Monday, 31 October 2011

Roger Kerr 1945 - 2011 (updated)

The news of Roger Kerr's death came as a shock to me despite the fact that we were all primed to expect it. I can't describe Roger as a close personal friend, but I did meet him on a number of occasions. When in Christchurch he would to come to the economics department or at least meet with members of the department whenever he could. He also gave talks to economics classes discussing issues to do with economic policy when asked. The times I did meet Roger I'm sure I gained a lot more from the encounter than he did!

Roger's influence went beyond New Zealand, Tyler Cowen writes at Marginal Revolution:
Roger had a huge influence on my life. I spent a good deal of time working for him and with him at the New Zealand Business Roundtable in Wellington and he was always up for a discussion and an argument. He seemed to have boundless energy, and he played a key role in making New Zealand a sounder and better country. A lot of my interest in economic policy comes from my time spent with Roger, most of all my interest in the institutional design of central banks but not just. Roger expected you to be ready to discuss anything, at the drop of a hat, and I consider my time with Roger a major influence on my blogging. He exposed me to the New Zealand classical liberal tradition and from that I saw a lot of deficiencies (and some strengths) of the North American traditions. Roger will be missed but we all know that his influence extended far.
And across disciplines, law professor Richard Esptein gives the following appreciation of Roger at the New Zealand Business Roundtable website:
Earlier this morning I received a simple email from Catherine Isaac that “Roger passed away peacefully at home last night surrounded by his family.” That brief email came as no surprise, because her previous communications had indicated that all treatment options had been exhausted. But for me that short message marks the sad end of an era in my personal life.

Roger was one of a kind. I first met him in 1990, when he prevailed on me to come to New Zealand to speak, among other things, against the new pay equity legislation that had just become law into New Zealand. Roger was never a man for half measures so that he managed to line up about eight or ten other speaking engagements during that short stay. It was the first of four such nonstop visits to New Zealand, each of which Roger orchestrated with his customary enthusiasm and efficiency. After each of the trips, he would prepare a transcript of my remarks, be sure that they were edited, and then passed them back to me for elaboration and expansion, after which they were published by the New Zealand Business Roundtable, which he had led since 1986.

Working that closely with Roger over so many years, and in so many different settings, gave a bird’s eye view of the man. Often a close working knowledge of another human being leads to a certain cynicism well captured by the somewhat faded aphorism that no man is a hero unto this valet.

That was not the case with Roger. The more you knew him, the more you came to respect and love him as a person. He had a combination of attributes that are hard to match. On those trips to New Zealand, I was always joined by my wife Eileen, and sometimes by my children as well. We not only worked together, but we vacationed together for extended periods of time. We also managed to get together in other locations, including for the last time at the Mont Pelerin meeting in Stockholm, in August 2009.

Being with Roger was a revelation. All too often it is said of people who are in favor of markets, they only do so because it gives an outlet for their own greed and other base emotions. Nothing could be further from the truth with Roger. The most extraordinary feature about him was the exemplary way in which he consciously chose to lead his life.

For Roger, the freedom under law to act in your own self-interest was an invitation to make sure that you led your life in accordance with the highest principles of right conduct. Roger never used to speak about profit and personal gain. And he never spoke much about how it was that he should lead his own life. He always sensed that self-praise was a way to diminish your own character, so he relied on quiet deeds to communicate the values that he held most dear.

First on that list was his incredible sense of duty toward others with whom he worked. Doing business with Roger was always a pleasure, because you knew down to the marrow of your bones that Roger’s word was indeed his bond. What he said he did, and if that did not satisfy his personal sense of duty, why he would do something else in addition. For Roger the correct ecological balance was to do all that he could to help others, and to be self-reliant in all that he did, so as never to tax the good will resources of others. One might say that throughout his life he enjoyed a favorable balance of trade with the rest of the world. He received much from those with whom he gave, but he always gave back more in return.

Second on that list was Roger’s utter incorruptibility on all matters of first principle. Early in life, and surely in his days at Treasury under Sir Roger Douglas, Roger internalized the importance of open markets and free trade. Watching New Zealand nearly implode under its grotesque policies made a lasting impression on Roger. Taxes and subsidies for competitive advantage fell into the class of original sins. He could never lift a finger to support such ignoble causes, even for his friends.

As head of the New Zealand Business Roundtable, Roger lived his principles on an everyday basis. He labored successfully through his 25 year tenure of office, to make sure that this organization would not seek to find short-term advantages for its members at the expense of the public at large. For Roger, these were matters of high principle, not issues of short-term expediency. To be with him in conversation was to know of the strength of his convictions and of the quiet eloquence and determination with which he defended them.

Third on the list was Roger’s piercing intellect. Dwight Eisenhower once described an intellectual as someone who used more words to say less than he knew. That was never the case with Roger. Over the years, I have had the privilege to read the many addresses and short articles that Roger wrote on a variety in economic and social issues, large and small. In each of these gems, Roger was the master of a clear and orderly exposition of any topic. He possessed the power to persuade without any of the pretense and self-importance of lesser.

During his life, Roger suffered many short term reversals, for his positions were not always popular in intellectual and political circles. But his persistence and clarity have paid enormous dividends to New Zealand. His ceaseless efforts to pass the Employee Contracts Act of 1990 accomplished far more for the health and well-being of New Zealand labor markets than his detractors could acknowledge. The success was so great that even the passage of the misguided Employment Relations Act of 2000 could not undo most of the gains from market liberalisation that the earlier statute had achieved.

Today New Zealand ranks near the top on most indices of economic freedom. Much of the credit for that improvement goes to Roger, whose dedication and wisdom has made the world a much richer place. We shall all miss him greatly, for the grandness of his character, for the strength of his moral fiber, for his clarity of his thought, and for the warmth of his friendship.
Update: Not PC reminds us of this video of the interview Roger Kerr did with Lindsay Perigo earlier in the year.


O’Driscoll on UCLA, Chicago and Vienna

At the ThinkMarkets blog Jerry O’Driscoll writes about the relationship between Austrian economics Chicago and UCLA.
It was obvious to me that Mises had influenced Alchian. Also Hayek, as is made clear in a video of Alchian interviewing Hayek.

Hayek’s classic essays on prices and information were on various reading lists at UCLA. Fisher was used as a text in Hirshleifer’s capital theory class. For purposes of learning capital theory, Fisher was as Austrian as Bohm-Bawerk (and much more accessible). Both Hayek and Mises thought Fisher had improved on BB.

It was by taking Leijonhufvud’s macro course that I became acquainted with Prices and Production. I wrote a term paper on it for that class, which eventually became my dissertation (Economics as a Coordination Problem).

When Harold Demsetz arrived, the influence of Mises on his theory of property rights was evident. We read a lot of Ronald Coase, and his relationship with Hayek at London is well documented by James Buchanan in Cost and Choice.

The relationship between Vienna and Chicago proper is more complex, mainly because Chicago is complex. There was an Old Chicago School of Frank Knight, Henry Simons, Lloyd Mints, Paul Douglas, et al. Some have viewed it as leftwing. It was “Keynesian” on fiscal policy before Keynes. Simons was frequently criticized by classical liberals, yet Hayek defended him vigorously. Simons proposal for 100% reserve banking was adopted as first best by Milton Friedman and second best (to free banking) by Hayek (who thought both systems would be an improvement, but not politically possible).

The new Chicago School, heavily influenced by Friedman and Stigler, struck out on its own. Its relationship with the old school blurred as time passed. On micro topics like competition, there was heavy overlap with modern Austrians. Demsetz and Kirzner made common cause on competition. Hayek was never fond of monetarism, however.

The modern Chicago School of rational expectations and real business cycles is a topic unto itself. But, yes, there is still a connection as John Cochrane and others understand.

Kevin Murphy talks NBA lockout negotiations

Rugby is not the only sport in the news right now. In the US the NBA lockout is big news. Here is an interview with University of Chicago professor of economics Kevin Murphy about the lockout. Here's an interesting point about the relationship between salaries and the number of wins in a season.
NBA.com: One effect of equalizing payrolls is you incentivize good players to go where the money is available. But another might be paying good money to players who might not deserve it, just because more franchises have to spend on … somebody.
KM: That’s a problem. The other thing is, there is some relationship between pay and success but it’s not nearly as strong as people think it is. Even if you were to completely equalize pay across teams, there still would be an enormous variation in strength of teams. In a statistical sense, the level of payroll of a team explains somewhere like 5 percent to 10 percent in the variation in outcomes.
NBA.com: That’s all?
KM: That’s it. I did a little experiment. All you have to do is take the overall distribution of win-loss percentages. Let them tell you what they think the relationship between salaries and wins is. They tell you ‘This much spending is worth this many wins.’ So then you take everybody’s salary down to the mean or up to the mean. Then if you tell me you get an extra win for every $3 million you spend, I’m going to give everyone I’m moving up an extra win for each $3 million. Everybody I move down, I’m going to give one fewer win for each $3 million.
NBA.com: And?
KM: The relationship between salaries and the number of wins in a season is positive, but it’s pretty weak. It certainly is not going to have a dramatic change in the distribution of outcomes. It might change who the winners are and who the losers are, but you’re still going to have some teams that are much better than others. Because some people spend their money much more wisely than others do.

Friday, 28 October 2011

Thursday, 27 October 2011

Only economists can save the planet

Economist Ed Dolan has reviewed Gernot Wagner’s book But Will the Planet Notice? Given that Martin Weitzman is coming in a couple of weeks to give the 7th Annual Condliffe Memorial Lecture I thought this piece in the review interesting:
He [Wagner] is especially devastating in his critique of the Endangered Species Act. The ESA is perhaps the least economically inspired piece of environmental legislation on the books, allowing for no tradeoffs or optimization at all. Under the act, everything is all or nothing. If the barred owl is not on the endangered list, it fends for itself until it qualifies. If the spotted owl is on the list, there is, literally, no limit to how much is too much to spend on protecting it. Ten million dollars to save a single bird? Sure, it’s been done. Never mind that the largest expenditures often go to species that are beyond saving while other conservation needs, like habitat protection to keep other species off the list in the first place, are underfunded.

What would be better than dumb regulations? Smart regulations, of course. Wagner likes an idea advanced by his one-time Harvard professor Martin Weitzman: Use DNA testing to measure the genetic distance between species. Adjust the amount of money and effort spent of protecting the spotted owl depending on its genetic distance from its cousin the barred owl. Pursuant to the goal of maximizing genetic diversity, genetic outliers would become the top priority. Measure, maximize, optimize. That’s the economic way of thinking at work.

Weitzman’s work appears elsewhere in the book, as well. Wagner spends a whole chapter elaborating the reasons for thinking climate change is the planet’s number one threat. At first that might seem like overkill, since, for the most part, he seems to address the book to readers who already share his concern for the future of the planet. But it turns out he has more to say than simply to reiterate the findings of the Intergovernmental Panel on Climate Change. Following Weitzman, he explains why conventional climate change research, which focuses on mean values and normal distributions, misses the point.

The risk of climate catastrophe, he argues, is not like the risk that your house will burn down, a case where normal distributions work just fine. Instead, it is more like the kind of systemic financial risk that shook the world after the collapse of Lehman Brothers. Why so? Financial and climate risks both have fat-tailed distributions. That makes it worth taking serious precautions against “black swan” events that are very far from the mean—events that, although not especially likely, would result in huge losses if they did occur.

The consensus among mainstream climate scientists is a mean expected warming of 2 to 4 degrees Celsius by the end of the century. Adapting to such an increase would be costly and disruptive, but it would not mean the end of life as we know it. Instead of the mean, Weitzman and Wagner (who have worked together on the issue) argue that we should be focusing on the 5 percent probability that warming will end up way out in one of those fat tails, say, 12 degrees or more. That would put half the world’s population in areas so hot that a few hours out in the sun would be fatal—even for a person soaking wet, with light clothing and a strong breeze.

The Weitzman-Wagner approach puts the precautionary principle on steroids. With no change in the mean expected rate of warming, fat tails triple the amount we should be willing to invest in climate change now. To put it in dollars, if were willing to tax carbon at $20 per ton based on conventional analysis, then we should be willing to tax it at $60 or more based on fat tail math.
So don't miss the Condliffe Lecture!

Are police services too important to be left to governmental provision?

Economist Edward Stringham discusses the economics and historical record on private provision of police services.



Challenges facing the international economy

In this audio from VoxEU.org Professor Anne Krueger of Johns Hopkins University talks to Romesh Vaitilingam about the issues around globalisation and the crisis covered in her forthcoming book, ‘Struggling with Success: Challenges facing the International Economy’. She discusses the eurozone crisis, US debt issues, the threat of rising protectionism and the role of the multilateral institutions.

New Zealand's future hosting of the Rugby World Cup

At Fair Play and Forward Passes Sam Richardson writes,
So, should we host the tournament again? We need to be objective when it comes to a future tournament, and consider the implications of hosting. Given that much of the infrastructure is in place, I'm sure we'd like to think that in maybe 16 or 20 years time it could well be New Zealand's time again. My concern is that the price tag attached to the tournament may well have escalated well beyond our means by that stage. We have shown how a country can embrace the event. It would be nice to think that the IRB might embrace some form of revenue/profit sharing to see the place many consider the spiritual home of rugby host the tournament again. This, of course, remains to be seen.
Cost is the problem, just as it was the problem for this world cup. In 20 years the infrastructure we have now will most likely need to be upgraded or replaced. This will be expensive. And if the benefits of this world cup don't cover the costs why would we think that the increased costs of a future world cup will be covered? I can't see an economic rationale for a future world cup, warm fuzzies are all well and good, but they come at a very high cost. The IRB would have to come up with a good deal to make another tournament worth New Zealand's while.

The stupidity that is the EU's Common Agricultural Policy

Thanks to Homepaddock for this bit of information.
Milk production in Austria, Cyprus, Denmark, Germany, Italy, Luxembourg and the Netherlands has been higher than expected.

That ought to be cause for celebration in a world we keep being told is short on food and where developing countries are hungry for protein.

But no, they will be fined a total of €221m because they exceeded their annual quota.

What makes it even sillier is that 14 countries produced less than their quota and total EU production was 6% lower than quota.
Policing a cartel is never easy! The good news that Homepaddock notes is that,
The quota system is to be phased out as part of reforms to the Common Agricultural Policy which aim to end government protection for the dairy industry.
If there is any part of the EU economic system that needs reform - that is, to be done away with - it is the CAP. The EU could do worse that to learn from New Zealand, there is life after subsidies and protection.

7th Annual Condliffe Memorial Lecture

‘Why is the economics of climate change so difficult and controversial? 
 The lecture will be delivered by Martin Weitzman, Professor in Economics at Harvard University.

Date: Thursday 17th November 4.30pm – 5.30pm. Refreshments to follow

Venue: Law 108, Ground floor, Law Building, University of Canterbury

RSVP: by 10th November to karen.ashby@canterbury.ac.nz

Abstract: In this lecture Professor Weitzman will focus on the special features of the economics of climate change that make this area so very difficult to analyse by conventional economic tools. He will discuss such topics as deep structural uncertainty, whose preferences are included, the possibility of catastrophic outcomes, discounting the distant future, and international public goods. Professor Weitzman will speculate on how the dilemmas of climate change might play themselves out.

Biography: Martin L. Weitzman is Professor of Economics at Harvard University. Previously he was on the faculties of MIT and Yale. He has been elected as a fellow of the Econometric Society and the American Academy of Arts and Sciences. He has published widely in many leading economic journals and written two books. Weitzman's interests in economics are broad and he has served as consultant for several well-known organisations. His current research is focused on environmental economics, including climate change, the economics of catastrophes, cost-benefit analysis, long-run discounting, green accounting, and comparison of alternative instruments for controlling pollution.
Be there!!!


Wednesday, 26 October 2011

Economic impact of the rugby world cup

I have commented on work by Sam Richardson on the economic impact of the rugby world cup before: here, here and here. Richardson is now blogging at Fair Play and Forward Passes and is writing more on benefits of the world cup. Back in September Richardson noted,
And while we are on the economic impact figure, there is a wealth of research that has shown that large sporting events rarely generate anywhere near the economic impact that is promised. Even if the economic impact of $411m actually materialises (I'd say it is unlikely, but let's say it did), it would add no more than 0.2% to the nation's Gross Domestic Project. That is not a misprint. It is a very, very small impact. Surprising, really, that it gets the coverage it has received thus far.
and more recently he writes on the spending that has taken place during the RWC,
Paymark, who cover about 75% of all credit card transactions in the country, have found that spending on cards during the tournament "was up by $195 million." I don't know precisely what this phrase means, but I assume it means that spending is up by $195m on last year's figures for the same period. Of course, the first Christchurch earthquakes was during this period last year, so spending was particularly depressed at that time. It stands to reason that domestic spending was likely to rebound at some stage - perhaps the tournament and the performances of the All Blacks were a catalyst?

Of that $195m, the amount spent by tourists was $70m up on the same period last year. What, only $70m? Yes, $70m is 10% of $700m. or $700m with the decimal point moved one place to the left. Obviously it is early days, and this is by no means a complete measure of spending, but it is pretty clear that the impact of spending by overseas visitors would appear to be quite a bit less than initially projected. Of course, projected economic impacts were gross, not net, which are the figures of particular interest.
Richardson is not the only economist who has doubts about the economic impact of the RWC. Shamubeel Eaqub, principal economist at the New Zealand Institute of Economic Research, also isn't too excited about its economic impact,
A leading economist has labelled the Rugby World Cup's effect on economic growth a "red herring", dismissing expectations that there will be a widespread boost as "hopium".
And while tourists will increase spending, business was being displaced from the main centres, and he argues that New Zealanders were spending less overall
The effect would be "minuscule", he said . "From a GDP point of view it should be marginally positive, but we're talking 0.1 per cent – margin-of-error stuff."

Tuesday, 25 October 2011

Is "Too Big To Fail" too big to end?

The short answer seems to be yes, for Korea at least.
Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea's 1997-99 crisis, suggests an answer: No. Despite a general "no bailout" policy during the crisis, the largest Korean corporate groups (chaebol) - facing severe financial and governance problems - could still borrow heavily from households through issuing bonds at prices implying very low expected default risk. The evidence suggests "too big to fail" beliefs were not eliminated by government promises, presumably because investors believed that this policy was not time consistent. Subsequent government handling of potential and actual defaults by Daewoo and Hyundai confirmed the market view that creditors would be protected.
This is from a new NBER working paper, Ending "Too Big To Fail": Government Promises vs. Investor Perceptions by Todd A. Gormley, Simon Johnson and Changyong Rhee.

But is anyone really surprised that people don't believe what politicians tell them? A no bailout policy is not credible given the way governments have acted in the past. To make such a policy work governments really do have to let big firms fail.

EconTalk this week

Valerie Ramey of the University of California, San Diego talks with EconTalk host Russ Roberts about the effect of government spending on output and employment. Ramey's own work exploits the exogenous nature of wartime spending. She finds a multiplier between .8 and 1.2. (A multiplier of 1 means that GDP goes up by the amount of spending--there is neither stimulus nor crowding out.) She also discusses a survey looking at a wide range of estimates by others and finds that the estimates range from .5 to 2.0. Along the way, she discusses the effects of taxes as well. The conversation concludes with a discussion of the imprecision of multiplier estimates and the contributions of recent Nobel Laureates Thomas Sargent and Christopher Sims.

Monday, 24 October 2011

Bonus points and incentives in rugby

Liam Lenten at the Sports Economist blog writes on Bonus Points and Incentives in Rugby. He says,
The 2011 Rugby World Cup has climaxed with hosts New Zealand being crowned champions for the second time last night (joining Australia and South Africa, while England has won it once). They did so by defeating France 8-7 in a tense affair in the Final at Auckland’s Eden Park, in front of (a capacity) 60,000 supporters – certainly not the easy way as most expected, but having endured 24 years of angst since their last title in 1987, all Kiwis will still take it nonetheless.
Oh yes! We will take it!

Lenten continues,
A co-author of mine, Niven Winchester (these days at MIT), is a native New Zealander who will no doubt be ecstatic after having been at the game in person. He is primarily a Trade Economist, but also has a penchant for modeling predictions and ranking systems in sport. His 2008 paper in JQAS (abstract here) concludes that the current bonus points system is sub-optimal at his defined objective of revealing the best quality teams over the duration of the season. Instead, he favors altering the narrow-loss bonus threshold from seven to five match points, and changing the try bonus to either a minimum of eight tries, or alternatively, for scoring at least three more tries than the opponent does.
Not sure about the 8 try idea, how many teams score 8 tries?, but the 3 more tries notion could strength the incentives for try scoring. An interesting question is how such incentives affect the attacking-defending attitude of teams? Big defence seems to win the big games, so do we need more incentives for attacking play?

Hayek on "The Road to Serfdom"

Steven Horwitz at the Coordination Problem blog has written on Hayek's interpretation of  "The Road to Serfdom". He writes,
Hayek wrote in 1973 (p. 58, my emphasis):
What I meant to argue in The Road to Serfdom was certainly not that whenever we depart, however slightly, from what I regard as the principles of a free society, we shall ineluctably be driven to go the whole way to a totalitarian system. It was rather what in more homely language is expressed when we say: "If you do not mend your principles you will go to the devil." That this has often been misunderstood to describe a necessary process over which we have no power once we have embarked on it, is merely an indication of how little the importance of principles for the determination of policy is understood, and particularly how completely overlooked is the fundamental fact that by our political actions we unintentionally produce the acceptance of principles which will make further action necessary.
It would seem to me that this is a clear statement that the "inevitability hypothesis" reading of RTS is a bunch of nonsense.
The Hayek quote is from Law, Legislation, and Liberty.

Thursday, 20 October 2011

Economics gets misunderstood by journalists ... and everybody else

At the Stumbling and Mumbling blog Chris Dillow writes on why economics is misunderstood by journalists. He says, with regard to a radio interview involving economist Patrick Minford,
That interview with Minford highlights three (of many?) reasons for this:
1. Time pressure. Interviewees typically have only a few seconds to state their position. But it takes longer to explain statistical results. The typical item on More or Less, a programme that does explain statistics, lasts longer (I suspect) than interviews or news items in lesser programmes.
2. The adversarial mode encourages binary yes/no thinking. Minford’s views are juxtaposed against those of John Gieve. This encourages the impression that either one or the other is right, or that economists don‘t really know what they‘re talking about. But I suspect if Gieve and Minford were to talk away from the mic, they would exchange empirical evidence about the scale of the competing costs.
3. Incentives. Even in a radio studio, no-one has an incentive to proportion their beliefs to the evidence; it makes for bad (that is, dull but truthful) radio. And this is - of course - still more true in politics; those campaigning for, say, easier planning laws have incentives to overstate their case.
In these ways, even apparently “neutral” media serve a pernicious function. They perpetuate bad thinking and (what might or might not be the same thing) a misunderstanding of economics.
Another reason, which I would argue is relevant for New Zealand at least, is that journalists simply don't understand economics well enough themselves to be able to explain it to the general public. Journalists spread misunderstandings simply because they don't realise they are misunderstandings.

Wednesday, 19 October 2011

Business and the Literati

At National Affairs Algis Valiunas has a piece on Business and the Literati.
The business of America may be business, but the business of American literature in the past century has been largely to insist that the nation is, in pursuing business, wasting itself on unworthy objects. In the eyes of most novelists and playwrights who deal with the subject, business is not an honorable vocation, but rather an obsessive scramble for lucre and status. Tycoons are plunderers. Salesmen are poor slobs truckling to their bosses, though most of them aspire to be cormorants and highwaymen, too. The mass desire to strike it rich has launched a forced march to nowhere. In short, American literature hates American business for what it has done to the souls of the rich, the poor, and the middling alike.

Right-thinking people now take it for granted that, in criticizing business, American literature has saved (or at least elevated) the nation's soul. But after a century of slander, that assumption needs revisiting.
But the big question is, How is it our culture came to hold the image of the businessman that it now does? Valiunas gives his answer.

Europe’s Lehman moment?

As chief economic adviser to President Bush, Edward Lazear was at the heart of the US policy machine in October 2008. In this VoxEU.org audio Lazear talks to Romesh Vaitilingam about the Eurozone crisis and whether now might be Europe’s Lehman moment. They also discuss the growing significance of the emerging economies and the US political debate about the debt ceiling.

CERA economist

Eric Crampton points out that the Canterbury Earthquake Recovery Agency, is looking for an economist.
The position of Economist is a senior level role that reports to the General Manager, and is required to contribute to the development and implementation of plans originating from the Recovery Strategy, including the overarching Economic Recovery plan.

The Economist is responsible for ensuring a strengthened economic focus across CERA, advising and influencing work programmes and outputs. Working closely with key stakeholders, a focus is to ensure the right conditions are in place to encourage and support economic recovery and growth.

Key deliverables will include developing priorities and programmes that partner with the economic efforts of private business, collaborating with central and local government to ensure the recovery is business friendly. The Economist is expected to inject commercial savvy and apply an economic lens to set priorities, develop high quality strategic level analysis, policy development, methodologies and frameworks. Essentially, this role will lead and oversee work based on identification of economic and financial impact of proposals, market drivers, opportunities and threats to progress.

We are seeking an Economist who is experienced at a senior level, well networked and highly credible across the economic sector. You will have a track record of success when developing economic advice, leading consultation, planning and management of projects with key interdependencies and trade-offs. This opportunity presents a unique opportunity to join a skilled and passionate team committed to making a real difference for all who live and work in greater Christchurch.
Crampton writes,
There are a half-dozen economists I can imagine doing this job well and rather more that I can imagine doing it badly. Let's hope they pick one of the good ones.
But they won't pick a good one because the good ones are smart enough to know not to apply. From what we have seen so far CERA isn't interested in good economics, just in playing politics. Being their economist would be a no win position. If CERA really wanted economic input into their work, an economist would have been the first guy they employed, not one of the last.

Tuesday, 18 October 2011

Incentives matter: roading file

Thanks to Matt Nolan at the TVHE blog for this one:
This story is a great example of how institutions can shape incentives, in order to change outcomes.
The women of Barbacoas, Colombia have ended a three-month, 19-day “crossed legs” strike of sexual abstinence aimed at getting a road to their isolated town paved, after officials pledged to invest in the project.
The money quote is:
“The men’s first reaction was laughter, because they found the way we were protesting very curious,” Silva said.

Then reality set in, and work on the road finally began last week as the government had promised.
I guess it shows that the women really wanted the road paved! However it does seem a strange way of going about getting it. The longer the strike went on the higher the costs on all parties, which makes maintaining the strike that much more difficult.

EconTalk this week

Nicholas Wapshott, author of Keynes Hayek: The Clash That Defined Modern Economics, talks with EconTalk host Russ Roberts about John Maynard Keynes and Friedrich A. Hayek--their ideas, their disagreements, their friendship and how the two men influenced economists and public policy during their lifetimes and beyond.

Sunday, 16 October 2011

Real versus nominal

In this case its real versus nominal exchange rates. Much has been written about China’s currency manipulation policies and why its bad policy. But most of the anti-Chinese rhetoric has been written as if its the nominal exchange rate that’s important. But what’s happening to the real rate?

At his blog economist Ed Dolan looks at this issue. He writes,
[...] what really matters for US-China competitiveness is not the nominal exchange rate, but the real exchange rate. The simplest way to calculate the rate of real appreciation of the yuan against the dollar is to add the inflation differential between the two countries to the rate of nominal appreciation. Recently, inflation in China has been running about 3 percentage points higher than in the United States, depending on what price index you apply. That implies a rate of real appreciation of about 8 percent per year. Such a rate is enough to wipe out a 20 percent undervaluation in less than 3 years or a 40 percent undervaluation in less than 5 years. That’s change you can start to believe in.

There’s more to the story than that, however. What really matters for jobs and competitiveness is not consumer price inflation, but the rate of change of unit labor costs. (Unit labor costs are wage rates adjusted for changes in productivity.) A recent study from the Boston Consulting Group suggests that Chinese unit labor costs will grow at about 8.5 percent per year over the next five years. Meanwhile, U.S. unit labor costs in manufacturing, where the head-to-head competition for jobs lies, have been on a steady downward trend, because productivity growth has been strong and wage increases moderate. The most recent data, which show a tiny upturn, are the first increase in 10 quarters.

Conservatively speaking, then, it appears that over the past couple of years, the real exchange rate of the yuan, deflated by unit labor costs, has been appreciating against the dollar at a rate of something like 15 percent per year. Even if the U.S. unit labor cost trend flattens out, a continued 10 percent rate of appreciation appears likely.

Let’s remember that back in the spring of 2010, when the Chinese were still holding firm to their peg of 6.82 yuan to the dollar, the maximum demand being made by American China-bashers was a 40 percent revaluation. In the fifteen months have elapsed since the peg was abandoned, a third, maybe even half, of the gap has vanished. At the rate things are going, the yuan will reach parity against the dollar, measured by unit labor costs, about two years from now, possibly sooner.
So lets keep it real.

Given all of this, What are we to make of the recent U.S. moves to counter the Chinese manipulation of its currency?
The bottom line? The Senate’s latest assault on Chinese currency manipulation makes no sense at all. Its economic goals will already have been reached long before the tortured procedures it calls for could ever work themselves out. The bill is a blatant play for ephemeral domestic political gain at the risk of unneeded diplomatic conflict. We can only hope that the legislation will die in the House, or if it passes there, that it will be vetoed by the White House, and if so, that any attempted override falls short. Thank goodness for checks and balances.
In other words the politicians make no real sense, again.

Friday, 14 October 2011

A devalued renminbi makes wealthier Americans

A point Don Boudreaux makes in this article at U.S. News & World Report‘s “Debate Club”. We should add that it makes for wealthier New Zealanders as well. Boudreaux writes,
The U.S. government should not respond to China's allegedly undervalued renminbi by raising taxes on Americans who buy imports.

The lower the value of the renminbi the wealthier it makes Americans. Ultimately, the goal of trade is to import goods and services. Exports are a cost; they're the price paid for imports. By keeping the value of its currency low, Beijing enables Americans to stretch our dollars farther. This results in significant improvements in living standards.

University of Chicago economist Christian Broda explains, "In U.S. stores, prices of consumer goods have fallen the most in sectors where Chinese presence has increased the most." Prof. Broda also finds that the benefits of low-priced Chinese goods flow disproportionately to poor Americans, dampening the effects of income disparities. Low-priced consumer goods are good for Americans regardless of why the prices are low.
Boudreaux conitnues by pointing out the effects of a globalised supply chain.
A higher-value renminbi (as opposed to threatened U.S. tariffs) won't necessarily achieve the hoped-for rise in the prices Americans pay for Chinese goods. Supply chains today are global, so many of the components that Chinese manufacturers use are imported into China from elsewhere. If the value of the renminbi rises, Chinese producers' costs of acquiring these components decrease. The resulting fall in Chinese production costs enables producers there to cut prices. Lower prices of Chinese finished products would offset, perhaps significantly, the higher prices Americans would pay even with a higher-valued renminbi.
Basically an "artificially low renminbi" means China is making the rest of the world wealthier at its own expense. Why are we complaining?

Incentives matter: grades file

It is interesting that students in many of the top M.B.A. programs in the U.S. vote for grade non-disclosure policies which have the effect of reducing the signal that a potential employer gets of a student's ability. Why? It seems strange that top students would vote to give employers less information about themselves.

The first thing to note here is that in the U.S., by federal law universities can not release academic grades to third parties without the student's permission. Since academic grades are the property of the students, and not the university that they attend, students can vote to create a "social norm" of grade non-disclosure to potential employers.

Notice that grade non-disclosure policies in U.S. M.B.A. programs are concentrated within highly-ranked schools. A majority (9) of the most selective 15 schools have a grade non-disclosure policy, while no school ranked 20 - 50 has such a policy. A new NBER working paper, Grade Non-disclosure by Daniel Gottlieb and Kent Smetters, sets out to explain this. Gottlieb and Smetters write,
We show that students at elite schools are the most likely to adopt a non-disclosure policy, subsequently reducing their effort. Intuitively, a non-disclosure policy allows the median voter to study less and then pool to receive the expected (mean) wage, which might be more valuable to her than receiving the median wage with effort. For plausible wage distributions, the desire to pool becomes more valuable at more selective schools.
The decision on grade disclosure is made by a majority vote. So, how will the median voter vote? The median student’s decision must balance his own productivity, and thus wage, under disclosure against the expected pooled wage that he would receive under non-disclosure. Under non-disclosure he will receive the average wage for students from the school he attends. Under disclosure he will get a wage based on his, not the average, productivity. So the choice is, basically, between the average wage and the median wage - given we are talking about the median student here. If the mean-median wage gap is "large", non-disclosure is an attractive choice. A vote for non-disclosure allows the median voter to, essentially, "free ride" on the expected pooled wage. This can be advantageous to such a voter when there are enough students who are more productive than the median student. Gottlieb and Smetters continue,
The disclosure policy, therefore, depends on the skewness of the distribution of ability.
Selective business schools
will adopt grade non-disclosure policies while less selective schools will not if the mean-median gap is increasing in school selectivity. The increasing mean-median gap assumption states that higher selectivity increases the quality of students by attracting a disproportionately higher amount of very good students.
So if you are bad at a good school you can free ride on those who are good at the school.

Thursday, 13 October 2011

Papers on everything

A Brief History of Economic Dictionaries: An Essay in Bibliography by Daniele Besomi. The abstract reads:
This chapter outlines a history of specialized dictionaries in economics and allied disciplines, presenting them grouped by their scope in chronological order. The first dictionaries qualifying themselves as ‘economic’ were in reality concerned with practical arts and agriculture (18th and early 19th century). There followed a number of commercial and financial dictionaries in the 18th century and throughout the 19th century. The former eventually turned, early in the 20th century, into general business dictionaries, while financial dictionaries are still published nowadays. The first dictionary dedicated to political economy was published in 1826, it was followed by a dozen extensive works in the remainder of the century and a myriad of smaller sized works in the 20th century. Meanwhile more general dictionaries dedicated to social sciences also began to be published. In the late 20th century, a number of sectorial and biographical dictionaries also appeared. The chapter finally offers a quantitative survey of the distribution of dictionaries according to scope, size and language.
I'm not sure what to say about this. A history of dictionaries, not really my thing, but whatever pushes your buttons I guess. I wonder who will star in the film version?!

Lies, damn lies and statistics

At the IEA blog Kristian Niemietz notes that in the U.K., at least, Poverty falls, because we are getting poorer.
In poverty measurement, this is precisely what happens. We don’t have final data on the recession’s effect on poverty yet, because these only go until 2009 so far. But judging from the latest forecasts by the Institute for Fiscal Studies, it seems that the recession has decreased poverty. Between 2008 and 2011, the rate of relative child poverty has fallen by 2.6 percentage points and the rate of relative working age poverty by 0.4 percentage points. This is a recurring phenomenon: the recessions of the early 1970s, the early 1980s and the early 1990s have also been effective anti-poverty programmes, at least statistically. But an index of poverty which falls during recessions is like an index of binge-drinking which falls on Friday nights.
Why? you are asking,
The phenomenon is explained by the following pattern: during recessions, incomes fall across the board, but they fall at different paces. For households at the bottom of the distribution, the most important income source is government transfers, while for households in the middle of the distribution, it is wages. Transfers are not as exposed to the recession as wages, so the middle often takes a harder hit. When middle incomes fall, they automatically take the poverty line with them, and poverty ‘falls’.
Useful things poverty measures.

Unraveling in soccer: Real Madrid signs 7-year old

From Al Roth at the Market Design blog.
Real Madrid signs 7-year-old

"Real Madrid has signed a 7-year-old soccer prodigy from Argentina who goes by the name Leo...

"Leonel Angel Coira signed with the Spanish club and will begin training Sept. 6, Madrid spokesman Juan Tapiador told The Associated Press on Monday.
...
"Madrid reportedly made the push to sign Coira because Spanish league rival Atletico Madrid was also pursuing the youngster."
Does this violate child labour laws?

Interesting blog bits

  1. Peter Boettke on The 2011 Nobel Prize in Economic Science
  2. David Henderson on Henderson on Sargent and Sims Nobel
  3. Tyler Cowen on Thomas Sargent, Nobel Laureate and on Christopher Sims
  4. Alex Tabarrok on the Nobel for Sargent and Sims
  5. Arnold Kling on The Latest Nobel and The Legacy of Sargent and Sims
  6. John Taylor gives Congratulations and Thanks to Tom Sargent and Chris Sims
  7. Larry White on Tom Sargent, 2011 Nobel Laureate

Wednesday, 12 October 2011

Tobin Tax

The Tobin Tax is an idea that is often put forward as a way of regulating financial markets. Here is a short video of an interview with Professor Philip Booth on the subject of a Europe wide Tobin Tax, as was recently suggested by the President of the European Commission. This interview is part of Cass Business School's latest edition of Cass Talks.

Toward a political economy of macroeconomic thinking

A new paper by Gilles Saint-Paul on Toward a Political Economy of Macroeconomic Thinking. The abstract reads:
This paper investigates, in a simplified macro context, the joint determination of the (incorrect) perceived model and the equilibrium. I assume that the model is designed by a self-interested economist who knows the true structural model, but reports a distorted one so as to influence outcomes. This model influences both the people and the government; the latter tries to stabilize an unobserved demand shock and will make different inferences about that shock depending on the model it uses. The model's choice is constrained by a set of autocoherence conditions that state that, in equilibrium, if everybody uses the model then it must correctly predict the moments of the observables. I then study, in particular, how the models devised by the economists vary depending on whether they are "progressive" vs. "conservative". The predictions depend greatly on the specifics of the economy being considered. But in many cases, they are plausible. For example, conservative economists will tend to report a lower keynesian multiplier, and a greater long-term inflationary impact of output expansions. On the other hand, the economists' margin of manoeuver is constrained by the autocoherence conditions. Here, a "progressive" economist who promotes a Keynesian multiplier larger than it really is, must, to remain consistent, also claim that demand shocks are more volatile than they really are. Otherwise, people will be disappointed by the stabilization performance of fiscal policy and reject the hypothesized value of the multiplier. In some cases, autocoherence induces the experts to make, loosely speaking, ideological concessions on some parameter values. The analysis is illustrated by empirical evidence from the Survey of Professional Forecasters.
When he considers the evidence from the Survey of Professional Forecasters, Saint-Paul finds that forecasters who believe that expansions are more inflationary also believe that public expenses are less expansionary.

The Economic Logician writes,
His [Saint-Paul] claim is that we live in a self-confirming equilibrium. We devise theories to understand our surrounding and take decisions, and those decisions then shape the economic environment. Theories can thus survive even if they deviate from the true structure as long as the decisions make it conform. This is a statement about a lack of uniqueness of the path to the rational expectations equilibrium. In a sense, this is not too disturbing, as long as decisions are still optimal and outcomes do not differ too much from the rational expectations first best. And if this true, we will never know what the rational expectations first best is. Of broader implications would be if the political agenda of an economist would lead an economy on an different path, on a different self-confirming equilibrium. Is this why Europe and the United States are different? Were Keynes and von Hayek that influential?
Is macroeconomics really all in the mind .... or the model of the economist?

Tuesday, 11 October 2011

2011 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel

The 2011 Economics Nobel Prize has been awarded to: Thomas J. Sargent and Christopher A. Sims "for their empirical research on cause and effect in the macroeconomy".

The Press Release reads:
Cause and effect in the macroeconomy


How are GDP and inflation affected by a temporary increase in the interest rate or a tax cut? What happens if a central bank makes a permanent change in its inflation target or a government modifies its objective for budgetary balance? This year's Laureates in economic sciences have developed methods for answering these and many of other questions regarding the causal relationship between economic policy and different macroeconomic variables such as GDP, inflation, employment and investments.

These occurrences are usually two-way relationships – policy affects the economy, but the economy also affects policy. Expectations regarding the future are primary aspects of this interplay. The expectations of the private sector regarding future economic activity and policy influence decisions about wages, saving and investments. Concurrently, economic-policy decisions are influenced by expectations about developments in the private sector. The Laureates' methods can be applied to identify these causal relationships and explain the role of expectations. This makes it possible to ascertain the effects of unexpected policy measures as well as systematic policy shifts.

Thomas Sargent has shown how structural macroeconometrics can be used to analyze permanent changes in economic policy. This method can be applied to study macroeconomic relationships when households and firms adjust their expectations concurrently with economic developments. Sargent has examined, for instance, the post-World War II era, when many countries initially tended to implement a high-inflation policy, but eventually introduced systematic changes in economic policy and reverted to a lower inflation rate.

Christopher Sims has developed a method based on so-called vector autoregression to analyze how the economy is affected by temporary changes in economic policy and other factors. Sims and other researchers have applied this method to examine, for instance, the effects of an increase in the interest rate set by a central bank. It usually takes one or two years for the inflation rate to decrease, whereas economic growth declines gradually already in the short run and does not revert to its normal development until after a couple of years.

Although Sargent and Sims carried out their research independently, their contributions are complementary in several ways. The laureates' seminal work during the 1970s and 1980s has been adopted by both researchers and policymakers throughout the world. Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.
More information is available here (pdf).

EconTalk this week

Frank Rose, author of The Art of Immersion and correspondent for Wired Magazine, talks with EconTalk host Russ Roberts about how the web has changed the art of storytelling and the interactions between the web, advertising, games, movies, and television. Rose argues that when a new medium is introduced, whether it is the book, movies, or the web, there is always a period of exploration as to how storytelling, the author, and the audience will interact. While there have always been readers, viewers, and listeners who immerse themselves in good stories, the web allows this immersion to expand dramatically, partly because the audience can share reactions and insights with each other as well as becoming part of the creation of the story in ways that past media have not allowed. Rose chronicles these developments with specific examples and speculates on where storytelling on the web might be headed. The conversation closes with a brief discussion of the passing of Steve Jobs.

Monday, 10 October 2011

EZ crisis: Ireland’s recovery, European Safe Bonds and a reform agenda for the Eurozone

In this VoxEU.org audio Philip Lane talks to Viv Davies about Ireland’s export-led recovery; they also discuss the interplay between banking and sovereign risk in Europe. Lane presents his and other economists’ proposals for European Safe Bonds and a reform agenda for the Eurozone.

The why of deregulation

Over the last 20 years or so deregulation has become the norm for many industries and markets in many countries. This movement has often been portrayed as a case of "free market" economics winning out over state (or social) control. In a 1999 comment economist W. Bentley MacLeod looks at these changes in a different light. He writes,
Viewing the evolution of transaction costs as an innovative process suggests that the recent deregulation movement [...] is not an example of free market economics winning over state intervention, but it is an example of the remediableness criteria in practice, as changes in transaction cost technologies make it possible to commodify products such as telephone or electricity services. It may even be the case that some future innovation in transaction costs makes it possible commodify probity, in which case it would be efficient to privatize the State Department. (MacLeod 1999: 347).
In other words as the level of transaction costs change the efficient organisational form that transaction take place in also changes.

The idea of "remediableness" referred to by MacLeod is due to Oliver Williamson and refers to the notion that an extant mode of organisation for which no superior feasible alternative can be described and implemented with expected gains is presumed to be efficient. That is, an "efficient" organisational form is one which is better than the possible alternatives, rather than being better than some theoretical standard.

The existence of transaction costs means there exists a profit opportunity for anyone who can discover ways to reduce these costs, and a reduction in transaction costs could lead to what is now a government provided service being moved into the marketplace. As transaction costs are reduced, new "feasible and implementable" alternatives to government supply are developed, with resulting gains, and thus government supply may no longer be efficient by the remediableness criteria. Thus deregulation, outsourcing and/or privatisation may just be the result of transaction cost reducing activities of entrepreneurs.
  • Macleod, W. Bentley (1999). 'Comment on "Public and Private Bureaucracies: A Transaction Cost Economics Perspective;" by Oliver Williamson', Journal of Law, Economics and Organization, 15(1) April: 342-7.

Saturday, 8 October 2011

Incentives matter: teachers pay file

Gadi Barlevy and Derek Neal have a column at VoxEU.org in which they put forward, yet another, scheme for teacher pay: A different approach to assessment-based accountability. Barlevy and Neal write,
For more than two decades, school systems in the US and around the world have introduced new accountability and incentive systems for public school educators that rely of the test scores of students as performance signals for educators. There is now a large empirical body of evidence on the effects of these assessment-based accountability and performance pay systems.

Existing systems often suffer from two design flaws: They rely on performance targets or standards that are vulnerable to manipulation, and they use exams that can be easily compared to past formats in ways that encourage coaching or teaching to the test. (References removed.)
The Barlevy and Neal pay method is Pay for Percentile:
In Barlevy and Neal (forthcoming), we describe an assessment-based incentive system for educators built around educator performance metrics that are invariant to the scaling of student assessments. These metrics are also relative-performance metrics because they do not express educator performance relative to a statistical target but relative to the performance of other educators that form an appropriate comparison set.

We call this scheme Pay for Percentile. It is built around a performance metric called the Percentile Performance Index (PPI). The following algorithm describes how one might calculate PPI scores for teams of teachers that work together to teach one class, eg fifth-grade maths, in the same school.
  • Step One: Consider all students in a large school district or state who are taking the same class, eg fifth-grade maths. Place each student in a comparison set with students who are similar in terms of their expected achievement given their past academic performance, their demographic characteristics, and the characteristics of other students in their school or classroom.
  • Step Two: At the end of the year, when the fifth-grade maths assessment results are reported, rank all students in each comparison set based on their end–of-year scores, and assign each student a percentile equal to the fraction of students in her comparison set who performed the same or worse.
  • Step Three: Overall the students in a given school who are taking a particular subject, eg fifth-grade maths, form the average of their percentile scores. This average is the PPI score for the team of fifth-grade maths teachers at this school. It reflects how often students in a given course in a given school perform as well or better than comparable students elsewhere.
We show that it may be possible to elicit effective teaching by paying teams of educators performance bonuses that are proportional to PPI metrics. Further, our basic result holds in the presence of instructional spillovers, peer effects, and heterogeneity in rates of student learning within classrooms.

A large literature in economics explores how properly seeded contests can be used to create incentive systems. Pay for Percentile generalises these results to a setting where workers (educators) produce many different outputs (achievement growth for many students) simultaneously by allocating time among several different tasks (lecturing, tutoring, lesson planning, etc). Because all contests are properly seeded, teachers respond by allocating efficient effort to all tasks that foster achievement for the set of students in a given class.

Pay for Percentile uses seeded competition to create performance metrics. PPI scores implicitly summarise the outcomes of many different simultaneous contests among students, and every contest that one fifth-grade maths team wins is a contest that another team lost. By construction, PPI scores do not tell policymakers how often students in a given school or classroom reached some pre-determined achievement target. Rather, PPI scores tell policymakers how often students in a given class or school outperformed students in other schools that began the year as their academic peers.

Because every contest between matched students in different schools must have one winner and one loser by construction, this approach also eliminates the Lake Wobegon effects that plague many accountability and performance pay systems. Neal (2011) argues that often, in target-based systems that permit the possibility that all educators can be judged satisfactory, almost all educators are deemed satisfactory whether they deserve to be or not.

As we note above, since Pay for Percentile involves assessments that avoid repeated items and predictable formats, these assessments will not provide much information about secular trends in student achievement. However, if policymakers use a separate no-stakes assessment system to measure student achievement, they eliminate incentives for educators to engage in the "teaching to the test" behaviours that often inflate reported achievement trends derived from high-stakes testing systems.

This approach may seem bizarre to many in the education testing and policy community. To many, it seems intuitive that, if educators should be held accountable for what their students learn, education officials should create measures of student achievement and educator performance using a single assessment system. However, the job of placing student assessment results on modern psychometric scales does not need to be and should not be part of the process of building accountability and incentive systems for educators. Whenever policymakers insist that these tasks be intertwined, they are only guaranteeing that education officials will perform both tasks poorly.
Reference:
  • Barlevy, Gadi and Derek Neal (2011), “Pay for Percentile”, American Economic Review, forthcoming.

The political economy of protectionism

Donald J. Boudreaux has an article in the October 2011 issue of the journal, Economic Affairs in which he attempts to answer the question, Do Subsidies Justify Retaliatory Protectionism? The abstract reads,
A theoretical case can be made to justify trade protectionism on the ground that foreign governments are subsidising export industries. This case is based on overall international welfare grounds. However, the country receiving the subsidised products benefits from the subsidies. Furthermore, imposing retaliatory protectionist measures risks encouraging rent-seeking behaviour. In practice, it is impossible to define exactly what behaviour does and does not amount to the grant of subsidies by the government of an exporting country.
If another country wants to make itself poorer by sending their wealth to us via export subsidies, Why should we complain? The real trick is to get them to do it forever!

Price distortions slow economic growth in sub-Saharan Africa (updated)

Real income in sub-Saharan Africa has grown by less than 1% per year over the past half century. Yet within this dismal statistic, there is wide variation. A new column at VoxEU.org explores the policy reforms that may have caused growth to flourish or stagnate.

In their column Kym Anderson and Markus Bruckner note that,
Economic growth in sub-Saharan Africa has been slow for decades
  • Sub-Saharan African real income per capita grew at less than 1% over the past half century 
  • Some countries have enjoyed faster growth in recent years, but the reasons for that acceleration, and the extent of its sustainability, are still uncertain
(References removed)
Anderson and Bruckner then point out that the in the majority of sub-Saharan African countries, there was a strong policy bias against agriculture over the past half century. By which they mean a negative relative rate of assistance. The relative rate of assistance is the ratio of the nominal rates of assistance to agricultural and the non-agricultural tradables, where the nominal rate of assistance is defined as the percentage by which government policies directly raise the gross return to producers of a product above what it would be without the government’s intervention (or lowered it, if NRA<0). They also note that there is substantial RRA [RRA is the relative rate of assistance, which is defined as RRA = [(100+NRAagt)/(100+NRAnonagt)] - 1 where NRAagt and NRAnonagt are the percentage NRAs for the tradables parts of the agricultural and non-agricultural sectors, respectively, and NRA is the percentage by which gross returns to producers of a product have been raised directly by government policies above what they would be without the government’s intervention (or lowered it, if NRA<0)] variation across time and countries. For example, in Ethiopia, Madagascar, and Tanzania there was a continuous reduction in policy biases against agriculture, while in countries such as Zambia and Zimbabwe the strong bias against agriculture has persisted.

When discussing their study, Anderson and Bruckner (2011), Anderson and Bruckner say,
Our key finding is that policy-induced price distortions had a quantitatively large negative effect on economic growth. In other words, reductions in those distortions in recent decades have contributed significantly to economic growth in sub-Saharan Africa. More specifically, a one standard-deviation decrease in distortions to relative agricultural prices raised real GDP per capita growth in the region by about half a percentage point per annum on average
Why does this matter?
Our finding of a statistically significant and quantitatively large negative effect of distortions to relative agricultural prices on sub-Saharan African economic growth is important for several reasons.
  • First, it implies that reducing distortions to incentives faced by even the world’s poorest farmers can be growth-enhancing. Thus this result does not support the view that there are significant growth benefits associated with supporting manufacturing and other sectors at the expense of agriculture.
  • Second, our finding suggests that the returns from investments in agricultural development will be greater in countries with less-distorted relative prices. Since funding for agricultural development in sub-Saharan Africa is expanding rapidly at present, particularly via development assistance programmes, our findings provide additional empirical support to those arguing that aid flows would be more effective in those African countries that have reduced, or are willing to reduce, their anti-agricultural policy bias.
  • Third, our empirical analysis shows that there is a significant within-country effect of policy distortions on economic growth. This is an important result. It implies that the relationship between price distortions and economic growth is unlikely to be a consequence of the strong ethnic divisions that characterise many sub-Saharan African countries. The reason is that ethnic divisions, as measured by countries' ethnic fractionalisation or polarisation, are mostly time-invariant variables. Hence, these variables cannot be a cause of within-country variations in price distortions. From an economic policy viewpoint, this is important because it suggests that in African countries there are significant factors that influence economic growth other than ethnic divisions.
Yes people, market prices really do matter.

Reference:
  • Anderson, K and M Brueckner (2011), “Price Distortions and Economic Growth in sub-Saharan Africa”, CEPR Discussion Paper No. 8530.
Update: Tim Worstall also notes The Importance of Market Prices

Thursday, 6 October 2011

Quote of the day

From Peter Boettke at the Coordination Problem blog:
I applied once for a fellowship to Stanford to a program on 'Ethics and Society' and I got back a rejection which read "As a student of Buchanan and Tullock, you undoubtedly have philosophical interests, but they have nothing to do with either ethics or society." Seriously!

Solow on Mises

In this book review Robert Solow writes,
Hayek’s mentor, the even more far-right economist Ludwig von Mises, undertook to argue that efficient centralized economic planning was an impossibility in an advanced economy. The main reason was that no central planning bureau could conceivably have all the knowledge needed to allocate resources to alternative uses effectively. That knowledge—technological possibilities, local conditions, consumer preferences, likely futures for all these—is necessarily scattered around the economy. A system of (competitive) markets is a uniquely suitable way for this knowledge to be expressed and converted into decentralized decisions about production and consumption. No central organization could conceivably access and analyze this information and calculate the appropriate allocations.
First what can we make of this "far-right" comment. I mean von Mises is after all the author of the book "Liberalism: In the Classical Tradition" and a great defender of classical liberalism, so I don't get where the "far-right' bit comes from.

But more importantly Solow's description of Mises's argument on why central planning can not work is, I would argue, at best somewhat inaccurate, if not misleading. I would take Mises's point to be that the rational economic use of resources is only possible if market pricing is applied not only to final goods but also to all intermediate products and factors of production. Without markets, and prices, for the factors of production, rational allocation of said factors is impossible. Markets for the factors of production are, of course, impossible, by definition, under socialism.

An Austrian view of the firm

Per L. Bylund has an interesting article in the Quarterly Journal of Austrian Economics, Vol. 14, No. 2, pp.188–215, Summer 2011, on The Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market. The abstract reads:
This paper reviews Austrian approaches to the firm and drafts a theory that emphasizes the firm as a market phenomenon. Here the firm is a vehicle for imaginative entrepreneurs to create artificially high factor density, thereby increasing its internal “extent of the market” to support specialization of factors beyond the general level of division of labor in the market. The firm therefore becomes a product of, and prospective catalyst for progressing the market’s overall division of labor, and the firm emerges as an entrepreneur-generated means toward increased efficiency and more roundabout production. It consequently may play a crucial role in the evolution of market structure and, by extension, the development of civilization.
Bylund opens his paper by noting
The theory of the firm has been a neglected area of study in mainstream economics. Despite Ronald Coase bringing the issue up for discussion in 1937, it was not on the research agenda until the 1970s. Even now, as both Coase and Oliver Williamson, the founder of and prominent scholar in the transaction cost-focusing analysis of firm organization, have received the Nobel Prize in economics, the area remains in the periphery of economic analysis.
This does raise the somewhat strange question of, If the theory of the firm is an area of study significant enough to warrant a couple of Nobel Prizes, why is it at the periphery of economics? Part of Bylund's answer is that,
Part of the reason the firm is not considered worthy of analysis in the economic mainstream is undoubtedly, to a degree, because it should not exist.
As Coase pointed out in a world of zero transactions costs firm have no rationale. He noted that firms would exist only in a world in which there were costs to using the price mechanism, that is, a world of positive transaction costs. The mainstream theory of the firm has grown out of this Coaseian insight. But
[...] even as mainstream economists began to realize Coase’s contribution, some thirty years after “The Nature of the Firm” (1937) was published, Austrians still had no such theory. About two decades after the rediscovery of Coase (1937) by Williamson (1967; 1973; 1979) and others (see e.g. Alchian and Kessel, 1962; Alchian, 1965; 1968; Alchian and Demsetz, 1972; Demsetz, 1967; Klein, Crawford and Alchian, 1978; McManus, 1975; Monsen Jr and Downs, 1965; Silver and Auster, 1969), O’Driscoll and Rizzo stated that “there is no […] Austrian theory of the firm” (1985, p. 123) and another decade later Foss (1994) made the same observation and could still, a few additional years later, safely theorize about “the Austrian lack of interest in the firm” (Foss, 1997, p. 176). More than seventy years after Coase’s seminal article, Foss and Klein identified that “a small Austrian literature on the firm has emerged” but that “[u]ntil recently the theory of the firm was an almost completely neglected area in Austrian economics” (2009, p. 2).
So while the mainstream has at least started to develop a theory of the firm, even if not with too much enthusiasm, the Austrians have lagged behind. Again the question is, Why?

As to why the firm was ignored in Austrian economics Witt (1999: 108) writes,
“[t]he neglect of the firm as the organizational form of an entrepreneurial venture has a tradition in Austrian economics. It may be traced back to a characteristic of the scientific community in the German language countries. There, economic theory (Volkswirtschaftslehre) and business economics (Betriebswirtschaftslehre) were institutionally segregated as early as at the turn of the century to a degree still unknown today in the Anglo Saxon world. As Lachmann once conjectured, Austrian writers therefore considered the organizational form of entrepreneurial activities to be a topic best left to their business economics fellows.”
As Bylund's paper shows this tradition is changing, which is all to the good.

Wednesday, 5 October 2011

Forgive student loans? (updated)

No says Freakonomics contributor and economist Justin Wolfers, who calls the suggestion the Worst Idea Ever. Wolfers writes,
Let’s look at this through five separate lenses:
  1. Distribution: If we are going to give money away, why on earth would we give it to college grads? This is the one group who we know typically have high incomes, and who have enjoyed income growth over the past four decades. The group who has been hurt over the past few decades is high school dropouts.
  2. Macroeconomics: This is the worst macro policy I’ve ever heard of. If you want stimulus, you get more bang-for-your-buck if you give extra dollars to folks who are most likely to spend each dollar. Imagine what would happen if you forgave $50,000 in debt. How much of that would get spent in the next month or year? Probably just a couple of grand (if that). Much of it would go into the bank. But give $1,000 to each of 50 poor people, and nearly all of it will get spent, yielding a larger stimulus. Moreover, it’s not likely that college grads are the ones who are liquidity-constrained. Most of ‘em could spend more if they wanted to; after all, they are the folks who could get a credit card or a car loan fairly easily. It’s the hand-to-mouth consumers—those who can’t get easy access to credit—who are most likely to raise their spending if they get the extra dollars.
  3. Education Policy: Perhaps folks think that forgiving educational loans will lead more people to get an education. No, it won’t. This is a proposal to forgive the debt of folks who already have an education. Want to increase access to education? Make loans more widely available, or subsidize those who are yet to choose whether to go to school. But this proposal is just a lump-sum transfer that won’t increase education attainment. So why transfer to these folks?
  4. Political Economy: This is a bunch of kids who don’t want to pay their loans back. And worse: Do this once, and what will happen in the next recession? More lobbying for free money, rather than doing something socially constructive. Moreover, if these guys succeed, others will try, too. And we’ll just get more spending in the least socially productive part of our economy—the lobbying industry.
  5. Politics: Notice the political rhetoric? Give free money to us, rather than “corporations, millionaires and billionaires.” Opportunity cost is one of the key principles of economics. And that principle says to compare your choice with the next best alternative. Instead, they’re comparing it with the worst alternative. So my question for the proponents: Why give money to college grads rather than the 15% of the population in poverty?
And Wolfers's punchline?
Conclusion: Worst. Idea. Ever.

And I bet that the proponents can’t find a single economist to support this idiotic idea.
I just hope that those in New Zealand who favour forgiving loans read Wolfer's posting and learn from it.

Update: Eric Crampton also asks if we should Forgive student loans?

Tuesday, 4 October 2011

Buy American

And what could be more American than Apple’s iPad 2 tablet? Or is it?

The following comes from Grossman-Hart (1986) Goes Global: Incomplete Contracts, Property Rights, and the International Organization of Production by Pol AntrĂ s.
Apple’s iPad 2 tablet is a case in point. Its slim and sleek exterior hides a complex manufacturing process combining components provided by multiplier suppliers located in various countries. Apple does not disclose information on its input providers, but teardown reports (such as those published by isuppli.com and ifixit.com) have shed light on the global nature of the iPad 2 production process. The tablet itself is assembled in China (and by the end of 2011 also in Brazil) by Taiwan-based Foxconn. The displays are believed to be manufactured by LG Display and, more recently, by Samsung, both of which are based in South Korea. The distinctive touch panel is produced by Wintek, a Taiwan-based company that also owns plants in China, India and Vietnam, while the case is provided by another Taiwanese company, Catcher Technologies, with operations in Taiwan and China. A third important component, the battery pack, also originates in Taiwan and is sold by Simplo Technologies and Dynapack International. Apart from these easily identifiable parts, the iPad 2 incorporates a variety of chips and other small technical components provided by various firms with R&D centers in developed economies and manufacturing plants (under various organizational structures) worldwide. A non-exhaustive list includes (again) Korea’s Samsung, which is believed to manufacture the main processor (designed by Apple) and possibly the flash memory, Japan’s Elpida contributing the SDRAM, Germany’s Infineon and U.S. Qualcomm both supplying 3G modules, and Italo-French STMicroelectronics, Japan’s AKM Superconductors and U.S. TAOS each contributing key sensors.
I guess "American" just isn't what it once was. Which means it's difficult, if not impossible, to workout what to buy if one want to "Buy American". In this globalised world the same problems occur for those who wish to "Buy New Zealand".

EconTalk this week

Bruce Meyer of the University of Chicago talks with EconTalk host Russ Roberts about the middle class, poverty, and inequality. Many economists and pundits argue that the middle class has made little or no economic progress over the last 30 years, that poverty rates are stagnant or rising, and that inequality has increased dramatically. Meyer, drawing on his research over the last ten years, argues that these conclusions are either false or misleading. He argues that standard measures of economic progress and inequality are based on faulty inflation data or a misplaced focus on pre-tax income instead of post-tax income or consumption.

Is there a 'hidden cost of control' in naturally-occurring markets?

There is a new, interesting working paper from the NBER on incentives and their effects. The paper, Is there a 'Hidden Cost of Control' in Naturally-Occurring Markets? Evidence from a Natural Field Experiment (NBER Working Paper No. 17472, September 2011), is by Craig E. Landry, Andreas Lange, John A. List, Michael K. Price and Nicholas G. Rupp.

The authors note that,
Behavioral economics has matured to the point where theorists are leveraging psychological insights to improve their models and government officials are using behavioral results to fine tune policy. One particular result that has attracted increasing attention is the interaction of psychological and economic incentives [...]. For example, in a novel set of experiments, Gneezy and Rustichini [...] show that extrinsic incentives influence effort in an unexpected manner—small monetary incentives can crowd out intrinsic motivation, resulting in a perverse relationship between incentives and effort.

Complementing such insights is the line of work in the spirit of [papers by Fehr and Rockenbach, and Fehr and List], who find that the use of control and explicit incentives entail “hidden” costs: such control causes the principal’s actions to backfire, leading to lower profits. As this literature points out, such effects are first order and should be a concern for economists interested in studying labor markets. Yet, whether, and to what extent, such hidden costs manifest themselves outside the confines of the laboratory remains an important open empirical question [...]. Difficulties arise, however, in finding natural instances where agents are randomly allocated to appropriate treatment groups to permit a clean test of the relevant hypotheses. Because of these challenges, the literature has to date been unable to provide tests of the major hypotheses of ‘control’ in the field.
The point of the current paper is to make a first step in this direction.
We present an empirical approach that is composed of a set of field treatments that parallel the important economic features of the environments in Fehr and Rockenbach [...], Fehr and List [...], and the literature that has followed. To do so, we examine solicitor (worker) effort in a door-to-door capital campaign for the Center for Natural Hazards Research at East Carolina University. Importantly, we use natural incentives to exogenously change the action space of solicitors randomly assigned to one of three treatment groups. In the baseline treatment, workers are provided a pre-announced, fixed hourly wage of $10. In a second treatment, workers are provided an unconditional gift – a copy of Freakonomics – in addition to the pre-announced hourly wage. In our final treatment, the most opportunistic actions are ruled out by making the gift conditional – solicitors must raise at least $10 per hour to obtain the copy of Freakonomics. If trust is a characteristic rewarded by workers, then the control evoked in the final treatment might crowd out effort compared to the second treatment – particularly amongst those who would have raised more than $10 if the gift were provided unconditionally.
The authors argue that there are several important insights which emerge from their field experiment.
First, unconditional gifts have the ability to enhance worker productivity. Solicitors in our unconditional gift treatment were approximately 56 percent more likely to elicit a contribution than counterparts in the baseline. Similarly, solicitors in this treatment raised approximately 10.1 to 63.4 percent more per hour than those in our baseline treatment. These results are consonant with the existing literature [...] and suggest that reciprocal motives are an important determinant of worker behavior.

Second, conditionality proves a profit enhancing strategy. Participation rates and dollars raised per hour in our conditional gift treatment are higher than those observed in both the baseline and unconditional gift treatments. For example, solicitors in our conditional gift treatment elicit contributions from nearly 26 percent of all households approached – a rate of giving that is approximately 68 percent (8 percent) greater than that observed in our baseline (unconditional gift) treatment. Similarly, solicitors in our conditional gift treatment raise approximately 83 percent more per hour than counterparts receiving an unconditional gift and more than double that observed in our baseline group.

Finally, solicitors in the conditional gift treatment are approximately two and half to three times more likely to raise at least $10 per hour – the required threshold for receiving the gift – than are counterparts in our unconditional gift and baseline treatments respectively. As this threshold corresponds with the level of productivity necessary to cover labor costs, conditionality therefore has a positive effect on net revenues. Taken jointly, these data are at odds with models suggesting that agents respond adversely to control. Accordingly, our data suggest that hidden cost relationships identified in prior laboratory studies [...] do not arise in our field setting.
So, yes incentives do matter, just as economists normally argue.