Random financial inclusion thoughts

The buildup around Prime Minister Modi’s Independence Day speech was palpable in the EPoD/BCURE office last week. My research group does quite a bit of work on financial inclusion in India and so rumors that Modi would announce a financial inclusion plan had not a few people talking.

In fact, the PM did announce a financial inclusion plan to open bank accounts for 75 million Indians by August 2018. It’s an ambitious plan, to be sure, but it struck me as rather odd. The way the papers presented the plan, Modi introduced the plan by talking about how many people have mobile phones in India, but nobody has a bank account. My head went immediately to the thought of “well, maybe he wants to expand mobile money use in India.” Despite the presence of quite a few mobile money providers in India, mobile money is used in very few transactions. This is very different than a place like Kenya, where mobile money is extremely widely used.

I’m not sure that mobile money is the best answer, but I think it’s at least an interesting use of existing infrastructure, as opposed to brick and mortar banks with minimum transactions and high withdrawal fees, for instance.

The measure of a market (a really old one)

A year ago, about this time, I was on my way to Ottawa for the Canadian Economic Association and Canadian Network of Economic History Meetings. They coincided, so I presented papers at both and took the opportunity to adamantly assert that I was not an economic historian.

A year later, I have a book chapter, a working paper, a paper (almost–I’m just waiting for confirmation it was sent out) under review, and a paper idea percolating that all belong under the label Economic History. I’m trying to get the paper idea in shape to submit to the CNEH meetings again this year, with the deadline fast approaching.

While my coauthors and I were hard at work on the paper on financial portfolios in the early 18th century, the one that is (almost) under review, a seminar participant at Stanford asked my coauthor what an optimal portfolio would look like. We didn’t know. None of us is really a finance person. I got involved with the project because it had a gender component and the others on the papers are economic historians.

I took it upon myself to pick the brain of my colleague who teaches finance at Gettysburg and found myself quickly immersed in the heady world of portfolio optimization, betas, alphas, indices, Markov matrices, and so much more. From my understanding of the literature, the S&P500 represents the closest thing we have to an optimal portfolio, and so creating a similar index for the time period we’re interested in should provide the answer to the seminar participant’s question.

What I find particularly interesting about the index method of portfolio construction is that the S&P500 in particular is thought to provide an accurate picture (returns and growth-wise) of a balanced portfolio of all assets–not just financial instruments. If you were to put a big chunk of your money in a fund that purchased stocks along with the S&P market capitalization strategy, you would actually be bringing your portfolio out of balance by buying things like real estate or durable investment goods.

The idea, I believe, is that the stock market has “evolved” such that it captures the risk and reward of all those types of instruments–not just the stocks themselves. I find this assumption, particularly given the dramatic dips and peaks in the stock market we’ve seen over the past four or five years to be heroic, at best, but it becomes more problematic when we turn to 1700s finance.

The financial instruments available in the period for which I have data are incredibly few in number and even more limited in scope. Besides a bank or two, they are joint-stock, charted trading companies, whose fortunes lie entirely in the wind and the water and the ability of colonists to extract resources from the colonies. There’s no ability to invest in steel or textiles or the machines that make them. I don’t have information about real estate or other investments for most of the people in the sample, and I certainly don’t have their prices. So, our optimal portfolio can really only be for the available stocks, not for the entire gamut of instruments.

I doubt that I’ll be the one to rewrite modern portfolio theory, and I do think this is the best place to start, but it’s not ideal. Story of an economics paper, I guess.

Equal pay for equal work, including housework

My twitter feed is abuzz with Romney’s claim that Obama is really responsible for the war on women. While I noted a few weeks ago here that the recovery has been slightly weaker for women, it’s certainly not true that women’s employment has decreased under Obama or that any specific policies enacted have had the goal of decreasing women’s employment.

Brian Beutler has a good post about it up at TPM.

Male-dominated industries took a hard, early hit during the recession. As those industries rebound, more jobs are going to men than to women. Conversely, women lost a huge number of jobs in states and municipalities as a result of teacher layoffs — a hemorrhaging that could have been stanched by Obama-proposed legislation to spur teacher hiring, which the GOP blocked.

Meanwhile, I’m reading proposed Venezuelan legislation for the new Organic Work Law (Ley Orgánica de Trabajo or NLOT) and marveling at the language put forth by a consortium of women’s groups. Case in point, one of the goals of the proposed legislation:

Visibilizar el aporte de las trabajadoras del hogar no remunerado a la vida social, y garantizar sus derechos laborales.

My translation: “Make visible the contributions to the social fabric of unpaid, female home workers and guarantee their workers’ rights”

The text is filled with language that appears to have the goal of being inclusive particularly of women’s contributions in the home. It calls for giving those responsible for “reproduction and life care” access to social security payments, “equal pay for equal work”, and up to 14 months paid maternity leave  I don’t have enough understanding of the law to say whether it’s a “good law” per se, but it’s incredible that so many women’s groups in Venezuela agreed to this proposed language.

Note that this isn’t the law, and might not ever be. But someone’s talking about it.

The text of the proposed law, in Spanish, was sent to me by Florangel Parodi, former Venezuelan Minister for Women. I’m happy to pass it along if anyone is interested.

 

The value of financial history

Last week, when Eric Hanushek was at Gettysburg College for the Finance Symposium, we got into a post-symposium debate over a couple of glasses of wine concerning the usefulness of historians. In a place like Gettysburg, where most everyone is a historian of some stripe, this is a relevant argument. Gettysburg hosts the Civil War Institute and several scholars who study just that. Civil War buffs travel from all over the country–and perhaps even the world (are there non-American Civil War buffs?) to visit the battlefield and the town. They walk over Cemetery Ridge and Seminary Ridge and talk about Pickett’s Charge* and strategy and the people who died and go on ghost tours. Students and scholars read books and reimagine history, too. Hanushek argued that history is unlikely to change much because we already know all the facts and thus studying it, or at least writing several new books and papers on topics that had been exhausted, was perhaps not the best use of intelligent peoples’ time.

Last summer, I attended the Canadian Network of Economic Historians conference. It’s a great group of scholars who I’m sure would profoundly disagree with Eric’s argument, and they were particularly excited when I told them about my plans. “Gettysburg is going to have three economic historians!?” someone asked me. Actually, no. One retired, one is on leave–the one whom I’m replacing–and me, well, I don’t really consider myself an economic historian.

Despite that lack of self-identified association, I was ready to tell Eric he was wrong. I do have a few papers in economic history, using financial transaction and shareholding data from 18th century England. It’s really cool. Which is exactly what I told Eric. Perhaps I’m not going to entirely rewrite the History (with a capital H) of the establishment of the English stock market and modern portfolio theory, but I probably can make little changes to our understanding of how financial markets worked, how investors made decisions, and what effect that might have on commerce, trading, and the like.

In one of these papers, a coauthor and I show that despite relatively established secondary markets for trading shares of companies, individuals did not tend to buy in more than one company. Wealth constraints and the value of being able to vote likely trumped the relative ease with which one could stroll down to Garroway’s in Exchange Alley and pick up a few extra shares. In another, we show how women (who likely couldn’t stroll down to Exchange Alley for propriety reason) used the market.

Like I said, I’m not changing the history of the world, but it’s kind of cool to know that investors weren’t diversifying over these kinds of assets as we might expect modern investors to do. (Which, incidentally, they don’t always do, either).

I’ve been discussing some of these ideas with a few colleagues and all of a sudden, the ideas are flowing. Over lunch today, we mapped out at least half a dozen papers that could come out of these data. So now, my problem is this: how do I go on the market as a labor economist with a slew of papers that fall better under financial macro and economic history? I usually say that being a labor economist means I can do whatever I want, so there it is, I guess.

*Notes:

  1. The Battle of Gettysburg was July 1-3, 1863.
  2. You now know pretty much everything that I do about the Battle of Gettysburg.

Chapter 2

I’m going a little out of order here because I’m trying to deal with something random on my first chapter that arose this week.

The second chapter of my dissertation has to do with expectations, incidentally the unifying theme of this year’s Nobel Prize in Economics.

Believe me, I’m not there.

In this chapter, (chapter2_health) I show that a mother’s expectations of financial support from her child’s father influence how she invests in her child’s health. In the Fragile Families and Child Wellbeing survey, women are asked a the birth of their child whether the father promised financial support. Around the child’s first birthday, they are asked when the child last went to the doctor and for long they breastfed. Interestingly, the promise of financial support is a significant predictor of whether the last doctor’s visit was in the last three months, but the effect is much more pronounced for black women. For white women, the promise of financial support is a significant predictor of how long a woman breastfed.

When I started this paper, I imagined I would be addressing a simple problem of financial (doctor’s visits) versus non-financial (breastfeeding) investments. The promise of support would make you feel richer and thus more likely to invest where you might feel constrained financially.

It turns out, however, that the effect is much more complicated that. The differences by race, which are largely differences of SES and class given the sampling strategy, indicate that a promise of support likely means very different things to people in different circumstances. The lack of distinction in terms of affecting financial versus non-financial investments also indicates that the question likely has a psychological or cultural angle that is not captured by the question itself.

In short, be careful with questions about expectations.

I think Greece could do with a little social norms marketing on taxes

Greece has a serious problem with paying its taxes. It’s a self-reinforcing problem because when people see the system as corrupt, they think their money will be wasted and they won’t face consequences, so they cheat more.

I liked this quote from James Surowiecki in the New Yorker:

According to a remarkable presentation that a member of Greece’s central bank gave last fall, the gap between what Greek taxpayers owed last year and what they paid was about a third of total tax revenue, roughly the size of the country’s budget deficit. The “shadow economy”—business that’s legal but off the books—is larger in Greece than in almost any other European country, accounting for an estimated 27.5 per cent of its G.D.P. (In the United States, by contrast, that number is closer to nine per cent.) And the culture of evasion has negative consequences beyond the current crisis.

It seems to me that Greece needs a serious infusion of social norms marketing (among several other things). I can see the billboards now: “People in our community think it’s good to pay your taxes.”

Okay, back to dissertating. So close.

Potlatch, Denver style

A friend put out a call on facebook today for a food swapping event in Denver. Given that food sales are highly regulated by the government (try getting a license to sell food, not fun), it’s perhaps unsurprising that people want to unload their extra canned peppers or limoncello. But from the point of view of economics, barter, or trade without money, is a rather odd process.

Though not entirely the same, the food swapping event reminded me of Potlatch, an old Native American tradition of sharing the harvest in Northwest. The tribes who did really well, catching a lot of salmon, etc, would invite all the tribes who didn’t do as well to partake in the bounty. The point was to make sure that all food was consumed, but also avoid war and provide a sort of intertemporal trade. If you did well this year, you share in the hopes that if you don’t do well next year, someone will share with you. You could also see it as a form of insurance. Economic Historians tend to view Potlatch this way, but it also highlights the fact that economics doesn’t have a good framework for incorporating the value of community or cultural norms. (Case in point, a recent working paper by economists has the word culture in quotation marks, indicating its social significance, but lack of academic standing.)

But what do you call this modern-day Potlatch? In Denver, a city of about a million people, the odds of running into one of your bartering partners again are small, but perhaps on some level it’s insurance. Otherwise, we’re forging bonds with people we might never meet again, we get homemade goodies, feel good about the earth, piss on the idea of a monied society?

Barter in general gets a lot of press in Boulder, at least the word-of-mouth kind of press. I know lots of folks who try to barter for goods and services before offering money. You like someone’s t-shirt, so you offer to trade your own for it, you need yoga therapy, so you offer to trade a photography session for it. While many people swear by it, I also know just as many people (and often the same people who tout it) who come away feeling cheated or like they’re not getting their time’s worth. It’s a noble goal, I guess, to diminish the importance of money in society and close the gap between consumer and provider. In some cases, I think it works really well, particularly when you’re trading for two similar goods. A t-shirt for a t-shirt, an hour of massage for an hour of web editing, a jar of canned tomatoes for a jar of apple butter. But it becomes a lot trickier when we try to barter for things that are very different, eggs and chickens or photography and armchairs or programming for cookies.This is where people start to get cross, where valuations diverge and a perception of someone not holding up their end of the bargain chips away at the relationship.

Perhaps, there’s value in just thinking that we can do without money, or without the money printed by our big, bad government. That represents much of the justification behind local currencies as well. Or maybe, we just want to feel like things we do are valuable, that a connection from a barter–you care about what I made enough to give me something you made–is that much stronger than a connection made by a dollar, even if that relationship is temporary. Maybe there’s a psychological high from that interaction onto which we put a high value.

Or maybe I just live in a place totally detached from reality.