Wednesday, February 27, 2008

What kind of inequality should we be concerned about?

There has been some discussion on the blogosphere on an NYT op-ed by Cox and Alm on consumption versus income inequality. Good points were made by Lane Kenworthy with some discussion by Andrew Gelman and Mark Thoma.

Consumption is constrained by income so if consumption inequality is lower than income inequality seems to imply that the constraint at the lower end is as binding as we would like to believe. If we were to transfer all of the top quntile income to the bottom quintile, the bottom quintile might consume only just as much as the top quintile leading to an equalization in consumption inequality. The article would like us to believe that this difference in consumption inequality is not all that much.

But what about the income less consumption i.e. savings? The rich are able to save more and hence would probably be able to consume more in the future than the poor when both are no longer working.

Perhaps the answer to the question in the post is that we should be concerned with neither income nor consumption but the present value of lifetime income and consumption (including bequests).

Tuesday, February 26, 2008

Stand up and say something

There was an interesting segment on ABC's Primetime on what we would do if confronted with an incident of racism. The set up was that of a Muslim woman at a convenience store whose store clerk would not serve her and proceeded to berate her with all kinds of racist comments. (Both the woman and clerk were actors.) Roughly an equal number of people stood up for and against the clerk's actions and some of those who stood up for the woman were quite emotional. Unfortunately, roughly three times as many people did nothing.

Why is this? Is this cultural, the way we are brought up (to avoid any kind of confrontation), or is this apathy or fear? I'm ashamed to say that I'd probably be in the group who did nothing.

Are there too many citations for Perry Preschool and Abecedarian?

The case for universal preschool usually hinges on the effects found in the Perry Preschool and Abecedarian project. (See for instance, Heckman and Masterov "The Productivity Argument for Investing in Young Children".) Both find positive impacts at levels of spending per child that are higher than those seen in Head Start, for instance. Both these projects seem a little dated although I think it is important to continue tracking the adults -- the sample for Perry Preschool was drawn in the 60's and the Abecedarian sample was drawn in the 70's. In order to bolster the case for positive impacts of high quality childcare there should be funding for newer and bigger longitudinal studies. In addition, there should be a sample drawn perhaps every decade to continue to monitor the effects of quality child care.

It is also unfortunate that after almost 40 years none of the data have been made public (at least not on the websites cited above).

The motivation for this post was from Lane Kenworthy's excellent synthesis on findings of economic mobility.

Monday, February 25, 2008

Overlaying/superimposing NBER recession dates on time series

I don't really know what you'd call it but I've always been curious how Econbrowser produces nice charts like this one on recession probabilities. I'm a SAS geek and this is how I coded it although I think that SAS should have an easier way of doing this without having to use an ANNOTATE data set which despite having used it quite a lot on project work is still a little bit of a mystery to me. Unfortunately, I don't know enough about HTML to render the code correctly so the input statement looks wrong.

data NBERdates;
length PeakQ $ 20 TroughQ $ 20;
informat Peak Trough ddmmyy10.;
format Peak Trough date9.;
input PeakQ 1-20 TroughQ 21-40 Peak Trough;
February 1945(I) October 1945 (IV) 1/2/1945 1/10/1945
November 1948(IV) October 1949 (IV) 1/11/1948 1/10/1949
July 1953(II) May 1954 (II) 1/7/1953 1/5/1954
August 1957(III) April 1958 (II) 1/8/1957 1/4/1958
April 1960(II) February 1961 (I) 1/4/1960 1/2/1961
December 1969(IV) November 1970 (IV) 1/12/1969 1/11/1970
November 1973(IV) March 1975 (I) 1/11/1973 1/3/1975
January 1980(I) July 1980 (III) 1/1/1980 1/7/1980
July 1981(III) November 1982 (IV) 1/7/1981 1/11/1982
July 1990(III) March 1991(I) 1/7/1990 1/3/1991
March 2001(I) November 2001 (IV) 1/3/2001 1/11/2001

data NBERdates;
set NBERdates;
where Peak > '01Jan1947'd and Peak < '31Dec2000'd;
PeakS = "'"put(Peak, date9.)"'d";
TroughS = "'"put(Trough, date9.)"'d";

filename gdp 'GDPC1.txt'; /* File downloaded from FRED St. Louis */
data GDP;
infile gdp firstobs = 14;
/* Read two variables: date and GDP */
input date value;
informat date yymmdd10.;
format date yymmdd10.;
lngdp = log(value);
/* We will refer to Y instead of LNGDP for consistent notation */
/* Calculate the first difference of y */
diffy = dif(y);


data NBERDate1;
set NBERdates;
date = Peak; output;
date = Trough; output;

data anno;
merge GDP(rename = (y=y1)) NBERdate1; by date;

goptions ftext = swiss fontres = presentation htext = 0.9;
axis1 label = (angle=90);
axis2 order = ('1Jan1945'd to '30Jun2000'd by year5) minor = none;
symbol1 color = red interpol = j;
symbol2 color = black interpol = j;

proc gplot data = GDP;
plot lngdp * date /legend vaxis = axis1 haxis = axis2 annotate = anno chref=blue;
format date yyq6.;

Perspiration versus Inspiration?

Jonathan Coulton went from being just another "code monkey" to the Godfather of "Geek Rock." Here’s how he did it. From Yahoo People.

When he was packing up his office cubicle to begin his new adventure, a colleague suggested that Coulton try to write one song every week for an entire year. ... "There were a lot of times when I would have an idea that I thought was really bad, or stupid, but sometimes that would be the only idea that I would have, and so I didn't have any choice but to do it," Coulton says. "That's definitely how a lot of those songs ended up being about such weird things, or news items."

He became a master of observation of the things that surrounded him. A Shopvac inspired a tune by the same name about a life of suburban angst and regret. When he saw a photo online of a giant squid, he wrote a song called "I Crush Everything," in which a lonely giant squid wants to play with the ships he sees sailing above, but fears he'll destroy them with his innocent but deadly embrace. Coulton also found a rich source of material from his former life. A song titled, "RE: Your Brains," tells the story of an office worker being besieged by a co-worker-turned-zombie, who of course wants to eat his brains. But Coulton is perhaps best known for the tune "Code Monkey," about a software engineer who dreams of a better life. The song has become an anthem for downtrodden office workers and has helped propel his fame.

His web site:

Sunday, February 24, 2008

Metaphors in economics

Here's one thanks to Marginal Revolution:

Should the IMF behave like a Sovereign Wealth Fund?
"Retrenching now is tantamount to downsizing a fire department when there is a low incidence of fire," he said ...

Here's another one of my own:
1. What if building codes have now been upgraded so that the probability of fire is now lower?
2. Or what if building codes have not been upgraded, but the material used for houses is so poorly regulated that a simple spark can cause such a large fire that swamps any ability of any fire department to control the fire? That all the fire department can do is just to make sure the flames don't burn down the fire department?
3. Or what if Mrs. O'Leary has let too many cows run amok?

Tuesday, February 19, 2008

I was glad to read this

And to learn that I'm not the only one full of angst:

A few days ago I was in a London taxicab when I noticed a possibly expensive purse in the seat next to me. I climbed out of the cab and without much thought (shame on me) gave it to the driver. I explained someone had left it there. Of course I was intent on treating the driver like a decent human being. But wait, I know I am honest and maybe he isn't. But wait, maybe I couldn't have gotten the purse to the woman very easily. But wait, I could have posted notice on this blog and had you help me track her down. But wait, isn't it my obligation to simply leave the woman no worse off than she was in the first place? But wait, what is the default point for defining "in the first place"? But wait, what would the driver have thought if he saw me taking the purse out of his cab? But wait, isn't a purse really really important? But wait, what if the purse belonged to the driver?

Some interesting pieces from the Washingtonian

1. Celebrities:
a. Gilbert Arenas of the Washington Wizards. Athletes usually thank their moms but this is one with a strong father figure.
b. Condoleeza Rice by Brooke Lea Foster.
c. NPR - should we emphasize National PUBLIC Radio or NATIONAL Public Radio?

2. Local celebrities:
a. Bob Woodward - by Alicia Shepard excerpted from her book Bernstein and Woodward: Life In the Shadow of the Watergate (not online alas).
b. George Michael of Sports Machine/NBC4.

1. How minor brain injury caused by a fender bender derailed the life of a young economist.
2. A story by Arch Campbell, movie critic who was for a long time at NBC4 and his experience with colon cancer.
3. A family in PG County whose twins developed autism by Cindy Rich.

1. Made in Maryland - about PRS Guitars. Profile of Paul Reed Smith. It made me want to visit Kent Island to see the guitar factory.
2. A fascinating history of water in Washington. Lt. Montgomery Meigs of the U.S. Army Corp of Engineers built the Washington Aqueduct and most of the water infrastructure including what is now the Dalecarlia treatment plant, the Georgetown reservoir and a counduit that is 9 feet in diameter that carries water from Great Falls into DC that is buried within the single lane Cabin John Bridge.

Wednesday, February 13, 2008

What good is growth accouting?

In an interesting entry and comments, Dani Rodrik says this:
These accounting exercises come in two flavors. A levels-exercise which decomposes differences in GDP per worker across countries into factor endowments and efficiency (or TFP). For the state of the art on this, see this paper by Francesco Caselli. The more traditional kind decomposes growth within a country into components having to do with physical and human capital deepening and a residual (TFP growth). A comprehensive source on the latter is the 2003 paper by Barry Bosworth and Susan Collins. ... Aside from all kind of measurement problems, these accounting exercises say nothing about causality, and so are very hard to interpret.

I mostly agree with the commentator who had this to say:
The purpose of growth accounting is quite simple: ACCOUNTING --- NOT MODELING. Accounting requires a framework, and that's what the neoclassical 1957 Solow framework offers. ... Growth accounting serves the purpose of classifying growth into that part that can be traced to measured inputs and that part which cannot. The residual can be thought of as a "measure of our ignorance", that part for which we were not able to find measured or measurable inputs. The more sizable the residual, the more humble we ought to be about the accounting exercise.
Prof. Rodrik asks:
1) "Say you found it's 50% efficiency and 50% factor endowments. What conclusion do you draw from it?"
@ You can conclude that you've only done half the job. You may want to look into the work of Denison, Jorgenson, Mankiw, Romer, and Weil, Barro, and others who have seriously looked into expanding the range of measured inputs.
2) "You could imagine a story where the underlying cause of growth is factor accumulation, with technological upgrading or enhanced allocative efficiency as the by-product. Or you could imagine a story whereby technological change is the driver behind increased accumulation. Both are compatible with the result from accounting decomposition."
@ Sure, that's where you want to move away from accounting and towards modeling. Solow's 1956 model was a first shot, which typically explains about half of the growth. A lot more work has been done since. The new growth theories of Romer, Lucas, Aghion and Howitt, Grossman and Helpman, the barriers to riches theories of Prescott and Parente, and others, are one giant step in the right direction.

Countries that grow don't really care how or why they grow as long as they grow. Well, they really care because they would like to keep it up. Since economists are not able to tell them why they will continue to do the things that they've been doing.
1. Countries that grow continue to save, invest, educate their population since this works for them.
2. Countries that do not grow continue to engage in armed conflict, be corrupt and extract the wealth of their country for personal gain.

The more controversial issue was and still is the aggregate production function - its existence and how useful a construct it really is. Perhaps some sensitivity analyses on different functional forms may be illuminating.

What is an unintended consequence?

There was some ruckus over the Freakanomics article in the NYT on the unintended consequences of the American Disabilities Act.

1. Andrew Gelman believes that all consequences are actually intended but he ponders this entry by Dubner and Levitt. What is considered an unintended consequence?
2. In the comments section of Andrew's post: To take the one example in their article that I know something about: The paper they cite on the ADA and the disemployment effect is one of the very earliest papers on the subject, and there has been a lot of subsequent refinement. For example, there is a case to be made that the disemployment effect was actually due to more people with disabilities choosing to get further education, rather than enter the job market immediately, because the ADA increased educational opportunity for people with disabilities. See, e.g., Christine Jolls, Identifying the Effects of the Americans with Disabilities Act Using State-Law Variation: Preliminary Evidence on Educational Participation Effects, American Economic Review, 94:447-53 (2004). But whether the Jolls paper is exactly right or not, there is certainly no consensus (to say the least) that employers stopped hiring disabled people after the ADA because of onerous requirements created by the ADA. (Indeed, there is not even consensus that the ADA did in fact create onerous requirements, at least for the vast majority of employers.)
3. Further commment on Michael Dorf: An interesting story, but is it true? Well, for one thing, it's not clear that Dubner and Levitt understand the argument they're reporting: Fear of back-end lawsuits by dismissed members of a protected class is a frequent argument made against non-discrimination mandates in general, but the particular worry with respect to the ADA has typically been that its requirement of "reasonable accommodations" for disabled workers would impose higher costs on employers for workers they don't fire. The reasonable accommodation requirement of the ADA distinguishes it from Title VII, the general federal anti-discrimination in employment statute. By failing to confine their argument to the disability context, Dubner and Levitt (perhaps unwittingly) suggest that all anti-discrimination law is perverse.
4. The NYT article was based on research by Acemoglu and Angrist which does not make such a strong claim - in fact I thought the abstract was tantalizingly close to claiming causation but does not actually say that so they've covered themselves.

Finally, the most important question asked by Andrew - what can be considered an unintended consequence? A comment on Marginal Revolution highlighted by Andrew: The law of unintended consequences is what happens when a simple system tries to regulate a complex system. The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high-feedback, incentive-driven system. When a simple system tries to regulate a complex system you often get unintended consequences.

I don't necessarily disagree with this but I think there might be more to it than that. For instance, a water company adds a new additive (replacing chlorine with chlorine ammonia or chloramine) to its water purification process in order to comply with EPA regulations. This new additive causes old lead pipes to bleach lead into the water coming out of the taps of homes in Washington, DC. Is this really an unintended consequence? I would not consider it so -- rigorous analysis of the affects of the chloramine on all kinds of pipes would have led regulators to this effect. Sloppy regulation perhaps but not an unintended consequence. Likewise, with the other examples cited in the NYT article.

What about when I replace my incandescent light bulbs with fluorescent ones and this lead me to use the fluorescent ones even more -- for instance, they are not as hot so in the summer I would tend to turn on the lights more. Is this an unintended consequence?

Housing bubble?

The ever contrarian Alex Tabarrok at MR states that there is no bubble but prices are now at a higher equilibrium (or a higher plateau). He uses the chart above (the same chart that can be used to claim that there is a bubble) from Robert Shiller's Irrational Exuberance.
1. He notes that 2006 is similar to the post war run up in house prices that settled onto a permanently higher plateau.
2. He does not believe that prices can fall back down to 110.
However, he does not note that the post war run up to 110 is not really a new equilibrium level. Prior to the First World War, house prices have been around the 110 level before so the "new" equilibrium is really not so new.
It seems like we've heard this story before during the Internet "bubble" (or is it bubble without the quotes?). The story goes something like this - there is a increase in asset prices. Is it a bubble or not? The not a bubble camp comes up with a story -- increasing productivity, unique website visitors, eyeballs on page, demographics, interest rates -- but none of the stories show direct causality and remain speculative at best.

Saturday, February 9, 2008

Failure of development in Kenya?

Economists View pointed to this Project Syndicate article titled "Did the World Bank's Development Efforts Fail in Kenya?":

A month ago, Kenya fell prey to a sudden burst of post-electoral violence... The intensity and scale of the violence have stunned the world. ...

[T]hings seemed to be going well recently. This year's campaign was exceptionally peaceful... Perhaps more fundamentally, Kenya was unanimously seen as the "good student" of development, sometimes referred to as a symbol of an African renaissance.

All the rosy comments was news to me which seems to indicate that development agencies and donors might have been fooling themselves. The reason I say this? K1 has a friend in her class whose family left Kenya two years ago. They loved it there but they said it was no longer safe. Based on this comment alone, the violence in Kenya was not unexpected and was in fact foretold.

How to give a talk

MR pointed me to this entry on how to give a talk. The part I liked best (esp. #1):
The Big Four
A collection of four heuristics that make a talk work.
1. Cycling. Deliver ideas first in brief, then in detail, then in summary. To use the lingo of artificial intelligence: let your audience load the schema, then fill in the details, then let them know what’s worth indexing for future reference.
2. Verbal Punctuation. Provide a mechanism to help people who “fogged out” to easily rejoin the talk. For example: “We have just finished talking about the first heuristic, cycling, I am now going to talk about the second heuristic for helping to make your talks more interesting…”
3. Near Miss. When explaining an idea, also describe other ideas that are close but not quite the same. This will help people understand what the important points are that define your idea.
4. Ask Rhetorical Questions. Don’t make them too easy. Don’t make them too hard. Wait 6 seconds for an answer.

Friday, February 8, 2008

Why the need for greater transparency of sovereign wealth funds?

Looked over Edwin Truman's Sovereign Wealth Funds: The Need for Greater Transparency and Accountability. This and other writings on SWFs seem to call for greater transparency mostly because of a fear (rational or not) that the country will use what is equivalent to a financial nuclear weapon of mass destruction. The fear is that in order to achieve political ends, a country will use the power of its SWF to wreak economic havoc in the financial world.

Apart from that I can see no other real reason listed in any of the other writings. In general, I thought the article was a good introduction but would benefit from:
1. A source for Table 1.
2. A baseline reference for a reader to gain some insight on the size of these SWFs. For instance, the size of the largest hedge fund and/or CALPers.

1. I did not find that a compelling case was made for the need for greater transparency or accountability.
2. It is also hard to make the case that the citizens of the countries in question even know that their governments have a large SWF and would demand accountability.
3. Backlash by host countries against invesment by SWF would force them to become more transparent unless they take their money elsewhere. No need for rules or mandates - self interest on the part of SWFs would eventually lead to greater transparency (again, if they don't take their money elsewhere). Academic and policy efforts requiring greater transparency and accountability are misplaced.

I'm curious how seriously the possibility that increased disclosure could be destabilizing, for instance something along the lines of Hyun Song Shin and Haresh Sapra's Do Derivatives Disclosures Impede Sound Risk Management?

It seems like the mad government scenario could also be applied to a mad hedge fund manager which are unregulated as well. I may be watching too much James Bond or reading too much Tom Clancy.

Brad Setser has some discussion.

Thursday, February 7, 2008


Progressive, Liberal, Conservative - and in different stripes.

American Progressivism
New Deal liberalism
Educational progressivism
Progressive libertarianism

American liberalism
Classical liberalism
Conservative liberalism
National liberalism
Economic liberalism
Social liberalism
Cultural liberalism

Cultural conservatism
Liberal conservatism
Social conservatism
National conservatism
Libertarian conservatism

Life Among the Econ

Axel Leijonhufvud's oldie (c. 1973) but a goodie - thanks to MR and Tyler Cowen:

The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours such as the Polscis and the Sociogs. Despite a common genetical heritage. relations with these tribes are strained-the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter-and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even somewhat dangerous for the outsider.

The facts (a) that the Econ are highly status-motivated, (b) that status is only to be achieved by making ”modls,” and (c) that most of these “modls” seem to be of little or no practical use, probably accounts for the backwardness and abject cultural poverty of the tribe. Both the tight linkage between status in the tribe and modlmaking and the trend toward making modls more for ceremonial than for practical purposes appear, moreover, to be fairly recent developments, something which has led many observers to express pessimism for the viability of the Econ culture.

The young Econ, or “grad,” is not admitted to adulthood until he has made a “modl” exhibiting a degree of workmanship acceptable to the elders of the “dept” in which he serves his apprenticeship. Adulthood is conferred in an intricate ceremony the particulars of which vary from village to village. In the more important villages, furthermore, (the practice in some outlying villages is unclear) the young adult must continue to demonstrate his ability at manufacturing these artifacts. If he fails to do so, he is turned out of the “dept” to perish in the wilderness...Once elected an elder, the member need do nothing and will still be well taken care of.

I'd say that very little has changed.

Wednesday, February 6, 2008

Comment on economics of economic growth

New Economist's entry on the sensitivity of growth regressions to data revisions reminded me of this critique by Lant Prichett:

First, growth regressions never satisfactorily resolved the "symptoms versus syndromes" problem. They could establish the relationship between particular observable empirical variables ("symptoms") and growth but could only rarely move convincingly from those observed associations to specific recommendations on how to tackle the underlying causes of the emergence of the symptoms. For example, suppose one finds that a high black market premium is associated with lower growth. Is this an indicator that trade policy was awry, that there were macroeconomic imbalances, or that the country was unable to respond to adverse trade shocks? Or was it just an indicator of general dysfunction? Hence, although it was clear that there was something about a country's external policies that affected growth and triggered a syndrome of misguided inward orientation, even two decades into trade liberalization, prominent scholars are still debating exactly what that something is and how best to address it.

Second, growth regressions were widely seen as producing estimates of gains from policy reform that were orders of magnitude larger than the microeconomic estimates of those gains—without any particularly convincing economic explanation. As trade theorists like T.N. Srinivasan and Jagdish Bhagwati consistently pointed out, the justification of trade reform based on growth regressions was a dubious exercise indeed, compared with the firmer groundings in theory and microeconomic empirics such reforms already had. The growth regression literature in field after field (trade, tax and expenditure, and finance) has had a very difficult time reconciling micro and macro evidence.

Third, growth regressions have a tough time dealing with the huge differences in country experiences. Establishing a correlation between economic output and some variable, say, corruption, on average across countries is only the very beginning of wisdom. Is the effect proportional to corruption as measured? Or does it follow a different relationship? Is the effect stronger in democracies than in nondemocracies? In poorer than in richer countries? In more open than in less open countries? In reality, the growth regression is only a crude approximation that indicates the average impact of corruption, but it does not provide the information policymakers really want—the specific impact in a particular country. This inability to tackle country differences head-on led to differing results about one set of growth determinants (for example, external orientation) depending on sample, period, technique, and the other variables included—creating a general skepticism about the reliability of all growth regressions.

It's possible that economists have been misled by the Solow model and its variants and its search for determinants of steady state growth rates. Perhaps there is no such thing as steady state growth rates as noted by Pritchett in the article (not cited here).

... Solow could write that everything that could be said with his growth model had been said. And what was said was not that nothing could be said with certainty but that, with certainty, nothing could be said by the model. In the model (and all its variants), equilibrium or steady-state growth rates of per capita output were driven by technical progress—but these models, as constructed, could say nothing about the determinants of technical progress.

The next financial crisis

James Surowiecki's article at the New Yorker is a great reminder why we won't know where the next financial crisis will come from.

Monoline insurers do a straightforward job: they insure securities—guaranteeing, for instance, that if a bond defaults they’ll cover the interest and the principal. ... Like everyone else in recent years, they wanted to cash in on the housing and lending boom. In order to expand, they started insuring the complex securities that Wall Street created by packaging mortgages, including subprime ones, for investors. ... —but it rested on a false assumption: that the insurers knew how risky these securities really were. the claims. They’re now on the hook for tens of billions of dollars in potential losses, and some esThey didn’t. Instead, they gravely underestimated how likely the loans were to go bad, which meant that they didn’t charge enough for the insurance they were offering, and didn’t put away enough to cover timates suggest that they’ll need more than a hundred billion to restore themselves to health.

Obviously, this is bad news for the insurers— ... but it’s also very dangerous for credit markets as a whole. This is because of a peculiar feature of bond insurance: insurers’ credit ratings get automatically applied to any bond they insure. ... As a result, any bond they insured, no matter how junky, became an AAA security, which meant access to more investors and a generally lower interest rate. The problem is that this process works in reverse, too. If the insurers lose their AAA ratings ... then the bonds they’ve insured will lose their ratings as well, which will leave investors holding billions upon billions in assets worth a lot less than they thought. That’s why so many people on Wall Street are pushing for a bailout for the insurers. It may be an abandonment of free-market principles, but no one has ever accused the Street of putting principle above profit.

... The situation illustrates a fundamental paradox of today’s financial system: it’s bigger than ever, but terrible decisions by just a few companies—not even very big companies, at that—can make the entire edifice totter.

In that sense, the potential collapse of monoline insurers looks like a classic example of what the sociologist Charles Perrow called a “normal accident.” In examining disasters like the Challenger explosion and the near-meltdown at Three Mile Island, Perrow argued that while the events were unforeseeable they were also, in some sense, inevitable, because of the complexity and the interconnectedness of the systems involved. When you have systems with lots of moving parts, he said, some of them are bound to fail. And if they are tightly linked to one another—as in our current financial system—then the failure of just a few parts cascades through the system. In essence, the more complicated and intertwined the system is, the smaller the margin of safety.

Tuesday, February 5, 2008

Best and worst phrases/words ever made up by economists

1. Invisible hand
2. Creative destruction

1. Incentivize
2. Stylized facts

Effects of early primaries

Since today is Super Tuesday I took quick read of Brian Knight and Nathan Schiff's Momentum and Social Learning in Presidential Primaries.
1. I liked the paper - at about 20 pages it covered a lot:
This paper provides an investigation of the role of momentum and social learning in sequential voting systems. In the econometric model, voters are uncertain over candidate quality, and voters in late states attempt to infer the information held by those in early states from voting returns. Candidates experience momentum effects when their performance in early states exceeds expectations. The empirical application focuses on the responses of daily polling data to the release of voting returns in the 2004 presidential primary. We find that Kerry benefited from surprising wins in early states and took votes away from Dean, who held a strong lead prior to the beginning of the primary season. The voting weights implied by the estimated model demonstrate that early voters have up to 20 times the influence of late voters in the selection of candidates, demonstrating a significant departure from the ideal of "one person, one vote." We then address several alternative, non-learning explanations for our results. Finally, we run simulations under different electoral structures and find that a simultaneous election would have been more competitive due to the absence of herding and that alternative sequential structures would have yielded different outcomes.

2. As expected I was lost by Equation (6) which I think needs to be explained a little. I don't believe it was derived from the earlier equations but I may be wrong. It may work better as part of an appendix.

3. More details on estimation of the multinomial logit would also be good for doofuses like me -- again as an appendix. It looks like they take a state-by-state approach to estimation but this wasn't clear and for a data-centric approach, I think some discussion on how the independent variables were created would also be good.

4. It's hard to tell how general these results are since it is only applied to the 2004 Democratic primaries and a cookbook approach (again in an appendix as part of item 3) would help future analysts work through other future data.

5. Figures 3,4,5 might work better as one figure with 3 panels. Maybe some of the other weight figures as well.

Monday, February 4, 2008

Schumpeter's view of entrepreneurship

Certainly does not accord with my naive view - i.e. as small business owners. In Schumpeter's world, entrpreneurs destroy old ideas/jobs while creating new ones - they engage in "creative destruction."

Entrepreneurship is very difficult to measure, and virtually impossible to express mathematically. It therefore does not easily fit into formal models. ... [Entrepreneurial gains] emerge whenever an individual entrepreneur innovates in some important way - and then disappear as the innovation spreads. Meanwhile, they have contributed to general economic growth. They have also made the entrepreneur rich. because entrepreneurs' gains will practically always bear some relation to monopolistic pricing. (Page 458 of Prophet of Innovation)

In Schumpeter's view, entrepreneurs do not bear risk - the credit sector bears risk by lending to the entrepreneur. This is in contrast to a lot models (e.g. Kihlstrom-Laffont) where entrepreneurs bear the risk.

Moreover, the entrepreneur's role in growth - creative destruction - seems to defy a simple definition. We know it when we see it though. The wikepedia entry attempts to do it but it's examples are more illuminating. Unfortunately, the lack of a definition means that one can argue over what constitutes creative destruction. For instance, is Wal-Mart's business and management practices an example of creative destruction? I'm on the yes side but reasonable people can disagree.

Schumpeter's view on theory and data

"I believe that there is an incessant give and take between historical and thoeoretical analysis and that, though for the investigation for the individual questions it may be necessary to sail for a time on one tack only, yet on the principle the two should never lose sight of each other." The combination of narrative, numbers, and theory could exercise a power that none of the three could do alone. Theories are stylized stories; but without real stories and statistics to back them up they lose much of their force. "Economic historians and economic theories can make an important and socially valuable journey toether, if they will.

Thomas McCraw, Prophet of Innovation (pp. 474-475).

Another theme that runs through Schumpeter's life was his desire to see economics more as a science and lamented the lack of mathematical rigor in the field. If he could only see it now - the pendulum may have swung too much the other way.

Schumpeter and big business

Having not read any Schumpeter, I was surprised to learn:

... the organization of war production in the United States lent support to Schumpeter's arguments about the importance and efficency of large-scale business. ... in Capitalism, Socialism and Democracy, he mande no bones of his belief that big companies lay near the hart of advanced capitalist success.
pg. 388 of Prophet of Innovation, by Thomas McCraw

Idealogy in economics

In Thomas McCraw's Prophet of Innovation:
On pp. 454-455:
... "economists indulged their strong propensity to dabble in politics, to peddle political recipes, to offer themselves as philosophers of economic life, and in doing so neglected the duty of stating explicitly the value judgements that they introduced into their reasoning." An unfortunate result of this had been the discrediting of economic theory itself through the discrediting of the political stances of many theorists.

On pg. 477:

Most economists vehemently deny their own "idealogical bias." The "do not admit that it is an inescapable curse and that it vitiates economics to the core." ... the first step is to recognize that "perception of a set of related phenomena is a prescientific act. It must be performed in order to give to our minds something to do scientific work on - to indicate an object or research - but it is not scientific in itself ... This mixture of perceptions and prescientific analysis we shall call the research worker's Vision or Intuition." And the vision "is ideology by nature and may contain any amount of delusions traceable to a man's social location." ... Model building "consists of picking out certain facts rather than others," then working to refine the chosen facts, to adjust them in light of opposing evidence, and to place them all in a theoretical framework."On pg. 482:

Nearing the end of his long speech, Schumpeter turned to the subject of economic history. There, he argued, idealogical bias shows up more vividly than in any other subfield of economics. In books and articles on economic development, scholars who believe in the efficacy of activist government emphasize the role of public policies in achieving healthy growth. Conversely, those who think arguments to be less competent always minimize their contributions.

Rethinking Free Trade

I came across this same titled post on New Economist which reminded me of a letter to the Atlantic (still another unpublished attempt):

Armed with four numbers in four boxes, economists hope to convince the public of the benefits of free trade. If this is all they have then they have an uphill task. The logic behind Ricardo’s theory of comparative advantage is compelling. The assumed gains from trade is a comparison between two static equilibriums. However, economists have failed in terms of collecting the necessary data to validate the theory of comparative advantage. How much are the gains? Is the final equilibrium reached predicted by theory? If economics claims to be a science, where is the data that validates the theory? Here, economists continue to commit to the theory because of its elegance and simplicity without doing the hard work required to convince the public and themselvs of the benefits of free trade.

Unfortunately, opponents of free trade have plenty of anecdotal evidence of the pains from trade, job losses, for instance. It doesn’t take too many anecdotes before it becomes evidence against trade. What can economists point to as gains from trade – lower prices? They will need more than this to convince the public. As we all know, when free trade is not just economics but becomes politics, rhetoric becomes as important if not more important than data.

Moreover, economists do not have a clear understanding of the process that gets us from the initial state to the final state where trade is free.

The letter set up a straw man, of course: Complete specialization is never observed so rebutting Ricarod is easy but I wanted to make the letter short. This letter was in response to Clive Crook's Oct 2007 article.

Sunday, February 3, 2008

Some books by Joseph Schumpeter

At the end of Thomas McCraw's highly readable bookbook on Joseph Schumpeter he says:
Three of his books - The Theory of Economic Development, Capitalism, Socialism and Democracy, and History of Economic Analysis are still available in many languages, in inexpensive paperback editions.

A check on the English language versions at
1. Capitalism, Socialism and Democracy (paperback) - $70 ($65.10 discounted).
2. The Theory of Economic Development (paperback) - $24.95 (no discount).
3. History of Economic Analysis (paperback) - $84.94 ($78.00 discounted)

Compare with the 2 volume Business Cycles: Theoretical Historical and Statistical Analysis of the Capitalist Process (hardcover) - $150.00 ($130.00 discounted)

Most interesting chess game I've come across so far

At Wijk aan Zee between Carlsen and Anand.

Is the post-colonization borders of African countries to blame?

Not only on post war economic growth, but conflict. The map at the bottom of the article US denounces Kenya 'cleansing' was interesting and suggestive.