General Interest

Category: General Interest

Speaking of Gold

Jordan Weismann has an interesting bit in The Atlantic on the recent decline in gold prices — off about 15% from last-year’s peak — that includes some fascinating perspective on China and the world economy:

[China] deregulated its gold market in 2001, and since then, it has gone from consuming about a third as much gold as the developed west to overtaking it by 2011. Let me repeat that: the Chinese buy more gold than the entire west combined.

The current gold price seems pretty high to me.  Back when I was thinking more about the mining industry, (nominal) prices were less than $400 /oz;  today’s prices are north of $1500.  So, even adjusting for inflation, that is a pretty good ride.  But when I looked for a graphic to illustrate the changes, I came across this nice blog post on how it’s hard to find an “objective” series of real gold prices.

Gold markets are interesting for all sorts of reasons that I won’t get into here. Perhaps I will start cobbling together a reading list on the many dimensions of the economics of gold and gold markets.

Well, Just Wait Until the Winter Games

Some of you are aware that the summer Olympics have been taking place over the past few weeks, with athletes all around the world convening in London to kick each other, swim and dive in perfect synchronicity, throw balls into nets, and perform other feats of strength. As a way of monitoring each country’s progress, it is customary for the IOC and the media to keep a tally of how many medals each country has accumulated and then talking about it as if it had some great import. This year the United States amassed a whopping 104 total medals, with the People’s Republic of China coming in a distant second with 88 and Great Britain with a mere 65.

That metric never seemed quite right to me, though, because many events seem kind of like made up sports, and others involve teams, yet the team victory seems to just count as one medal.

Those issues aside, there is also the more fundamental issue that a country like, say, Grenada doesn’t have very many people in it.  Indeed, it might be the case that the Chinese sent more athletes to London than the entire population of Grenada combined. Yet, Grenada and China are set on equal footing in the ubiquitous Medal Count competition.

That’s why we’re fortunate to have Medals Per Capita dot Com keeping it real for us. The site does what you’d expect, adjusting the medals count based on population to produce the coveted “population per medals” metric.

And, on that score, the rankings change dramatically.  Indeed, tiny Grenada, with only 110,821 people, leads the way with one medal and a population per medal score of 110,821.   This bests second-place Jamacia’s score of 225,485 by a lot.  But Jamacia did come in with an astonishing 12 medals despite having a population slightly larger than the Pittsburgh metro area. Trinidad and Tobago and the Bahamas are also among the top five.

I should also mention — before somebody does it for me — that Hungary is an impressive 8th with 17 medals for a population of 10 million, which is about one medal per 600,000 inhabitants.

What about the “medals count winners”?  Well, the mighty US with its 104 medals is only about one medal per three million people, good for a measly 49th place, while China is way down in 74th on a per capita basis, with only a medal per 15 million people.

So, to put things in perspective, a simple linear extrapolation suggests that if Grenada had China’s population, it would have amassed more than 12,000 medals. In contrast, with 84 medals per 1.3 billion people, if China had Grenada’s population, it would have netted only 0.0068 medals.

On the one hand, this illustrates why it is probably a good idea not to put too much stock in linear extrapolations, but on the other hand, these types of comparisons are important, as any sort of comparative analysis needs to have some reasonable baseline or measure of perspective.

The Medals per Capita dot Com page has a whole menu of metrics for you to play with, so with the fall term at least a week away, go ahead and start playing.

Water Policy for People

In this TEDx talk ,  economist and aguanomics blogster David Zetland contrasts key differences between “push” systems in which water policies control people’s use of water with “pull” systems that are decentralized and encourage water trades to both improve efficiency and equity.  The technology of the talk isn’t terrific, but the ideas are worthy of attention.

Prediction Markets v. Polls, Cont.

This coming Tuesday in Wisconsin is the Republican Senate primary to replace retiring Senator Herb Kohl.  The race is quite hotly contested by former governor Tommy Thompson, Madison banker Eric Hovde, and former state representative Mark Neumann.

The latest poll is out, with Thompson enjoying a rather chunky lead at 28% to Hovde’s 20% and Neumann’s 18%.

As of 6 p.m. today, however, InTrade tells a much different story. And that story is that Hovde is up (a 40% chance of winning), followed by Neumann (35%) and then Thompson (32%). Huh.

So, who are you going to believe?

A couple of things to notice here.  First, yes, I know the InTrade odds add up to more than 100%.  Second, earlier this week, InTrade had Hovde with a commanding lead of 70% or so.  Oh, and a third thing, Tommy Thompson can do more pushups than any of the junior professors in the department.

More on this later.

UPDATE:  The prediction market now has Thompson as the odds-on favorite.

A Second Update: Thompson wins.

“Economists are in surprising agreement about surprising statements”

Continuing our series of posts about what economists believe, my colleague reminds me of the list at the beginning of Deidre McCloskey’s text, The Applied Theory of Price, available free for download!

Here’s McCloskey in all her rhetorical glory:

Considering the obstacles, economists agree about a surprisingly large number of things. Their agreements, in fact, are often about things that noneconomists would think silly or wrong or even evil.  That is, economists are in surprising agreement about surprising statements…

The list of surprising agreements is a long one.  Most of the 20,000 or so members of the American Economic Association would answer yes to questions such as:

  1. If gasoline is taxed to conserve energy, will the quantity consumed go down by a nontrivial amount, despite the protestations of drivers that they cannot do less than the amount they are now consuming?
  2. Was the rise in the standard of living of the American worker over the last 50 years chiefly a result of better knowledge and more machines rather than of activity by trade unions?
  3. Is the American Medical Association, far from being a benevolent organization set on improving medical care, in fact a monopolistic trade union like the plumbers, longshoreman, and electricians?
  4. Does the resting place of the burden of the social security tax depend exclusively on how workers and employers react to a change in wages, and not at all on the legal division of the tax (paid half by workers, half by employers)?
  5. Is there an optimal amount, greater than none, of polluted air and water, noisy streets and airports, and ruined countrysides?

Although the text was written more than thirty years ago (!), the policy issues still seem rather germane — the burden of social security taxes, energy conservation, rising standards of living. I like the bit about the longshoreman.

McCloskey does not weigh in here on drug legalization, but my guess is that she would argue that economists would agree on certain aspects.  First, decriminalization or legalization would definitely lead to more drug use, due to both supply and demand increases. Second, the level of violence associated with organized crime and others would decrease.  What there appears to be no consensus on in whether the goods outweigh the bads, or if the distributive implications are desirable, or even whether we want to be a society that “endorses” drug use.

That, my friend, is the classic positive v. normative distinction.

Do Economists Favor Drug Legalization?

In our usually dormant comments section, Dr. T has questioned whether economists really overwhelmingly favor drug legalization, a claim made in a recent NPR segment.  To address this concern, I consulted the Econ Journal Watchand its on-point article from Mark Thorton “Prohibition vs. Legalization: Do Economists Reach a Conclusion on Drug Policy?”

From the abstract:

A random survey of professional economists suggests that the majority supports reform of drug policy in the direction of decriminalization. A survey of professional economists who have published on the subject of drug prohibition and expressed a policy judgment indicates an even greater consensus which is critical of prohibition and supportive of policy reforms in the direction of decriminalization, and to a lesser extent, legalization.

Thorton concludes that there is in fact no consensus, and after taking a look at his summary statistics, I’d have to agree. That said, it does appear that there is solid support for some form of liberalization.

You can check the article to see some snippets from “vital” economists such as Robert Barro, Gary Becker, David Henderson, Jeffery Miron, and William Niskanen.

Lawrence Students v. Card-Carrying Economists

In the previous post, I mentioned the Robert Whaples survey of American Economic Association (AEA) members on their public policy views.  Of course, Whaples isn’t the only one with access to Survey Monkey, and with the help of some of my colleagues, we gave the same survey to students in Freshman Studies, Economics 100, and Economics 300 courses.

The Freshman Studies sample (n=26) should be fairly representative of incoming freshman population, as every student takes freshman studies and these students are allegedly distributed randomly across the sections.  I have data from two sections with a 90% response rate. The Econ 100 course is predominantly freshman as well, but is a much different cross section of the University, with 70% planning to major in economics or some other social science.  The Econ 300 is, of course, generally for students taking the first “major” step to joining Team Econ down here on Briggs 2nd.  It is well-worth noting that the Econ 100 (n=35) and Econ 300 students were surveyed at the beginning of the course,* not the end.   Perhaps next year we will switch that up.

The survey participants rate the questions on a 1-5 scale, with 1 being strongly disagree and 5 being strongly agree.

Here are selected results, sorted by the scores of AEA members:

 

Continue reading Lawrence Students v. Card-Carrying Economists

Finally, Something We Can Agree On

Did you just say we should eliminate corporate taxes?

You have probably heard about the exasperated President Truman asking for a “one-handed economist” because all of his economics advisers were prone to saying “on the one hand… on the other hand.”   Or, perhaps you’ve heard of the First Law of Economists: for every economist, there exists an equal and opposite economist (with the Second Law of Economists being that they are both wrong). Or, you might have even heard that if you were to lay all economists end-to-end, they still wouldn’t reach a conclusion.

Hilarious, indeed, and fair enough, it’s true that our profession is prone to qualifying our assessments.  But as a recent NPR Marketplace segment uncover, there are some thing views that seem to hold from east-to-west, from north-to-south, and, yes, from left-to-right across the profession.

And here they are, six shared policy beliefs among economists:

One: Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages. Gone. After all, big houses get bigger tax breaks, driving up prices for everyone. Why distort the housing market and subsidize people buying expensive houses?

Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits. That encourages fancier insurance coverage, driving up usage and, therefore, health costs overall. Eliminating the deduction will drive up costs for people with workplace healthcare, but makes the health-care market fairer.

Three: Eliminate the corporate income tax. Completely. If companies reinvest the money into their businesses, that’s good. Don’t tax companies in an effort to tax rich people.

Four: Eliminate all income and payroll taxes. All of them. For everyone. Taxes discourage whatever you’re taxing, but we like income, so why tax it? Payroll taxes discourage creating jobs. Not such a good idea. Instead, impose a consumption tax, designed to be progressive to protect lower-income households.

Five: Tax carbon emissions. Yes, that means higher gasoline prices. It’s a kind of consumption tax, and can be structured to make sure it doesn’t disproportionately harm lower-income Americans. More, it’s taxing something that’s bad, which gives people an incentive to stop polluting.

Six: Legalize marijuana. Stop spending so much trying to put pot users and dealers in jail — it costs a lot of money to catch them, prosecute them, and then put them up in jail. Criminalizing drugs also drives drug prices up, making gang leaders rich.

The catch, of course, is that politicians tend to not like these policies.  You can listen to the full NPR segment here.

For more on what economists do and don’t agree on, you might check out this survey from Robert Whaples at the Econ Journal Watch.

Does the Public Trust Scientists?

Here is Stanford’s Jon Krosnick  giving a very nice talk about the U.S. public’s view on climate change.  Krosnick responds to the idea that “Climate-gate” and media saturation and the economic malaise have somehow changed public opinion, and convincingly argues that they have not.  Indeed, Krosnick shows that the public generally trusts scientists, believes in global climate change, believes in human activities’ impact on the changing climate, and generally believes the scientific community knows its science.

Take a look starting at 23:30, though.   It turns out that when scientists start talking about policy, all you-know-what breaks loose.  The public basically doesn’t believe that scientists know what they are talking about when they start talking about policy.  It gets worse, though — when scientists talk policy, respondents are less confident that the scientists know their science! The final kicker is that it dampens support for government action on climate change.

Check it out for a marvelous cautionary tale.

I wonder if this carries over to economics and economic policy?

Federal Budget Parameters

Politicians pontificate profusely about their prodigious plans for procuring Federal budget sanity.  For the most part, their potential policy projectiles miss the mark.  In an essay in today’s Wall Street Journal entitled “Everything You Ever Wanted to Know About the Budget** But Were Afraid to Ask,”  David Wessel highlights six key facts that will constrain the efforts of these pugilistic pundits.

1. “Nearly two-thirds of annual federal spending goes out the door without any vote by Congress.”

2. “The U.S. defense budget is greater than the combined defense budgets of the next 17 largest spenders.”

3. “About $1 of every $4 the federal government spends goes to health care today. That is rising inexorably.”

4. “Firing every federal government employee wouldn’t save enough to cut the deficit in half.”

5. “The share of income most American families pay in federal taxes has been falling for more than 30 years.”

6. “The federal government borrowed 36 cents of every dollar it spent last year, but had no trouble raising the money.”

These “facts” form the basis for Wessel’s new book to be published next week and should inform political debate.  I won’t hold my breath regarding the latter point.  The cartoon reflects an earlier time period, but the political dynamics today, as characterized in the cartoon, still obtain.

“Um, hello? Can I tell you about the real world?”

That’s hedge fund manager Hugh Hendry talking to Nobel-prize winning economist Joseph Stiglitz, as quoted in this Financial Times article.

See the exchange here. It gets interesting around 7 minutes for sure where Hendry suggests Greece will have to default or give creditors a “haircut” as it recognizes that it has unsustainable levels of debt.

But, back the FT piece, Hendry thinks we are on the verge of financial anarchy, that France will nationalize its banks, that China is hosed, that Japan is in trouble, and that the global debt situation is so dire that “the scale and the magnitude of the problem is greater than their (read: governments’) ability to respond.” He concludes that we are within ten years of an epic financial collapse reminiscent of the 1930s.

The good news?

The US isn’t as bad off as Brazil, India, Russia, and China. And that the financial collapse will create investment opportunities of a lifetime.

Have a good weekend.

“This dwarfs by orders of magnitude any financial scam in the history of markets”

The LIBOR scandal is all over the financial press, and as the headline here indicates, it might be a big deal.  Typically, when you see a quotation like that, it is from a blogger residing in his parents’ basement. In this case, however, the source of the quote happens to be MIT distinguished professor Andrew Lo.

And he’s not alone.

Former New York governor Eliot Spitzer seems to concur, saying that “LIBOR is huge.  This is about as big as it gets in the financial world.”

So, what is this all about?

Essentially, it appears that a group of traders colluded to set the LIBOR rate, an interest rate that is at the center of international financial markets, over the course of several years. Indeed, roughly $800 trillion in financial instruments are tied to LIBOR.  A second issued now gaining traction is that it is possible that U.S. regulators knew about this years ago.

Both cases seem to undermine the integrity of financial markets generally, and that is simply not a good thing in terms of linking up savings and investment.

Here is a helpful infographic from AccoutningDegree.net. Not to be outdone, here is another helpful infographic via the New York Times.

You will probably be reading about this one for some time. I liked this piece in The Economist, which takes a forward look at these “Banksters.”  I also really liked this piece from Ed Dolan on why LIBOR rates were subject to manipulation — motive, means, and opportunity.

Columbo couldn’t have said it better himself.

When Will “Contained Depression” End?

In Monday’s Financial Times, economics editor Martin Wolf explains why the “end” will not be soon.  He notes that it has been almost five years since the beginning of our contemporary financial turmoil,  if one marks such by the first major sign of sub-prime mortgage problems in the U.S.  He characterizes the past five years as ones if which policies (both monetary and fiscal) have been very aggressive; yet economies – US, Europe and Japan – have been stagnant.  David Levy describes such a situation as a “contained depression”; that is, these economies feature excessive leverage (debt), especially in household and financial sectors and expansionary macroeconomic policy.  Stated differently, the private sector continues to de-leverage (reduce its debt level) while governments attempt to counter such counter-cyclical demand with public borrowing and money creation.  The two have, in fact, been connected, as central banks purchase much of the newly created governmental debt.  In short – remember the world of IS-LM – there is no crowding out.  The charts below show the depth of the problem.

The lower right hand graph shows that private sector debt in the US has come off its peak (of 296% of GDP in 2008) by roughly 17% (250% of GDP) about where the economy was in 2003.  If Reinhardt and Rogoff are correct, we have at least two more years to go, given that an “average” balance sheet recession last seven years. If the mid-1990s feature a stable debt to GDP ratio, of just under 200% of GDP, we are only half-way “home.”  In terms of economic growth, clearly, the Eurozone has yet to recover; while, the US and Germany have just barely exceeded their previous GDP peak (in 2007) – see upper left graph.

According to Wolf,

We know that big financial crises cast long shadows, particularly in countries whose underlying rate of growth is modest, which makes de-leveraging slow. Policy must both sustain demand and facilitate de-leveraging. This means aggressive monetary and fiscal policies, working in combination, along with interventions aimed at recapitalising banks and accelerating restructuring of private debt.

Policies designed to bring down public debt prior to the end of private de-leveraging will dampen economic growth and extend the period of adjustment.  Though public fiscal consolidation is necessary for long run stability, if it is not crafted to be consistent with an economic growth path that can meet the required debt service, economic stagnation or worse will be the order of the day.

Wolf concludes that

Far too much policy making and advice neither recognises the post-crisis challenges nor crafts effective answers. The heart of the matter is accelerating de-leveraging, while promoting recovery. By that standard, the policies now in place are, alas, very far from good enough.

 

“Spain is Doomed, Greece is Toast”

Here’s some more on the situation in Greece.  When I see a blog post titled “The Scariest Chart in Europe Just Got Even Scarier,” I typically think the author is invoking some grand hyperbole.

Perhaps not in this case.

Here’s Derek Thompson at The Atlantic:

Ouch

Thompson points us to a link that draws this conclusion:  “Spain is doomed and Greece is toast.”  Of course, last year we pointed to Michael Lewis’s similarly dire predictions for Greece, where he observes “the closer you look, the worse it gets.”  He concluded Greece is simply incapable of reform in its current form.

That unemployment bar looks like a big fuse.

Dispatch from Down Under

I am just returning from the 12th Conference of the Society for the Advancement of Economic Theory at the University of Queensland, which was very successful in that a great many economic theorists from all over the world got together and presented their work. I presented my recent work on falsifiability, complexity, and revealed preference in a session devoted to revealed preference theory.

One of the sessions was a panel discussion on the question “What Can Theory Tell Us About the Financial Crisis?” (My comments below may reflect my (mis)interpretations.) The moderator, Rohan Pitchford (Australian National University) foreshadowed some of the comments to come by stating at the outset that the panelists should feel free to turn that question around, asking what the financial crisis can tell us about economic theory. Some of the comments made were expected—for example, that theory has, of course had everything about the crisis figured out, just take a look at (Name, Year), and (Name, Year), and (Name, Year)… you get the picture. Even granting that (Name, Year) were all brilliant, this is hardly answering the question in a satisfactory way. Another point, often said, but not without reason, is that one should not expect economic theorists to be able to predict when a crisis would take place, and predicting that there would be one (some time) is hardly news. In fact, if the crisis could be predicted correctly, it is often repeated, it wouldn’t take place! And if it did, (some) economic theorists would be very rich.

But some of the panelists made some interesting points.  Continue reading Dispatch from Down Under

A Remarkable Fact

Continuing our string of posts about the EU, here is a remarkable but perhaps unsurprising fact:  Since gaining its independence in 1829, Greece has defaulted on or rescheduled its external debt five times (1826, 1843, 1860, 1893, and 1932).  Greece has been in default roughly half the time period since 1829.

That is culled from the astonishing This Time is Different: Eight Centuries of Financial Folly from Carmen Reinhart and Ken Rogoff.

I’m finally plowing through some of summer reading recommendations.  This particular recommendation was from 2010.

The Future of the Liberal Arts, A Continuing Series

Our recent guest, Brad Bateman from Denison University, has an oped in the Pittsburgh Post Gazette reflecting on a recent conference in Greece, discussing the future of the liberal arts college.

The piece, like much of the news out of Europe these days, will both shock and annoy.

Here’s a taste:

As it is, the government will not itself accredit private colleges or universities, and a law passed in the last decade disqualifies anyone with a degree from a private university from being a college professor. Therefore, for instance, a faculty member at the American College who earned a an undergraduate degree there and then went on to Princeton, Harvard or Oxford for graduate work is not legally able to teach. One of the best colleges in the country has been placed under constant duress in this way.

Why would anyone try to close a highly successful college? Why would anyone want to take educational opportunities away from young people in a struggling economy?

Because Greek public universities and their professors act like a cartel. Making private universities essentially illegal and preventing their graduates from teaching increases enrollment at state universities and benefits the professors who work for them. Both of the main parties buy votes by protecting these professors’ jobs.

Sadly, the future doesn’t appear to be too bright for Greece.   Unless you count watching the economy burn.

Jobs, Jobs, Jobs and Health Care

Given that it’s election season (again), the twin topics of jobs and health care will be upon us ad nauseum.  Employmnet in health care fields has grown rapidly since the passage of Medicare in 1965 (see the chart in the article cited below.)  Is this a good thing?  If the health care industry is terrific at creating jobs, why don’t we just spend continuously more on health care (as we in the U.S. have done steadily for at least the past 60 years)?

In the current issue of that most famous of medical journals, The New England Journal of Medicine, Katherine Baicker and Amitabh Chandra explain why such a policy is a terrible way to increase the economic welfare of Americans.  The argument is pretty straight forward for any student of economics, though not necessarily for the political cognoscenti.

But this focus on health care jobs is misguided. The goal of improving health and economic well-being does not go hand in hand with rising employment in health care. It is tempting to think that rising health care employment is a boon, but if the same outcomes can be achieved with lower employment and fewer resources, that leaves extra money to devote to other important public and private priorities such as education, infrastructure, food, shelter, and retirement savings.

They provide two graphs to illustrate the strong correlation between employment growth and cost per year of life expectancy gained (not easily transported to this blogpost).  Now, clearly, correlation does not imply causation, and there certainly are health outcomes of interest in addition to life expectancy, but careful studies of such relationships suggest strong diminishing returns to devoting a larger and larger share of our workforce to health care services.

Keynes argued that we could increase employment and spending by hiring one group of people to dig holes in the ground and another to fill the holes back up.  Although this might increase expenditures and employment in the short run, without productivity increases to generate income, such workers would have to be paid out of existing production, and thus, such income generation would not yield sustainable improvements.  Baicker and Chandra make a similar point.

The bottom line is that employment in the health care sector should be neither a policy goal nor a metric of success. The key policy goals should be to achieve better health outcomes and increase overall economic productivity, so that we can all live healthier and wealthier lives. Our ability to ensure access to expensive but beneficial treatment is hampered whenever health care policy is evaluated on the basis of jobs. Treating the health care system like a (wildly inefficient) jobs program conflicts directly with the goal of ensuring that all Americans have access to care at an affordable price.

So what does this have to do with yesterday’s Supreme Court ruling?  Who knows?  It all depends upon how the legislation is implemented and how people respond to incentives provided.

Friday Supernova

Who says the liberal arts are in peril?

As you probably know, back about 1300 years ago, in the year 724, there was a mysterious spike in Carbon 14 levels detected in the rings of Japanese cedar trees.  What you probably don’t know is that this spike coincided with an eerie “red crucifix” reported in the skies after sunset.

Well, undergraduate Jonathan Allen knew that and he put two-and-two together and posits that maybe the “red crucifix” may have been a supernova.

See here for the tree-warming story.