Career in finance

intelwanderer

Seconded.

StatGuy2000

The problem that the US is currently experiencing is not just a high unemployment rate, but also a mismatch between the skills currently possessed by those who are unemployed (or not yet employed) and those jobs that are currently in demand as of this moment. (There's also a problem with mobility of workers, which for the moment I will not address)

The situation we're facing is that there are N job openings, but out of the 1.1N job seekers, only, say, 1.1N/10 = 0.11N of them would possess the necessary skills or qualifications to actually be even hireable. Therefore, many of these N jobs end up being unfilled even though you have a large pool of job seekers.

So given that situation, wouldn't it make economic sense to provide some form of vocational training to reduce the mismatch and ensure that more of the N jobs end up being filled? I would argue yes.


I agree that China is indeed "doing stuff" to avoid the scenario of masses of unemployed people causing problems. All I'm stating is that there may be limits to China's ability to provide the levels of growth to ensure low unemployment, especially if their reserves of cash will diminish or the rest of the world economy goes into recession (a very real possibility given the problems with the Eurozone).

First of all, Singapore has high savings rates because the vast majority Singaporeans do not own any property (given the lack of land in an island-state like Singapore, that shouldn't be all that surprising). And the high economic growth rates in Singapore is not based primarily due to investments in science and technology, but more due to its unique position as a trading hub with the rest of Southeast Asia, and by extension the rest of East Asia (access to cheap labour from nearby countries such as Indonesia and the Philippines is a notable contributor as well, along with high immigration rates).

On your other point, China as of this moment is already transitioning into a consumer-based economy (as it inevitably would given the growth of the middle class), so it is only inevitable that savings rates will diminish. This will only accelerate given the rapid aging of the Chinese population (due in no small part to the one-child policy).

Moppy

Agreeing with Statguy2000.

Singapore's wealth in the main, came from a) the location of its seaport, b) banking, c) a benevolent dictatorship that was able to implement long term plans. Sings in general don't want to be scientists. They want to be lawyers, doctors and bankers. "Why you want to be scientist? No money lah". These days it's a retail trade hub too, but that's more a side effect of the first 3.

Saving rates are generally higher in Asian cultures than western. In the case of Singapore, being left with nothing is almost taboo. The government doesn't admit that truly homeless people exist - their official line is "homeless are that way by choice". The HDB system (public housing) doesn't cover everyone. There's 2 population figures. One includes migrant workers of which they have a gigantic amount all living in camps (and probably homeless, I don't know). The other doesn't.

China isn't really communist in the traditional sense of the word.

What concerns American businesses (financially as opposed to ideologically) is not Chinese communism, but Chinese capitalism and the value of their currency.

In the third world, Chinese are using a start-up type model, similar to how Silicon Valley works: small companies of about 3 guys, iterate your product, build as you go. It's much more agile than the traditional method of entering with a megacorp, paying your R&D upfront, and starting with a complete product. As a result, this agility means China is much more able to sieze opportunties in the developing world, such as Africa and Brazil, and this helps to explain their growing influence. Having a sort of command economy also helps as it can focus on long term issues; it's quite hard to get people to vote for a 25 year plan run by a 5 year government.

IOO China has too much saved up and "should" really spend some of that on social programs. I can't remember what they have. it's something like USD 3 trillion in reserves? They will spend it but I'm not sure they have decided how best to go about it. That's not really something I know much about. (*)

As you say, China's got a huge problem with population age. Recently passed/thinking of passing a law that requries children to care for their parents, after the parent reaches a certain age. Don't know if that came to pass or not.

(*) What they will do with the money.

atyy

This web site claims that the fraction of households in Singapore that own their homes is 88.6% http://www.singstat.gov.sg/stats/keyind.html .

Locrian

That statistic is not incompatible with StatGuy2000's statement. Just need more people per household (which they do have).

boomtrain

The Singaporean government manages to get by spending only 17% of GDP. http://www.heritage.org/index/countr...ted-government

it's possible to have both a relatively free market and a functioning government

boomtrain

I'm not sure this is accurate: http://www.nytimes.com/2010/07/02/bu...ring.html?_r=1

If we train people to have useful skills, businesses will use them. particularly businesses facing a skills shortage.

atyy

Yes, of course, I was questioning the point that it's "more of a free market". I think it shows that one can have both free market and socialist elements, such as good government housing, side by side. The underlying conception may be that free-market versus socialism is not always a useful "degree of freedom".

boomtrain

Isn't it generally more of a free market though? Its economic freedom rank is 2nd in the world, according to the Heritage Foundation:
http://www.heritage.org/index/country/singapore

atyy

That is a very interesting number indeed. I guess I was simply making the point that the Heritage Foundation itself makes: "State ownership and involvement in key sectors remains substantial. A government statutory entity, the Central Provident Fund, administers public housing, health care, and various other programs, and public debt is over 90 percent of GDP."

mdxyz

Every country has elements of both, but it's a matter of degree, and the more free market less socialistic countries generally do better.

I gather than in the US, socialism is a very bad and extreme word that even its supporters don't like attached to them. This is not the case in Britain, so apologies if what I say seems overly polemical to you.


Twofish - that is an awful lot of replies, so I can't promise I'll reply to all of it. I will try to reply to what I think are the most important points. edit: ok so I did end up replying to most of it; also I'd like to join the people from earlier thanking you for making interesting posts.

I don't think that that is the choice or anything like it. If you disagree, do you have any empirical reason, or is it just a feeling?

My argument has been that basic research is not excludable, ie. everyone gets it, and soon everyone benefits. For instance, the man who developed the world wide web was British, and working in Switzerland. Did this mean that the WWW was localised in either of those places for some time, with no one else getting the benefit? Countries adopted internet largely in line with how open their institutions in general were to investors coming along and building new infrastructure to make a profit, and where people were already wealthy enough to take advantage of it.

So I think the choice is more like, if the world as a whole invests a lot in basic research, the world as a whole might get 2% growth. If not, 1.5% growth.

It does matter, because if due to inefficient allocation the return on investment is 2% less than it should be maybe that really will wipe out GDP growth.

Mises is historically interesting and more right than most at that time, but the more modern economics is good too. Look up neoclassical growth models and 'conditional convergence'. Also public choice theory, if you are interested in governments and how they allocate resources.

The empirical evidence for this effect is weak.



(I'm actually amazed Obama made falsifiable predictions, as he is usually a competent politician. Probably some adviser got fired for this.)

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To play devil's advocate, maybe it is good if the world blows up. Recently everyone has decided that more regulation is needed because banks are too reckless. Well if everyone's savings and pensions were wiped out, I'd bet that banks would get a whole lot less reckless very quickly. I wouldn't be surprised if a lot of people started holding a substantial fraction of their savings in gold bars in a safe deposit box. So this sort of thing is a result, not exactly of socialism, but of government interventionism certainly. I agree that politically this is infeasible, but politics is not part of the free market.

I think this is plausible, because nationalisation killed a lot of British industry in the same way. But that's the whole problem: nationalised industries respond to political pressures and if there's no internal market it's more or less impossible to make any comparison in value beyond the very most basic ("10,000t of steel is better than 5,000t of steel" - at least until people start messing with the definition of steel). If you favour a nationalised investment fund that just investments money in the market like anyone else, then that's a lot less damaging.

Note that places like Singapore having big sovereign wealth funds is often a symptom of them being more free market than places like the US. This is because it means they fund their state pensions and unemployment insurance schemes via investing the contributions. In the US and Europe, these things are still controlled by the state but the contributions are spent immediately and the benefits are paid for using inter-generational transfers and debt.

We can at least say that, while both are flawed, the fake-markets have worked a lot better than the fake-communism. I'm open to the possibility there is some better system than markets, but it's not any of the ones I've heard of, and most of the improvements I can think of involve moving more toward markets.

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What do you think the US would have done to it? Or even the Germans, another command economy, who were inflicting 3:1 casualty ratio on the USSR even as they were retreating everywhere throughout 1944. The Japanese army in Manchuria would have been squashed by any of the great powers, because it had hardly any tanks or aircraft. Production had been diverted to the navy and airforce long before.

I agree it couldn't have happened 1936-1937, but 1911-1937 is a long time. The misleading thing is to think like an engineer. To an engineer, what matters is if you have the plans to build an aircraft carrier, and then if you have enough steel, and then skilled people who can make steel. But this is more of a management question. If you've got good institutions that are getting everyone to do profit-maximising jobs, soon you're going to be rich and can just pay people to learn those things or buy engineers from abroad who know how to build aircraft carriers. Most of the Japanese ships that defeated the Russians in 1905 were built in, then designed in, then just partially equipped by Britain, and orders were given in English. But Japan still ended up owning Port Arthur, not Britain.

In 1911, no one could build an aircraft carrier because no one knew what an aircraft carrier was.

Maybe, but it still matters how rich you are when you start this. If you take US economy of 1941 and convert everything for war, you can make a lot more war materiel than if you take the Japanese economy of 1941 and convert everything for war. The advantage for a centralised society if you can convert for war in, say, 1931, and then you can win against a stronger opponent for the first 12 months, until they can sort themselves out.

Problem is that it's mroe like people were more delusional in 1950. Here are two graphs from Maddison:

http://phobos.ramapo.edu/~theed/Cold...P%20Rate_b.jpg
http://phobos.ramapo.edu/~theed/Cold..._US_USSR_b.jpg

Two interesting things:

1. USSR never gets close to the USA
2. USSR's temporary improvement comes because of slower than usual US growth, not faster than usual USSR growth

atyy

I'm not one of those who considers socialism bad. I was actually trying to say that Singapore's success is partially due to socialist elements.

chill_factor

Thank you. I remember you saying before that in astrophysics that the dynamics change frequently, and the boundary conditions are trivial, whereas in say, engine design or pollution modeling, the dynamics stay roughly the same and complicated boundary conditions are the problem. Can you give examples of the equations *changing*?

twofish-quant

Sure.

Contract A: I lend you X dollars, tomorrow you pay me back Y0 dollars, then next day I lend you X1 dollars. The next day you let me back Y1 dollars. We do this for six months and at the end up pay me Y dollars. Let's suppose with interest the intermediate cash flows are zero.

Contract B: Now lets suppose I lend you X dollars and you lend me back Y dollars in six months.

OK, since the intermediate cash flows are zero A and B are mathematically identical, and worth exactly the same. That is.... Until 2008.

The rules changed. The thing is that if I lend you money for one day, and you look like you are going to go broke, I stop lending you money in contract A. Since you have my money in contract B, I can't stop lending money. So what you end up with is that since 2008, Contracts A and B have different values, so one thing that physics Ph.D.'s try to do is to come up with equations that describe the new relationships between A and B.

Another example:

I have a contract with you, that says that I loan you X dollars in exchange you deposit Y dollars as collateral. If certain events happen (i.e. SP500 goes below value Z), you will be required to put up more collateral. Now I have two contracts. Contract A says that you have to put up the new money in dollars. Contract B says that you have to put up the new money in either dollars or euros. Now before 2008, the difference in value between contract A and B was negligible, because people didn't think much about what happens when companies go broke. They aren't now, and contracts A and B are worth very different amounts

(Quick question on an interview: which contracts are worth more?)

Now I don't want to imply that *only* astrophysicists study these things. If some ocean physicists says "hey, we study that too" I would be tickled pink. I'm not an ocean physicist, but I'm sure that they study something that would be useful to me.

twofish-quant

And I disagree. Even to *copy* technology requires a non-trivial amount of science and technology skill. People in China benefit a lot more from the WWW than people in say Haiti, because China has institutions that can take advantage of that, and Haiti doesn't. One reason China is spending money on railroads rather than airplanes is that trains are easier to copy than airplanes, and China doesn't have the skill to copy civil aircraft.

The other point is that for basic research to be useful you need a good entrepreneurial economy. If basic research *alone* could create prosperity, then the Soviet Union would never have fell. Russia had excellent basic research, it also had no mechanism for converting that research into economic growth.

In looking out how places do and don't benefit from technology, it's better to look at regions rather than countries. Cuprertino, California and Austin, Texas benefited from the web a lot more than Detroit, Michigan or Jackson, Mississippi. Also a lot of the financial networks are regional. For example, if you have a great idea in Cuppertino, you rather easily find people to fund it. This isn't true in Detroit.

One reason for looking at regions is that you can better see the processes. I don't think that you say that Detroit is less "free market" than Cuppertino. You can point to some specific aspects. Such as non-compete clauses.

And that's ***HUGE****!!!!!

It's the difference between 3.4x growth over 100 years and 6.24x growth.

This also explains why people were so ga-ga over the Soviets. During the industry revolution, the typical growth rate was 3%. The Soviets in the 1950's were able to get 6%, that is totally un-freaking-precedented historically. Now the US was able to do a lot better and the Soviets hit a wall. But if you look at typical growth rates from 1870 to 1950 then it's not surprising that people thought that the Soviets had found salvation.

Yup. I know about the Solow growth model. The thing about technology is that it changes both the returns on capital and the amount of technology depreciation. The thing about public choice theory is that who governments allocate resources depends on the institutional context. In the case of China for example, you have state-owned enterprises, but the heads of the SOE's are rewarded based on the profit that they make, which leads to a different set of behaviors if you have a different set of institutional incentives.

The way that I view things is

institutional framework -> human incentives -> mathematical model that describes those incentives.

1) The problem is that if the world blows up, then there are no incentives for "good" behavior. You have two banks, one in which the people are "with clue" and do good risk management. One in which people are idiots and then have horrible risk management. Bank B blows up the world. This puts people in Bank A out of a job. Now if you know that this is going to happen, then the rational thing to do is to just get as much money as you can and go nuts. What's the point in being "good" if you are dead whatever you do?

2) The government just will not let the world blow up, and if they say that they will, no one will believe them. You saw this with Freddie and Fannie. Everyone know that they would get bailed out, so their securities would be priced as if they were government backed.

If *everyone's* savings were wiped out, then people would get a lot *more* reckless. Again, what's the point in being "good" if you are going to suffer for it? What's the point in saving anything if you know it's going to get wiped out. I mean, if there are no consequences, then the rational thing to do is to take every cent I have and blow it on hookers and cocaine.

Also putting it into gold in safety deposit boxes doesn't work. If things get really bad, they you won't be able to trust the people holding the boxes, and if you try to keep the gold yourself, you'll end up being prey to thieves.

We actually saw this in Russia and Latin America. Also "trust" explains a lot of things about the Chinese economy. One reason that people buy real estate is that it's tough to steal a house. It's not hard to steal things *in* a house, but it's hard to steal a house. Whereas with a stock all you have is a piece of paper.

Yup. You see this where people start holding dollars. The trouble is that this makes economic transfers much. much more inefficient, and if things get bad enough, even that's not going to work. If things break down enough, who is going to protect your gold? The police? HA.... They'll be first in line to steal it.

At which point you are stuck. You don't have the institutions for saving, which means no economic growth which means no institutions for saving.

I don't think it's useful to classify things into more free market or less free market. For example, in China, you argue that non-state pension funds are better because they are more socialist.

The other thing is that the US Federal government has a huge amount of money in the Social Security Trust fund, and theoretically it could invest that money in the stock market. The reason that it doesn't has to do with the fact that people in the United States don't think that the government should own industries, whereas people in France or China are less resistant to that idea.

The central role of markets is something that is not under serious question. The question involves how do you structure and regulate markets. Most of the changes that I've seen have been to fix the obvious "bad incentives" that you find in markets.

You can have rich people, but a government that is starved for money. If the government doesn't have money, you don't have an army, and once you don't have an army, other people come with their armies and take your wealth. You can be lucky like the United States and not worry about that, but China had less lucky geography.

I agree that good institutions are important, but then we get tauntological. Good institutions produce wealth. Producing wealth is the definition of good institutions. That doesn't tell me anything useful.

Cut the graph off in 1960, and the USSR looks very impressive. One could argue that the growth in the 1960's and 1990's was due to investments in science and technology and that if the US didn't respond to Sputnik that there would have been less GDP growth. Or maybe not.

The other thing is where you start the graph. If you go back to 1925 and start it with the Great Depression, then the USSR looks outstanding.

One fun game to play is "stop the clock". You stop the clock at a point in time and then see how the world looks. If you "stop the clock" in 1965, then you see Soviet growth rates starting to trend down and US growth rates starting to trend up, but in 1965 you have no way of knowing if this was a "blip" or a permanent trend.

Now it wasn't until the mid-1970's, when people realized that this *wasn't* a blip, and then you give it another ten years for the bureaucracies to start responding, at which point you are with Gorbachev.

The reason that "stop the clock" is a fun and scary game is that you realize that people in 1965 who saw Soviet style planning as the wave of the future weren't idiots. Based on the data that they had, that was a reasonable conclusion. Now it looks idiotic from the point of view of 1990. But one reason I'm not to harsh on people in the past, is that I'm sure there will be something that people in 2030 think that I'm idiotic about.

twofish-quant

I don't know about Singapore, but I do know that in HK these numbers are extremely misleading.

For example, public transit is usually a loss making government function. However, in HK public transit makes a profit because the government gives them land around subway stations, where they build malls, and the MTR corporation makes money from those malls. This only works because the government owns all land in HK. Similarly, when the government subsidizes housing, this doesn't show up as a budget item because the government owns a lot of apartments, and it rents them out at below market. It can do that because it owns the flats, so all that shows up on the official expenditure is the cost of maintainance which is near zero.

Also, HK doesn't pay for defense. It gets a PLA garrison for free (half smiley).

Because there are so many things that are "off-book" I think using HK as an example of "small government" is *very* misleading. I don't know the details of Singapore, but I suspect that there are similar things going on.

twofish-quant

One problem here is that I don't think that you can come up with non-tauntological definition of "amount of free market."

What you can do is to just show people an economy and say "does this look like a free market to you?" which is what the various indices do. The trouble with that is that things get "tauntological." You start *defining* "free-market" as "economies that work" and *defining* "socialism" as "economies that don't." That's good marketing. Trouble with that is that it tells you nothing about the policies that you want to follow. Since Singapore "works" you can point to the parts of it that are "free market." Suppose Singapore turned out to be a basket case. Then you say "socialist!!!!"

One reason I bring up Singapore is that there are some papers from the Heritage Foundation circa 1990 that claimed Singapore was doomed because it was too socialist. But since it worked I guess it's a free market.

It's the opposite in China, socialism is good, therefore you try to attach socialism to everything. For example, in China, you don't talk about privatization. That's a dirty word. You talk about "spreading ownership to the people" or "people managed enterprises". There is widespread admiration for the Hong Kong economy in China, so when I talk about Hong Kong as "central planning done right" that's how a lot of the political leadership in China sees it.

One other point which is extremely relevant for physics Ph.D.'s, is that the "free market" as most people imagine it, no longer exists in banking. Everything now is extremely regulated. One reason salaries have been trending down is that now the government has to approve bonus and compensation policy in most banks, and that puts downward pressure on compensation (although it still is very good).