. So that's not all that bad. I cannot expect to hit the nail on head in every attempt but at-least it did not go up huge. There will be couple of false moves before the real one. Have to have patience.

Bulls and bears have their own story to tell and both sides have merits in their argument. But I am following cycles, which says that possible trouble ahead. All the price levels that were to be achieved, have been reached for now. And a cycle top is close by. So let us see which way the wind blows.

The market has been a meat grinder for the last few months and it has been very difficult to make money or invest. The best course of action was no action at all. Hope you guys have kept your fire power dry.  So whichever way the opportunity comes, you will be ready to move.

For now though, I think the opportunity is to the downside.

Thanks for sharing my thoughts. 

Bain, Private Equity and All That

What is the economic role of private equity?  Private equity firms buy or invest in businesses, mostly private businesses, sometimes public companies.  The usual pattern is that a private equity investment helps a fledgling company expand by providing funding and often management expertise.  For public companies, private equity is often the source of turning a poorly run company into an efficiently run business.  With rare exceptions, private equity enhances shareholder value.

Absent private equity, private and public businesses alike are less valuable.  Why?  Because private equity funds are a source of equity capital, a liquidity provider (through the sale of a company to a private equity fund), and an enhancer of value (by providing management and consulting expertise).  Because of the existence of private equity funds, business large and small are more valuable.  More valuable businesses hire people and are the engine of economic growth in a free enterprise economy.

Politicians who have nothing else to brag about have been attacking private equity as if there is something evil about the industry.  If you despise free enterprise and prefer government control of business, then you probably will not like private equity.  But, if you like free enterprise, job creation and a health economy, then you will love private equity.  President Obama has made his views clear.  He is no fan of private enterprise, job creation, or free markets.  It is hardly a surprise that Obama does not like private equity.

Almost There?

For a change let me share a chart with you.

This funny little chart is actually McClellan Oscillator in Kelter Channel. You will note that when the McOs crosses the upper band, it means a correction is due, when it is below the lower band, it means a bounce is coming. Not 100% right all the time, but close. Again, you have to see it in conjunction with many other things and nothing is 100% right all the time.

Given that bit of information, may be we still have little bit more to go. I am not saying it will, but be mentally prepared. Anyway, it is close to the upper channel. So anything can happen and my XLF cycle topped today.

Going past 1400 serves two purpose. Kills all the weak hands and secondly, convinces everyone else that this rally is for real. Last March, I was reading in the Blogosphere that the rally is not suspect, we who doubt it are. Rather we are crazy to doubt the rally. I am reading exactly the same thing again. Not long after that, the markets topped in April. Will history repeat soon? We will find out.

Yesterday I wrote that I am afraid that they might push it past 1400 mark. Because it is so easy and kind of watermark for many investors, who invest , trade based on TA. That if SPX crosses 1400, we will go long kind of folks. And that's how it happened today. SPX closed just above 1400.

But we cannot afford to get married to one side of the market. If the market decides to go up and up, we are not going to fight it. But since GS recommended to its clients to but EURO, I am hopeful that EURO will now tank soon and will take the risk assets along with it. It may take few days to work out.We have to be sceptical yet opportunistic.

I shorted with few puts and have invested less than 5% of my trading capital. My risk tolerance is 20% of the trade. 20% of 5% is 1%. In other word I am risking 1% of my capital for now and if things do not work out that way I think, I will get out. If things move in my direction, I will add more in stages. So let us see how things play out.

I am unable to devote more time to the market with my other assignments and in any case, I should not worry about every tick. It does not matter what happens in short term so long I get the big picture right. I do not think we are in for a new Bull run but who knows.

Thanks for reading my ramblings and sharing with your friends. Be safe out there whichever way you are going.

Buy Bonds -- The New Cure for Government Excess

Markets and politicians are clamoring for the Fed and the ECB to buy sovereign bonds, presumably to make it easier for absurd debt levels to get to even more absurd levels.  Great policy.  It's almost reassuring to see Tim Geithner in support, since he has a perfect record -- he's never been right once regarding economic policy.

So what is the logic behind asking the Fed and ECB to buy sovereign debt?  Basically, to make it easier to sell more of that debt by increasing the demand.  Where will the Fed and ECB get the money to buy the debt?  Ah, that is the question.  How about -- out of thin air!  What we used to call the printing press.  In modern times, the printing press has been replaced by digital creation, but is there any real difference?

So Europe and the US are reduced to hoping that running the printing press to put more money into circulation will rescue their stagnant economies.  Let regulatory overkill, oppressive taxation, and massive government bureaucracy continue unabated.  Instead, let's just print dollars and euros.  That's the new policy for the Geithner-Obama-Monti-Draghi generation.

The only thing we know for sure is that inflation -- a lot of inflation -- is in our future.  For Europe, inflation will be accompanied by economic and political chaos reminiscent of the German situation in 1923.  For the US, it could be the same.  The US has an alternative available in November.  But, if that comes and goes, the US will follow the European route.

Re-instituting free markets and reducing the reach of government are the only tickets to economic expansion.  Printing money, as a cure-all, simply exposes the desperation of the modern politician who has run out of bullets.

Christie Delivers

New Jersey Governor Chris Christie, with bi-partisan support, has delivered once more for the average citizen in New Jersey.  Yesterday Christie signed a law that finally begins to put some accountability into the public schools in New Jersey by requiring annual reviews for public school teachers and makes it easier to remove incompetent teachers.  Naturally the unions fought this reform, preferring incompetence and unaccountability to a successful future for New Jersey children.  Together with Scott Walker of Wisconsin and Bobby Jindahl of Louisiana, Christie has shown what can be done when you try -- even in states that are normally heavily Democratic.

Contrast the leadership of Christie, Walker and Jindahl with that of McDonnell and others who take no political risks to help the average citizen.  McDonnell's conservatism seems to stop at the church door.  He actively opposed having employees contribute to their own retirement during his first year in office, a position exactly opposite that of Christie in New Jersey.  McDonnell has never shown any inclination to take on the VEA, Virginia's public school teacher's lobby.  Quite the contrary.  McDonnell seems to have placated the VEA at every turn.  McDonnell's main legacy is likely to be his aborted attempt to remove the first female president of the University of Virginia in its history, while pretending to stay aloof from the process.

Republicans and Democrats alike are beginning to wake up to the fact that empty rhetoric and no action do not produce reform -- reform that almost every state in the United States desperately needs.  The fiscal problems and public employee largesse, issues that are intertwined, need to be addressed.  Courageous leaders address them.

Do We Turn Here?

Following chart is from Stock Trader's Almanac:

According to them, Dow Jones is just below the monthly pivot point and the late day sell off created a shooting start which is a sign of bearish reversal.

Now, I am no expert in candle stick pattern, but the fact that SPX came within the touching distance of 1400 and reversed is an indication of failing momentum. I think tomorrow morning it may again try to breach 1400 but most likely it will close in red. Today both the VIX and SPX closed in green and that calls for caution.
Sentiment has definitely turned bullish. Now folks are talking of the indexes running on auto pilot based on higher job number and retail sales and they do not require the Fed or ECB. I think the Indexes are running on fume and now that bears have been killed and bulls have been trapped, it is time to pull the lever.

Precious metals are not showing much enthusiasm and that worries me. Crude spiked with the rumour of Assad getting killed. But Copper was down and AUD is kind of toppy. The risk on trade may still surprise with one last hurrah and take SPX above 1410 but the odds favour the trip down.

I plan to start laying the short trades from tomorrow. But I want to caution readers that The Powers That Be around the world, from USA to China, do not want the the market to drop. In America Obama does not want the market to fall because it will impact his bragging rights. Europe cannot afford any major correction because they do not have much to save their financial markets and China wants to continue the illusion till infinity. So it will be very difficult for bears because there is always the threat of intervention by the Central Banks. If and when the correction comes, it better be fast and furious. If we do not see a correction of 100+ points in SPX in 5 days, the battle is lost. More importantly, SPX will have to break down the support at 1335 convincingly before we can get serious.

Either way, we are set for some fun time. Take your pick but always use proper risk control measures. I do not know what is your risk tolerance level so it will be wrong to suggest names. I may use leveraged ETF but I will not hold them for long. Instruments like TVIX is highly risky because if the market does not fall rapidly, these kind of instruments lose value quickly. But if we are lucky, they may return the jackpot. There is no one size fits all formula.

Thanks for sharing my thoughts on the market. Please share it with your friends. And trade safe.