EconTalk this wek

Alex Tabarrok of George Mason University talks to EconTalk host Russ Roberts about a recent paper Tabarrok co-authored with Shruti Rajagopalan on Gurgaon, a city in India that until recently had little or no municipal government. The two discuss the successes and failures of this private city, the tendency to romanticize the outcomes of market and government action, and the potential for private cities to meet growing demand for urban living in India and China.

A direct link to the audio is available here.

Venezuela should be rich, but its government has destroyed its economy

Thats a headline from the Wonkblog at the Washington Post, which says it all.

Matt O'Brien makes a simple but important point when he writes,

It [Venezuela] should be rich. But it isn't, and it's getting even poorer now, because of economic mismanagement on a world-historical scale. The problem is simple: Venezuela's government thinks it can have an economy by just pretending it does. That it can print as much money as it wants without stoking inflation by just saying it won't. And that it can end shortages just by kicking people out of line. It's a triumph of magical thinking that's not much of one when it turns grocery-shopping into a days-long ordeal that may or may not actually turn up things like food or toilet paper.

The problem?

Venezuela, you see, has the most oil reserves [in the world], but not the most oil production. That's, in part, because the Bolivarian regime, first under Chavez and now Maduro, has scared off foreign investment and bungled its state-owned oil company so much that production has fallen 25 percent since it took power in 1999. Even worse, oil exports have fallen by half. Why? Well, a lot of Venezuela's crude stays home, where it's subsidized to the you-can't-afford-not-to-fill-up price of 1.5 U.S. cents per gallon. (Yes, really). Some of it gets sent to friendly governments, like Cuba's, in return for medical care. And another chunk goes to China as payment in kind for the $45 billion it's borrowed from them.

That doesn't leave enough oil money to pay bills. Again, the Bolivarian regime is to blame. The trouble is that while it has tried to help the poor, which is commendable, it has also spent much more than it can afford, which is not. Indeed, Venezuela's government is running a 14 percent of gross domestic product deficit right now, a fiscal hole so big that there's only one way to fill it: the printing press. But that just traded one economic problem — too little money — for the opposite one. After all, paying people with newly printed money only makes that money lose value, and prices go parabolic. It's no wonder then that Venezuela's inflation rate is officially 64 percent, is really something like 179 percent, and could get up to 1,000 percent, according to Bank of America, if Venezuela doesn't change its byzantine currency controls.

So what is the government up to?

The Maduro regime wants to throttle the private sector but spend money like it hasn't. Then it wants to print what it needs, but keep prices the same like it hasn't. And finally, it wants to keep its stores stocked, but, going back to step one, keep the private sector in check like it hasn't. This is where its currency system comes in. The government, you see, has set up a three-tiered exchange rate to try to control everything — prices, profits, and production — in the economy. The idea, if you want to call it that, is that it can keep prices low by pretending its currency is really stronger than it is. And then it can decide who gets to make money, and how much, by doling out dollars to importers at this artificially low rate, provided they charge what the government says.

This might sound complicated, but it really isn't. Venezuela's government wants to wish away the inflation it's created, so it tells stores what prices they're allowed to sell at. These bureaucrat-approved prices, however, are too low to be profitable, which is why the government has to give companies subsidies to make them worthwhile. Now when these price controls work, the result is shortages, and when they don't, it's even worse ones. Think about it like this: Companies that don't get cheap dollars at the official exchange rate would lose money selling at the official prices, so they leave their stores empty. But the ones that are lucky, or connected, enough to get cheap dollars might prefer to sell them for a quick, and maybe bigger profit, in the black currency market than to use them for what they're supposed to. So, as I've put it before, it's not profitable for the unsubsidized companies to stock their shelves, and not profitable enough for the subsidized ones to do so, either.

A big issue for Venezuela is its reliance on oil.

Not when 95 percent of its exports come from oil, and its price has fallen by half. (It's actually a little worse than that, since Venezuela's crude is so heavy that it sells at a $5 a barrel discount to the rest of the world's). Without as many petrodollars, Venezuela has had to cut back on imports so much that its shortages, which had already hit 30 percent of all goods before the central bank stopped keeping track last year, have gone from being a fact of life to the fact of life. Things are so bad that there isn't a bank run — who wants to save their worthless currency? — but rather, as Jonathan Wheatley puts it, a supermarket run. People have lined up for days to try to buy whatever they can, which isn't much, from grocery stores that are even more empty than usual. The government has been forced to send the military in to these supermarkets to maintain some semblance of order, before it came up with an innovative new strategy for shortening the lines: kicking people out of them. Now they're rationing spots in line, based on the last digit of people's national ID cards.

This is a story which simply can't end well. If the government keeps on doing what its doing things will only get worse and if starts to deal with the problems it has created the short term results will see a lowering of the already low standard of living for all citizens, but especially the poor, of Venezuela.

EconTalk for two weeks

Greg Page, former CEO of Cargill, the largest privately-held company in America, talks to EconTalk host Russ Roberts about the global food supply and the challenges of running a company with employees and activity all over the world. Page talks about the role of prices in global food markets in signaling information and prompting changes in response to those signals. Other topics include government's role in agriculture, the locavore movement and genetically modified organisms (GMOs).

A direct link to the audio is available here.

Nassim Nicholas Taleb, author of Antifragile, Black Swan, and Fooled by Randomness, talks with EconTalk host Russ Roberts about a recent co-authored paper on the risks of genetically modified organisms (GMOs) and the use of the Precautionary Principle. Taleb contrasts harm with ruin and explains how the differences imply different rules of behavior when dealing with the risk of each. Taleb argues that when considering the riskiness of GMOs, the right understanding of statistics is more valuable than expertise in biology or genetics. The central issue that pervades the conversation is how to cope with a small non-negligible risk of catastrophe.

A direct link to the audio is available here.

Economics joke

A joke attributed to Robert Tollison

An economic historian is someone in a dark room looking for a black cat.

An economic theorist is someone in a dark room looking for a non-existent black cat.

An econometrician is someone in a dark room looking for a nonexistent black cat who finds it.

An economic methodologist, is someone in a dark room looking for economists so he can tell them how to search properly for black cats in dark rooms.

More on the minimum wage

The seemingly never ending debate on the effects of the minimum wage continues with a new NBER working paper out on The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers by Jeffrey Clemens and Michael Wither.

The abstract reads:

We estimate the minimum wage's effects on low-skilled workers' employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a "target" group, whose baseline wage rates were directly affected, and a "within-state control" group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an "internship" effect), and lost wage growth associated with reductions in experience accumulation. Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage's effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.

In short, the demand curve for labour really do slope downwards. For low-skilled workers the effects on employment and income are negative. The effect on an economy-wide basis is relatively small, as you would expect, but the effect for those in the effected groups is still devastating.

EconTalk this week

Joshua Greene, of Harvard University and author of Moral Tribes: Emotion, Reason, and the Gap Between Us and Them, talks with EconTalk host Russ Roberts about morality and the challenges we face when our morality conflicts with that of others. Topics discussed include the difference between what Greene calls automatic thinking and manual thinking, the moral dilemma known as "the trolley problem," and the difficulties of identifying and solving problems in a society that has a plurality of values. Greene defends utilitarianism as a way of adjudicating moral differences.

There is a direct link to the audio available here.

An updated, updated version of "The Past and Present of the Theory of the Firm"

Yet more blatant self promotion. A new version of the paper. The introduction has been reworked a bit. A couple of new references. A number of typos have been corrected and thanks to the wonders of LaTex the equation numbering is now, I hope!, the way it should be.

The Past and Present of the Theory of the Firm: A historical survey of the mainstream approaches to the fir...

Bleg: a LaTex problem (updated x2)

A question for the LaTex gurus out there. How do you get equations numbers of the form "page number.equation number”. Is there a way to set things up so the equation command numbers this way automatically?

I'm sure someone must have written a style file or something that does this.

Thanks.

Update: Via twitter comes this answer from David Winter

@EricCrampton @psw1937 @ATabarrok \numberwithin{equation}{page} from amsmath. #veryUsefulTimeSink
— David Winter (@TheAtavism) January 3, 2015

And indeed putting the \numberwithin{equation}{page} command in the preamble of your document, assuming you are using amstex, gives the desired result. The only problem I have found with it is that it sometimes miss-numbers the first equation on a page if that equation is at the top of the page. In some cases it carries over the equation numbering from the previous page. But you can find ways around this.

Its a lot better than what I had before.

Thanks David.

Update 2: Another suggestion I have been given is to use the "perpage" package with the commands

\MakePerPage{equation}
\renewcommand{\theequation}{\theperpage.\arabic{equation}}

in the document preamble. This works as far as I can tell.

Interesting blog bits

A few interesting blog bits to start the year with.

1. Chris Dillow writes in Praise of Complexity Economics

   One feature of complexity economics is that recessions can be caused not merely by shocks but rather by interactions between companies. Tens of thousands of firms fail every year. Mostly, these failures don't have macroeconomic significance. But sometimes - as with the Fukushima nuclear power plant or Lehman Brothers - they do. Why the difference? A big part of the answer lies in networks. If a firm is a hub in a tight network, its collapse will cause a fall in output elsewhere. If, however, the network is loose, this will not happen; the loss of the firm is not so critical.

2. Tim Worstall asks Isn’t the Venezuelan economy doing well?

   As we’ve mentioned around here before there’s nothing wrong at all with the idea that you’d like to change an uneven income distribution. It may or may not be desirable, may or may not be practicable, but the basic desire for a little less extremity in the gap between rich and poor is not a dishonourable goal. It’s just that there are sensible and non-sensible ways of going about this.

3. Clive Cook writes about The Year of Piketty

   Above all, admirers and critics alike pay tribute to "Capital" for drawing attention to inequality. I hadn't noticed that it was lacking attention to begin with. The American left pays attention to little else. It was really the reverse: The obsession with inequality demanded, so to speak, an academic testament, and that's what "Capital" provided. Piketty's economics leaves a lot to be desired, but his timing was fantastic.

4. Scott Sumner on The French experiment: Laffer >>>>>>> Piketty

   What an unmitigated disaster for Pikettynomics! The French "super-tax" on the rich raised less than one one-hundredth of one percent of GDP in tax revenue.

5. Stephen Moore on The Laffer Curve turns 40: the legacy of a controversial idea

   When Reagan left the White House in 1989, the highest tax rate had been slashed from 70 percent in 1981 to 28 percent. (Even liberal senators such as Ted Kennedy and Howard Metzenbaum voted for those low rates.) And contrary to the claims of voodoo, the government’s budget numbers show that tax receipts expanded from $517 billion in 1980 to $909 billion in 1988 — close to a 75 percent change (25 percent after inflation).

6. Emma Griffin on Sex and the Industrial Revolution

   Before the mid-18th century poverty had controlled young people’s sexual behaviour and steered them away from sexual intercourse until they were ready in the eyes of their neighbours to marry, set up house and raise a family. The young men and women of the factory districts did not show this kind of deference to social norms. They made decisions about when to start a family that tied in with their own wishes, rather than obeying what their community dictated. Seen in this light it becomes possible to understand the true complexity and significance of the Industrial Revolution. As well as ushering in new working patterns, industrialisation raised the incomes of the poor just enough to permit them to make meaningful decisions about their own life. As such, it was a vital step towards the sexual revolution of more recent times.

7. John Cochrane asks Cancel currency?

   Ken Rogoff has an interesting NBER Working paper "Costs and Benefits to Phasing Out Paper Currency." Ken would like to get rid of paper currency in favor of all electronic transactions. I'm a big fan of low-cost electronic transactions using interest-paying electronic money. But I'm not ready to give up cash. Ken has two basic points: The zero bound, and tax evasion / illegal economy.

Top female economists

As it seems to be the time of the year for ranking economists here is a list of the top female economists. The list is computed with data from RePEc as at November 2014. For more rankings, historical data and detailed methodology, click here. Or see the ranking FAQ. The top ten in the ranking are:

1 Carmen M. Reinhart
Kennedy School of Government, Harvard University, Cambridge, Massachusetts (USA)

2 Esther Duflo
Economics Department, Massachusetts Institute of Technology (MIT), Cambridge, Massachusetts (USA)

3 Asli Demirguc-Kunt
Economics Research, World Bank Group, Washington, District of Columbia (USA)

4 Janet Currie
Institute for the Study of Labor (IZA), Bonn, Germany
Woodrow Wilson School of Public and International Affairs, Princeton University, Princeton, New Jersey (USA)

5 Marianne Bertrand
Booth School of Business, University of Chicago, Chicago, Illinois (USA)

6 Bronwyn Hughes Hall
National Bureau of Economic Research (NBER), Cambridge, Massachusetts (USA)
Graduate School of Business and Economics (GSBE), School of Business and Economics, Maastricht University, Maastricht, Netherlands

7 Claudia Goldin
Department of Economics, Harvard University, Cambridge, Massachusetts (USA)

8 Serena Ng
Department of Economics, School of Arts and Sciences, Columbia University, New York City, New York (USA)

9 Olivia S. Mitchell
National Bureau of Economic Research (NBER), Cambridge, Massachusetts (USA)
Pension Research Council, Wharton School of Business, University of Pennsylvania, Philadelphia, Pennsylvania (USA)

10 Ellen R. McGrattan
Department of Economics, University of Minnesota, Minneapolis, Minnesota (USA)

Lynne Kiesling discusses Adam Smith

As you have a few days off and thus time to relax and view videos on economics here are two short videos in which Lynne Kiesling looks at both of Adam Smith's major works: "The Theory of Moral Sentiments" and "An Inquiry into the Nature and Causes of the Wealth of Nations".

Adam Smith's Theory of Moral Sentiments (1759) lays out his moral philosophy, and provides the philosophical and psychological underpinnings of the better-known Inquiry Into the Nature and Causes of the Wealth of Nations (1776). In this video, prepared for the History of Economic Thought course for economics majors at Northwestern University, I highlight the main ideas in TMS and their relevance to Smith's subsequent works.

Adam Smith: Theory of Moral Sentiments from Lynne Kiesling on Vimeo.

The Wealth of Nations is Smith's most famous work, and is one of the foundational texts in economics. In the course of his extensive and thorough critique of mercantilist policies that tie together economic and political processes and power, Smith formulates important theoretical insights about the role of specialization in increasing productivity and income, market prices and their adjustments, labor and capital as complements in production, domestic and foreign trade as mutually beneficial value-creating processes, and the role of government in providing defense, enforcing (negative) justice, and providing infrastructure that increases the extent of the market and enables general basic education.

Adam Smith: An Inquiry Concerning the Nature and Causes of the Wealth of Nations from Lynne Kiesling on Vimeo.
Having seen these you will want to know more and a good place to start on Smith is

• Adam Smith by James Otteson
• The Life of Adam Smith by Ian Simpson Ross
• Adam Smith: A Moral Philosopher and His Political Economy by Gavin Kennedy

On Smith's moral philosophy start with

• The Impartial Spectator: Adam Smith's Moral Philosophy by D. D. Raphael
• Adam Smith's Marketplace of Life by James R. Otteson

On Smith's political philosophy see

• Adam Smith's Political Philosophy: The Invisible Hand and Spontaneous Order by Craig Smith

And of course the original works are available in many versions including online: The Wealth of Nations and The Theory of Moral Sentiments

Hayek and the knowledge problem

A short video of Lynne Kiesling discussing the knowledge problem.

Hayek's work in the 20th century explored a range of ideas, one of the most important of which was the argument that the fundamental economic challenge in a society is the coordination of plans and actions among agents in an economy, all of whom have diverse goals and make choices based on their own perceptions and private knowledge. The knowledge problem has implications for questions from the socialist calculation debate of the 1920s and 1930s to the modern policy analyses of the regulatory state

Hayek and the Knowledge Problem from Lynne Kiesling on Vimeo.

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Why do some business support raising the minimum wage?

In a letter to the Wall Street Journal Don Boudreaux points out one reason, anti-competitive behaviour on the part of higher wage firms:

Labor Department official David Weil justifies his support for raising the minimum wage in part by recounting that “the vast majority of retailers” who he met at a National Retail Federation conference pleaded with him to raise the minimum wage (“Wage-Law Enforcer Favors Proactive Approach,” Dec. 30).

Such pleading by some retailers for a higher minimum wage is not as clear a sign as Mr. Weil would have us believe of the wisdom of raising that wage.

For starters, every retailer is free to raise its wages on its own. And because raising its wages when other employers don’t allows the wage-raising firm to attract a larger and better pool of employees than it attracts when all firms raise wages, there’s something suspicious about some retailers pleading with government to force all employers to raise wages.

I have a good idea what that something is. The retailers who begged Mr. Weil for a higher minimum wage likely have wage scales well above the industry norm; they rely less intensely than do their competitors on minimum-wage workers. Raising the minimum wage, therefore, would impose heavier burdens on their competitors than on themselves. Mr. Weil’s retailer friends thus see a hike in the minimum wage as a way for government to artificially improve their profitability by bankrupting, or at least throttling, many of their rivals.

Who are the most influential economists?

Here is the list from The Economist:

Got to say I don't think any of them influenced me in anyway last year.

But Tyler Cowen also has a list,

1. Thomas Piketty
2. Paul Krugman
3. Joseph Stiglitz
4. Jeffrey Sachs
5. Amartya Sen

Again don't see what influence any of them had on me.

Arnold Kling has a list to

Steve Levitt. Not my cup of tea, but I have encountered a number of young women who are ardent admirers, which is something I cannot say about any other economist.

Daniel Kahneman. I know many economists and non-economists who have read Thinking Fast and Slow. Not just bought it because it was famous and stopped reading after a few pages, but got through the whole book.

Paul Krugman, for better or worse. If you look in the blogosphere and op-edsphere at the ratio of uncharitable to charitable treatment of those who disagree, then you have a measure of the ratio of his influence relative to mine.

Stan Fischer, for better or worse. The Genghis Khan of macroeconomics, as I put it.

Tyler Cowen. Where would the economics blogosphere be without him?

But it could be that such lists are just stupid.