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.

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.

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.

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.

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.

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.

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.

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

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?

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.