General Interest

Category: General Interest

(Some) Harvard Econ Students Unhappy

The “Ec 10 Walkout” at Harvard has garnered some media attention—Ec 10 being the famous introductory economics course at Harvard, “taught” by Gregory Mankiw. Only about 10% of his class walked out, which comes out to be about 70 students. (Yes, that means that the intro econ lectures at Harvard have 700 students, and they see Mankiw about 5 times and from far away.) The revolution was, in fact, televised. When I was in 7th grade, we did something similar in math class, but nobody paid much attention. Probably because we didn’t have youtube.

NPR managed to find a freshman who went on the record with this statement: “I’m someone who lives below the poverty line, my family’s extremely poor. And having a class like this that promotes gaining at the expense of millions of people disturbs me and bothers me at my core.”  A few more students made similar statements: “Their specific criticisms are that economics as taught in this class, formally called Economics 10, failed to prevent the financial crisis and does nothing to narrow the gap between rich and poor.” Read more. These quotes confirm that even at Harvard, one can apparently find students who are clueless about economics yet feel that they are in a strong position to criticize it. Mankiw’s blog has a post on the event, including the students’ open letter, and another post on the NPR interview with Mankiw on the subject. Finally, take a look at this defense of Ec 10 from a student.

The Long and Winding Road

As we continue On the Road with Hayek this term, we are faced with questions such as “what is capitalism?” and “what does it mean to have economic freedom?”   These are questions that we tend not to get at when we are teaching the nuts and bolts of supply & demand or getting to the bottom of a subgame perfect equilibrium.  But a nice piece in the New York Times argues that maybe we should pay more attention to the former than the latter.  It is on the role of economists and economics in the face of radical economic and social change:

Perhaps the protesters occupying Wall Street are not so misguided after all. The questions they raise — how do we deal with the local costs of global downturns? Is it fair that those who suffer the most from such downturns have their safety net cut, while those who generate the volatility are bailed out by the government? — are the same ones that a big-picture economic vision should address. If economists want to help create a better world, they first have to ask, and try to answer, the hard questions that can shape a new vision of capitalism’s potential.

The whole article is well worth the read and also worth thinking about as we continue our lifelong quest in developing an economics ciricullum.

Also fundamental seems to be this piece by Luigi Zingales on meritocracy and democracy.

[M]eritocracy is a difficult principle to sustain in a democracy. Any system that allocates rewards on the basis of merit inevitably gives higher compensation to the few, leaving the majority potentially envious. In a democracy, the majority generally rules. Why should that majority agree to grant a minority disproportionate power and rewards?

… Even the most meritocratic people, then, can vote against meritocracy when it damages their own prospects. No wonder meritocracy is so politically fragile.

However, two factors help sustain a meritocratic system in the face of this challenge: a culture that considers it legitimate to reward effort with higher compensation; and benefits large enough, and spread widely enough through the system, to counter popular discontent with inequality.

Certainly, we can see rather vocal and enthusiastic segments of our population questioning both of these assumptions.  What are the implications for American-style capitalism?

Daylight… Savings?

These days we don’t set back clocks very much any more, but instead our cell phones tell us that it must be the end of daylight saving time (although our cell phones do set us back quite a bit).

Dali clocks
Dali: The Persistence of Memory

The idea of daylight saving is famously attributed to Benjamin Franklin, but it was first introduced only about a hundred years ago. It has been policy in most of the US for about 50 years.

But does it really save energy? Surprisingly little research seems to have been done about that question. A 2008 NBER working paper considers the issue, taking advantage of a “natural experiment” in Indiana, where some counties used DST while others did not until 2006, when DST was sanctioned for all of the state. (Since it is often not possible to create lab experiments to resolve empirical questions in economics, we must rely on so-called “natural experiments” and a mysterious practice called “econometrics.”) Here is what the authors, Matthew J. Kotchen and Laura E. Grant, find:

The history of DST has been long and controversial. Throughout its implementation during World Wars I and II, the oil embargo of the 1970s, more consistent practice today, and recent extensions, the primary rationale for DST has always been the promotion of energy conservation. Nevertheless, there is surprisingly little evidence that DST actually saves energy. This paper takes advantage of a unique natural experiment in the state of Indiana to provide the first empirical estimates of DST effects on electricity consumption in the United States since the mid-1970s. The results are also the first-ever empirical estimates of DST’s overall effect.

Our main finding is that—contrary to the policy’s intent—DST results is an overall increase in residential electricity demand. Estimates of the overall increase in consumption are approximately 1 percent and highly statistically significant. We also find that the effect is not constant throughout the DST period: there is some evidence for an increase in electricity demand at the spring transition into DST, but the real increases come in the fall when DST appears to increase consumption between 2 and 4 percent. These findings are generally consistent with simulation results that point to a tradeoff between reducing demand for lighting and increasing demand for heating and cooling. According to the dates of DST practice prior to 2007, we estimate a cost to Indiana households of $9 million per year in increased electricity bills. Estimates of the social costs due to increased pollution emissions range from $1.7 to $5.5 million per year.

Addendum: Watch your step!

Jim Lyon and the World of Money and Banking

Thursday, you will have two opportunities to engage with Jim Lyon, Lawrence alum and First Vice President of the Federal Reserve Bank of Minneapolis.  He will be discussing “Too Big to Fail” and the Dodd-Frank Act response at 9:00 in Money and Monetary Policy (Briggs 225).  He also will chair a mock Federal Open Market Committee meeting in which students in the course will represent members of the Board of Governors and Presidents of the 12 district Federal Reserve Banks.  You are welcome to join us for either part of the class.

At 4:30, we will have an Econ Tea with Mr. Lyon as well.  This will be an open and free-wheeling session for which the topic will be “Everything you always wanted to know about money and banking and ARE NOT afraid to ask.”  Come for the discussion or just come for the cookies and tea.

Income Inequality Dynamics Matter

In a post two days ago, I highlighted the CBO report on the change in income inequality in the United States between 1979  and 2007.  The last sentence of that blogposting opines that the households represented in each quintile change over time; therefore, it’s not necessarily those who were in the top 1% in 1979 who made the massive gains in share of income and remained in the top 1% in 2007.

A recent Federal Reserve Bank of Minneapolis report highlights the dynamics of household movement across income quintiles during the 2001 to 2007 period.  The chart below shows that 44% of those in the bottom bracket in 2001 escaped to higher brackets by 2007 and that 34% of those in the highest quintile fell to at least the second quintile.  Longitudinal studies of particular households are most useful if we wish to understand what has happened to the distribution of household incomes over time.  The CBO study does not address the question, but the Panel Study of Income Dynamics selects a relative short and volatile period for its reference points.

How does this all matter?  It matters in that policy makers respond to such information to reshape both the regulatory structure and income tax  policies.  Given budgetary impasses that have characterized the past year, our legislators have not been able to reach any sort of consensus on how to do three things 1) ensure that the tax system creates appropriate incentives for generating growth,  2) put the US budgetary future on a sustainable path, and 3) create an efficient and equitable tax structure.  Will we again fail to take the opportunity to reach such desiderata?   What do you think?

Trends in the Distribution of U.S. Household Income

The “official scorekeeper” for Congress, the Congressional Budget Office, has just released a report on how the distribution of household income has changed from 1979 (when coincidentally I came to Lawrence) to 2007.  Their bottom line result is displayed in the figure below.  The “CBO estimates that the dispersion of market income grew by about one-quarter between 1979 and 2007, while the dispersion of after-tax (and governmental transfers) income grew by about one third.”  In particular, the share of after-tax, after transfer household income that accrued to those with the highest 1% of income grew from 8% in 1979 to 17% in 2007.  One should be a bit cautious about these comparisons since the there is a lot of movement in and out of different income brackets.  In short, it’s unlikely that most of the households counted in the 1979 calculation are in the 2007 calculation.  I encourage you to read the summary or the full report.

The Magic Sauce?, or Where’s the Beef?

Here’s a couple of easily digestible, certainly thought-provoking, pieces on business start ups and job creation.  The first is via Professor Finkler, who sends along one of these new, cool Kaufman Foundation sketchbooks. In this one, Kaufman President Carl Schramm asserts the best indicator of whether a country will grow is the number, not the size, of firms created every year.  That’s quite an assertion.  Here’s more from the Kaufmann blog.

In the blue corner, James Surowieki at The New Yorker argues that small businesses are not the source of growth.

Who are you going to believe?

Who Says Symmetry is No Graphing Matter?

Professor Scott Corry from upstairs in the math department will give a Science Hall Colloquium, “Symmetry: An Example from Graph Theory,” on Tuesday, November 1 at 11:10.  The Colloquium is intended for a general audience, and according to usually reliable sources, Professor Corry will be speaking at a level the general public like me can understand.  Here are the particulars:

Abstract: Professor Corry will provide a glimpse of how mathematicians ask and investigate questions in pure mathematics. Rather than speaking in broad generalities, he will describe one of his recent theorems about symmetries of finite graphs. No specific mathematical knowledge will be presumed, so all interested parties are heartily encouraged to attend.

Regular readers of this blog might remember Professor Corry as the winner of the 2011 Young Teacher Award right here at LU, so you can expect a clear, engaging talk.

Tuesday, November 1

Steitz Hall 102

11:10am

The World Schumpeter Made, or the World That Made Schumpeter?

SCHUMPETERFEST, OCTOBER 22, 2010

Warch Campus Center

Saturday, October 22,  4:30 p.m.

David A. Hounshell

Roderick Professor of Technology & Social Change

Carnegie Mellon University

I present a brief overview of Joseph A. Schumpeter’s fundamental theory of innovation and the entrepreneurial function in capitalism.  I further demonstrate how Schumpeter realized that the principal locus of innovation had changed between the time he first launched his ideas in Theory of Economic Development (1911) and 1942, when Capitalism, Socialism, and Democracy first appeared.  The shift in locus had profound repercussions for Schumpeter’s thinking about capitalism, which I discuss.  I also demonstrate that just as there was an intermediate position between the Schumpeter of 1911 (often called “Schumpeter, Mark 1”) and the Schumpeter of 1942 (“Schumpeter, Mark 2”), what I call “Schumpeter, Mark 1.5.”  Drawing from my research on the history of industrial R&D in the United States, I historicize these three versions of Schumpeterian theory about the entrepreneurial function in capitalism.  I go further, however, to channel Schumpeter’s thoughts about the entrepreneur and the locus of innovation in American capitalism over the last sixty-one years since his death—what I am calling “Schumpeter, Mark 3” (ca. 1965) and “Schumpeter 4.0” (ca. 2011, to express it in the lexicon we use today).  Looking into the future, I complete the Schumpeterian arc of capitalism by concluding with thoughts about the locus of innovation in 2050, the centennial year of Schumpeter’s death, when the principal locus of innovation might well be where Schumpeter believed it was in 1911, under what he called Competitive Capitalism.

About the Speaker: David Hounshell was originally trained as an electrical engineer (BSEE, Southern Methodist University, 1972) before he saw the bright light of history of science, technology, business, and public policy (Ph.D., History, University of Delaware, 1978).   His early publications include work on inventors in electrical and communications technologies of the 19th-century, for which he received the Browder J. Thompson Prize of the IEEE in 1978.  His first book, From the American System to Mass Production, 1800-1932 (Johns Hopkins University Press, 1984) remains in print today; the Society for the History of Technology (SHOT) awarded it the Dexter Prize in 1987.  Science and Corporate Strategy:  DuPont R&D, 1902-1980 (Cambridge University Press, 1988), co-authored with John Kenly Smith, Jr.,  received the Newcomen Prize in 1991.  He is the recipient of the Business History Conference’s Williamson Medal (1992) and the Society for the History of Technology’s Leonardo DaVinci Medal (2007).  He served as President of SHOT in 2002 and 2003.  He has published on Cold War science and technology, the history of industrial research and development, and technology-forcing regulation in post-World War II United States.

Who Won the Nobel Prize in Economics This Year? Professor Finkler’s Mentors, That’s Who

Most of you have probably never heard of either Tom Sargent or Chris Sims.  I’m not surprised; however, if you are an economics major at Lawrence, they have influenced how you have been taught.  I learned macroeconomics from Sargent.  His emphasis on the microfoundations of macroeconomics forms the base of how I think about macro questions.  In short,  a strong understanding of labor markets and how they work is critical to serious macroeconomic policy making.  Few of our decision-makers today understand that link.  Stated differently,  Okun’s Law (for every 2 percentage points that output is below potential output, the unemployment rate is 1 percentage point above its “natural” level) is an empirical relationship, not a theoretical one, that is if you are not a reductionist (to simple correlations.) Sargent convinced me that to reduce the unemployment rate in this country, one’s understanding must go well beyond how monetary and fiscal policy affect aggregate demand.

Chris Sims, a first rate econometrician, has addressed the fundamental questions of causality in macroeconomics, especially time series causality.  For those of you without a clue what this means, he tried to solve the chicken (money growth) and egg (GDP growth) problem; which came first?   His answer came in a 1972 American Economic Review paper entitled “Money, Income and Causality.”  Given his award, my students in Money and Monetary Policy will have an opportunity to work through this paper later this term.  Of course, Sims did not stop there.  No reductionist he, he broadened the question to ask of the variables that matter in macroeconomic discussion (Real GDP, Unemployment rate, stock of money, wages, the price level, and import prices), how do they relate to one other.  This paper, published in Econometrica in 1980 under the title “Macroeconomics and Reality”, is a much tougher read.  The conceptual direction and the results, however, are not hard to understand.  Sims argued that we should learn how the histories of each of these variables are related to each another.  He developed Vector Autoregression Techniques to answer this question.  These techniques have been embedded in contemporary econometrics software packages and in the work of many macroeconomists.  Despite the title of the paper, Sims did not believe he had found “the holy grail”, but he believed that an clear understanding of the time series relationships amongst the key macro  variables was essential to know where to look for it.

Of course, I am happy to discuss their work with any and all interested.  I am honored to have been a student of both of these creative economists and celebrate their receipt of the Nobel Prize in Economics for 2011.

Third Annual Predict the Economics Nobel Contest… Wait, what?

Falling off the Cliffs?

Well, I didn’t manage to get the contest running this year and, lo!, the Nobel Prize in Economics committee met anyway and made its awards.

I’m no macro guy (who is these days?), but the Nobel Committee saw fit to award this year’s prize to Thomas Sargent and Christopher Sims for their work in empirical macroeconomics.  As per usual, Tyler Cowen at Marginal Revolution is all over it.

Sims here and Sargent here.

Though I disavow any knowledge of it now, I had Sargent for my macro texts back in grad school — known as  black Sargent and red Sargent because one was black and one was red (I forget which was which).  For some of us, the mathematics was on the challenging side, and we had to spend a lot of time solving those spectral analysis problems.  I remember this like it was yesterday, one of my classmates asked if there was a “Cliffs Notes” version of black Sargent.

The professor replied, “Black Sargent is the Cliffs Notes.”

UPDATE: Tim Taylor has a very readable, conversable even, commentary at his new blog.

Economics for the 21st Century

David Warsh has an Economic Principals piece on the direction of the economics profession for the next decade.   Warsh points to a compilation of 55 papers, Ten Years & Beyond: Economists Answer NSF’s Call for Long-Term Research Agendas, posted at the Social Science Research Network.  Charles Schultze from Brookings provides some perspective in the title piece:

The National Science Foundation’s Directorate for the Social, Behavioral and Economic Sciences (NSF/SBE) for challenging economists and other relevant research communities “to step outside of present demands and to think boldly about future promises.” Specifically, NSF/SBE invited groups and individuals in August 2010 to write white papers that describe grand challenge questions in their sciences that transcend near-term funding cycles and are “likely to drive next generation research in the social, behavioral, and economic sciences.” NSF/SBE planned to use these white papers “to frame innovative research for the year 2020 and beyond that enhances fundamental knowledge and benefits society in many ways… We are disseminating the white papers of interest to economists independent of the NSF because these papers offer a number of exciting and at times provocative ideas about future research agendas in economics that are worth further consideration by economists.

There are many titles that look promising, including Deidre McCloskey’s “Language and Interest in the Economy,” which argues that economists should pay more attention to the role of persuasion. A number of us have been plowing through McCloskey’s Bourgeois Dignity, so we certainly welcome a succinct case.

Some other provocative titles include Nicholas Bloom’s “Key Outstanding Questions in Social Sciences,” David Autor and Lawrence Katz’s “Grand Challenges in the Study of Employment and Technological Change,” Randall Krozner’s “Implications of the Financial Crisis,” and Kenneth Rogoff’s “Three Challenges Facing Modern Macroeconomics.”

These are short, generally readable pieces from some of the biggest names in the profession.  This seems like a good place to poke around.

Sustainable China

As many of you know, Lawrence received a grant from the Luce Foundation to explore a program we call Sustainable China: Integrating Culture, Conservation, and Commerce.  Thursday and Friday we will be hosting two visitors from the Karst Institute at Guizhou Normal University in Guiyang, China.  They will be giving a  talk on Friday afternoon at 3:10 in Steitz 102 and are available for Q & A after the talk.  Please below for details or green posters in various spots in Briggs Hall.

Sustainable China:  Integrating Culture, Conservation and Commerce

~~~~~~~~~~~~~~~~~~~~~~~~~~

Ren Xiaodong

Professor at the Institute of South China Karst and Director of the Community-Based Conservation and Research Development Center at

Guizhou Normal University

“Integrated Management of Nature Reserves in Guizhou Province”

Professor Ren will discuss efforts to incorporate a variety of stakeholders in the management of the Chishui Nature Reserve.  The reserve is a national treasure as well as the source of water for the Moutai Liquor.

Zhou Zongfa

Vice Dean Institute of South China Karst and Professor in School of Geography and Biological Science at Guizhou Normal University

“Use of Geographic Information Systems (GIS) for the study of Karst and Caves in Guizhou Province”

Professor Zhou will address how GIS systems help identify the characteristics of sedimentary rocks in China which will assist decision-makers in evaluating the effects of and planning for future economic development in Guizhou Province.

~~~~~~~~~~~~~~~~~~~~~~~~~~

Friday, September 30th

3:10pm

Steitz Hall 102

The Piece I’ve Been Expecting about Robert Lucas

The Wall Street Journal has a short profile of Robert Lucas,  one of the most influential macroeconomists of at least the past 20 years (when I picked up my first grad macro text).  Lucas is probably best known for integrating “rational expectations” into macro models (he convinced his wife, at least).  He is also the namesake of the “Lucas Critique”  of using past behavior to predict the future.   Here’s a nice summary of his contributions.

Lucas might sound like someone affiliated with the Chicago School, and indeed, that is the case.  Someone you should know.

Excessive Monetary Easing is Part of the Problem

If short term interest rates drop from .1% to .02% does it generate more economic activity?  If long term rates drop from 3% to 2% (or even 1.7% as with 10 year US Treasury Notes), will people want to borrow more given the current economic environment?  Most readers know my pessimism regarding answers to these questions.  The IMF, in its latest global financial stability report, makes the case quite strongly.  Furthermore, as argued previously and by most “Austrians” since Mises and Hayek, overly cheap capital causes a great deal of mis-allocation of capital.  The Financial Times editorial today summarizes the IMF report.

The IMF’s latest global financial stability report says rightly enough that the eurozone crisis, and the row over the US debt ceiling, sparked an increase in risk aversion. But the IMF worries that exceptionally low interest rates are building a fresh credit problem. They have spurred a hunt for yield which, as widely broadcast, has sent too much capital to emerging markets. When capital is too cheap, it is mis-allocated.

The FT editorial concludes:

Either credit markets see reasons for economic cheer that have eluded everyone else, or low interest rates have sparked another round of irresponsible lending.

Tax them Back to the Stone Age!

Click to Enlarge

Do you think we should increase taxes on the rich?  Most of us do, to the tune of about a 70-30 split in favor of bumping up those taxes.  But what does that mean, exactly?

Reason Online takes up this question by asking people how high someone’s income has to be before they are rich.  Not surprisingly,  the answer depends on who you ask.  If you ask someone with an income less than $50,000, the median response is that $200,000 a year is rich, but even $100,000 seems rich to a significant fraction of that cohort.  On the other hand, if you ask someone who earns between $100,000 and $200,000, the response is that it takes $300,000 before you are rich.

A better survey question might be, should we raise taxes on people with incomes over $200,000?  My guess is you might still get majority support, with substantial defection from those at and round $200,000 a year.

Unstandard Oil

Because it's there?

Many of you have probably heard of “peak oil,” the idea that world oil production either has peaked or will soon peak, and it’s all downhill from there.  The implications of this could be that the world economy is crippled by high prices and short supply, or the world economy is not crippled by high prices and short supply.  In either case, most folks I talk with seem to believe we will soon be facing resource constraints.

Well, Daniel Yergin, author of the cinder-block-sized epic The Prize (now in documentary form) is back with his take on peak oil.  The condensed version of his argument — puh-leeze.

In his piece, Yergin goes over the basic storyline of so-called “cornucopian”  economists, such as the late Julian Simon, who claim that human ingenuity is likely to overcome any “natural” resource constraints.  Here’s Yergin on the premiere peak oiler, M. King Hubbert:

Hubbert insisted that price didn’t matter. Economics—the forces of supply and demand—were, he maintained, irrelevant to the finite physical cache of oil in the earth. But why would price—with all the messages that it sends to people about allocating resources and developing new technologies—apply in so many other realms but not in oil and gas production? Activity goes up when prices go up; activity goes down when prices go down. Higher prices stimulate innovation and encourage people to figure out ingenious new ways to increase supply.

Indeed.

New technologies and approaches continue to unlock new resources. Ghana is on its way to significant oil production, and just a few days ago, a major new discovery was announced off the coast of French Guiana, north of Brazil.

As proof for peak oil, its advocates argue that the discovery rate for new oil fields is declining. But this obscures a crucial point: Most of the world’s supply is the result not of discoveries but of additions and extensions in existing fields.

In addition to the WSJ piece, Yergin is back in print with The Quest: Energy, Security and the Remaking of the Modern World. If you are interested in third-party opinions, Steven Hayward has a column in the WSJ, and Steven Levine reviews the book for Foreign Policy.

Talk Like a Pirate Day

It’s Talk Like a Pirate Day over at The Mudd, and elsewhere.

As I told you last year, Peter Leeson has an excellent series of papers on piratical organization, including The Invisible Hook, an economic analysis of piratical organization.  You can also check out the JPE piece it was based on or simply get a flavor from one of its many favorable reviews.

Here’s the gist:

The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends.

Certainly the big eye opener is that classic pirates had democratic governance structures.  I would guess that most organized crime we think of today — including modern-day pirates is more conventionally hierarchical.  Watch for this in Econ 450.