General Interest

Category: General Interest

Nobel Prize Contest Update

The picks are pouring in for our Second Annual Pick the Economics Nobel Prize contest (see here).  The consensus pick around the department seems to be Paul Romer, so we might be dividing up that bag of M&Ms pretty thin if he wins.

Here are some more thoughts today from Tyler Cowen:

  1. Richard Thaler joint with Robert Schiller.
  2. Martin Weitzman and William Nordhaus, for their work on environmental economics
  3. Three prominent econometricians of your choice, bundled.
  4. Jean Tirole, possibly bundled with Oliver Hart and other game theorists/principle agent theorists.  But last year the prize was in a similar field so the chances here have gone down for the time being.
  5. Doug Diamond, bundled with another theorist or two of financial intermediation, such as John Geanakopolos.  Bernanke probably has to wait, although that may militate against the entire idea of such a prize right now.
  6. Dale Jorgenson plus ???? (Baumol?) for a productivity prize.

Thaler was my original (anomalous?) pick, though yesterday I hedged and went with Shiller.  So this might be a case of great minds thinking alike, or of me being brainwashed by reading Marginal Revolution too often.

I like the Marty Weitzman pick better.  Economics hasn’t given a prize for global climate change or for environmental work in general, and Weitzman has been a big deal forever for his canonical “prices versus quantities” paper, as well as for some more recent work on the “fat tail.” I’m not so sure about Nordhaus paired with him, however.

Professor Finkler has Paul Romer.  I have yet to hear from my other colleagues, who are no doubt strategically plotting their picks as I type here.

The Browning of America

PBS senior correspondent Ray Suarez will be on campus Tuesday to deliver the University Convocation lecture, “The Browning of America,” concerning the changing character of U.S. demographics.

Student attendance at Convocation has recently been low, so I hope you give this one a chance.  He is generally an interesting character, so the talk should be provocative. And the music and performances book-ending the speaker are generally superb at Convocations.

The action starts Tuesday, October 5 at 11:10 a.m. in Memorial Chapel.

The Extraordinary Influence of Freshman Studies

One of my more clever colleagues was telling me how impressed he was with the noticeable effects of our Freshman Studies curriculum, even extending well beyond affecting just Lawrence students and faculty.

How can he be so sure?

Just check out the similarities between this year’s Freshman Studies reading list and the frequently bought together books at Amazon.com.

So, how do you like that?  Some guy camped out in the mountains looking to pick up a copy of The Republic is suddenly prompted to buy a copy of Martin Guerre?

We should have negotiated a lower price.

Coincidence?

Second Annual Predict the Nobel Prize in Economics

As Professor Finkler points out, the Nobel Prize in economics will be awarded on October 11. That must mean that it’s time for the Second Annual LU Pick the Nobel contest.

So, who should you pick? Well, one strategy is to check out the Thomson Reuters picks from Science (Alesini, Kiyotaki, Moore, Murphy). If you don’t like any of those to win, you might peruse the “Vegas” odds and see who you like there. As of me typing this, these odds do not appear to be out yet, but keep an eye out here and check here are last year’s odds. The same favorites from last year are obviously in play for this year — Eugene Fama for his efficient markets and Paul Romer for endogenous growth theory, Aplia, and charter cities.

Another good choice might be Emmanuel Saez, who is fresh off winning a MacArthur “Genius” Grant. As a dark horse, you might pick the prolific blogging superstar, Tyler Cowen, for his work on the economics of culture.

Or, you can always defer to The Simpsons for your pick (Bhagwati).

A sentimental favorite, at least for me, is Armen Alchian. Don Boudreux points us to this essay and says that in a just world he would have already won the prize.

My pick, which I forgot to pick in the original post, is Richard Thaler.  I just hope that pick doesn’t somehow curse me.

To enter the contest, submit a pick in the comments or via email to me. One entry per person, need not be present in Sweden to win. This year’s winner will take home an authentic piece of Schumptoberfest merchandise. Ties will be decided by Random.org at the Economics Tea.

Professor Shober: Appleton not part of the Russ belt

Government department Professor Arnold Shober is in the news, handicapping the fall elections for the Appleton Post-Crescent.  Here’s a portion of the transcript in response to a question on whether Wisconsin Democrats are going to be taken to the woodshed this November:

The answer to that question is really how well Russ Feingold does. He’s the top race in the state. We think about governor, but Feingold gets a lot more attention. If he has trouble — and a series of recent polls suggest that he really does — then it will very bad. If he can’t carry reliable Democrats into the polling booth, nobody can.

Polling out last week suggested that, in northeast Wisconsin, Ron Johnson is up 60-40. That means Steve Kagen (in the 8th Congressional District) is certainly out. Penny Bernard Schaber (in the 57th Assembly District) is most certainly out. Tom Nelson’s seat (in the 5th Assembly District) will probably flip, and on and on and on, because that’s a big margin.

Certainly, everyone voting for Russ Feingold is going to be voting for a Democrat. He’s a maverick, but he’s definitely on the left. So if he does poorly, Democrats across Wisconsin are going to be in big trouble. If he can hold it even, it may not be so bad.

Emphasis is mine (Prof. Shober typically doesn’t speak in bold font), and included so I could use the pun in the title.

You can see the latest polling results outside of Professor Shober’s door right here on Briggs 2nd.

Interdependent Utility Functions

Does knowing what your peers make matter to how happy you are?  Certainly, the utility functions that I sketch in Econ 300 say no.  As Ray Fisman puts it in a recent piece at Slate, “Why do we care what those around us make? It doesn’t affect the real estate or furniture or sushi dinners we can afford.”

On the other hand, of course it matters. And Fisman continues:

[I]n recent years, economics has become both more social and behavioral, borrowing evidence and ideas from elsewhere in the social sciences. Economists now acknowledge that we constantly judge our own accomplishments in comparison to others, and salaries serve as one ready benchmark. People (and perhaps monkeys, too) are also averse to inequality—unequal pay for equal work just isn’t fair (especially if you’re the one who drew the short straw).

Monkeys? Wow.

Fisman talks about an ingenious study by group of economists, including David Card and MacArthur genius grant winner Emmanuel Saez, that investigated how differences in pay affect variables like job satisfaction.  If you are interested in how economists think about these things and how they evaluate them empirically, this paper is worth checking out.  The abstract is below the fold: Continue reading Interdependent Utility Functions

Tax Credits and Income Tax Exemptions are the “Hidden Hand of Government Spending”

Whether the government gives you a tax credit of $100 towards some specific expenditure or spends a $100 on that same item and thus reduces the out-of-pocket cost to you, the effects are the same:  1) a increased deficit to be funded, 2) distorted incentives.

Edward Kleinbard in the Fall 2010 issue of the journal Regulation argues that these incentives in 2008 amounted to foregone tax revenue of roughly $1.2 trillion per year which exceeds what was raised through the individual income tax ($1.1 trillion) and “is more than twice as much as all non-defense discretionary spending ($528 billion.)”

For example, mortgage interest rate deductions, health insurance premium deductions, and energy tax credits all distort our economic choices (often in regressive fashion) and deepen our budgetary abyss.  More of these, which seems the purview of both political parties, does not make our aggregate fiscal situation better, it just means that the day of reckoning when it comes, will be much more difficult than it otherwise might be.

Regime Uncertainty: Did the New Deal End the Great Depression?

There is a continuing debate, as you must know by now, as to whether Keynesian fiscal stimulus is an effective macroeconomic policy tool, especially with the US economy stuck in its current doldrums.  There is probably no bigger detractor to this idea than Robert Higgs of the Independent Institute.  Many on the Keynesian side say the $750 billion fiscal stimulus wasn’t big enough.

Robert Higgs says phooey.

Higgs argues that the whole Keynesian paradigm is out of whack, that, in fact, more robust governmental involvement in times of a crisis creates pervasive uncertainties for the private sector.  This “regime uncertainty,” whether it be from potential tax increases or other regulatory hurdles, shakes investor confidence and stifles capital formation.  Who is going to play a game when the rules of the game are subject to potentially radical change?

Those of you who have taken Economics 240 might recall Higgs’ “ratchet effect,” but he is perhaps better know for this regime uncertainty idea.  Higgs forwarded some of these arguments in the Journal of Economic History, and has recently bolstered it both in the Independent Review. He doesn’t see this as a unifying macro theory, but more as an element that is generally ignored (or ridiculed) by many macro theorists.

You can also catch Higgs talking about these issues with Russ Roberts on EconTalk.

Beer Distributors Apply Political Economy Herbicide

It is a good couple of weeks for those interested in the economics of (and innovation in) illicit drug markets. First, HBO started up its mega super miniseries,  Boardwalk Empire, about how an Atlantic City official built an organized crime empire following the enactment of the 22nd amendment prohibiting the production and sale of alcohol.

Then we find out that there is an online “weed” price clearinghouse.

And, now, via Marginal Revolution, we learn that the beer distributors actively oppose marijuana legalization in California.  So quick 100 and political economy question — do beer distributors think marijuana and beer are more like complements or substitutes?  To date, there is no word on whether manufacturers of Cheetos have taken a public stance on the isssue.

Interestingly, the teachers union supports legalization because of “the revenue that could be raised for the state.”

Are “Weed” Prices Sticky?

Competition is on my mind.  How do firms compete?  By price?  Quality?  Product differentiation?  Threatening potential entrants with physical violence?   All good questions.

But if we just stick to price competition, how much price variation is there across markets?  And why?  Monday at the Econ TeaBA, we  heard from a savvy young entrepreneurial type who claimed to be able to exploit exchange rate differences by selling used American stuff to Canadian customers.  Wow!

Of course, that whole enterprise sounded pretty idiosyncratic, so it is not entirely surprising that the law of one price didn’t seem to apply.  But what about in markets where the product quality is fairly homogeneous and there are limited barriers to entry.  Say, for instance, marijuana.

As most of you know, the US and most of the rest of the world restricts production and sale of most drugs, including marijuana, or “weed,” as it is sometimes called (among other terms).  But my understanding is that even the threat of legal sanctions, fines, and even prison do not eliminate don’t stop a robust trade.  Indeed, in his “Dear Undercover Economist” column, Tim Harford takes on this unusual question:

Dear Economist,

I have been a client of weed dealers in North America since the mid-1980s and no matter who the vendor, the price has remained $10 a gramme. I don’t think anything in 25 years has stayed fixed in price like weed has.

Dealers might have some power to increase prices, as it’s illegal, and there are some significant barriers to entry, such as getting arrested. But if I don’t like the prices, it’s pretty easy to grow some on my own, because it “grows like a weed”, even if it might not be as good as the dealer’s Cannabis sativa.

So how did we end up at $10 a gramme?

Sebastian

Dude, that is a puzzle, indeed.  My first response is supply (a.k.a., “more weed”) would keep the real price from falling, but that doesn’t affect what economists call the “price stickiness” question.  That is, why $10?

Check out Harford’s response here.

Right about $10

On the other hand, I have to wonder who Sebastian’s source is, as this past week, I was alerted to a site that tracks prices of various quality marijuana, www.priceofweed.com.   The site stratifies prices based on self-reported quality, and also logs the amount of the purchase (lots of bulk discounts, of course). average price of a high-quality ounce of weed is listed as north of $400 here in America’s dairyland.  The site legend of US prices suggests that Wisconsin marijuana is the pricey side.  The site also contains information about “social acceptance” and “law enforcement.”  So, one might expect some relationship between price, levels of enforcement, amount and quality.

A site that launched a thousand econometrics projects.  Excellent.

Global Competitiveness

The U.S. is number 4 according to the  global competitiveness survey just released by the World Economic Forum.  It dropped from second to fourth in the past year.  Switzerland, Sweden, and Singapore (is there something about S?) lie above the US.  What’s behind these rankings?  Should anyone care?  See today’s Financial Times Lex column for both an editorial opinion on the survey and for a link to the full report.  The website for the report contains profiles of each country as well as informative commentary about its meaning.

Krugman vs. Rajan on the Causes of and Responses to US Economic Stagnation

Paul Krugman rejects the claims that Raghuram Rajan makes about why the US entered the financial crisis.  Furthermore he argues that the cause is not particularly important and that more macroeconomic policy stimulus is needed until the US returns to pre-recession levels of employment and GDP.  Rajan argues that such stimulus is partly the reason why the crisis was created and that fundamental reform is required.

Cafe Hayek provides links to both articles in a recent posting.

Raghuram Rajan responds to criticism from Krugman and Wells. Much of his response will be familiar to Cafe Hayek readers but it is convenient to have all of Krugman’s mistakes about the housing bubble assembled in one place.

Toxie, We Hardly Knew Ye

Some of you may remember that last year we brought you a link to Toxie Cam , where folks at NPR purchased a so-called “toxic asset” to help them understand the mortgage crisis and the financial crisis more generally. To wit,

We bought Toxie for $1,000 earlier this year. Every month, we get a check. It’s a small piece of the payments people are making on their mortgages. And every month, more houses get foreclosed on and sold off by the bank. When enough houses get sold off by the bank, Toxie will be dead.

Hilarity ensued, of course, when they dedicated a live streaming web feed to a stack of paper, a la the live feed of the BP platform gusher. They went on:

She’s not dead yet — but things are looking grim. Last month, we got $72.41; so far, we’ve received a total of $449. This month, our payment was zero dollars and zero cents. We could still get another payment next month — maybe.

Well, it looks as she’s pretty much dead now, and as the value of the “Toxie” is converging to the paper it’s printed on.  So, in a final hurrah, NPR gives us some back story from before Toxie was toxic. This in includes a rather spectacular aerial photo of a neighborhood that was planned but never developed.

The Toxie Cam was part of an NPR series that seems pretty engaging.   Certainly not the worst thing you’ll read about the financial crisis.

The Yuan Also Rises?

For a variety of reasons, Chinese economic policy makers resist pressures to allow the yuan (or renminbi) to rise against the dollar.  On this side of the great pond (i.e., the Pacific Ocean), politicians (see H.R. 2378 Ryan-Murphy bill) and many economists clamor for explicit pressure that “forces” the Chinese to allow the yuan to appreciate.  What would happen if the yuan were to rise markedly against the dollar?  Several observations are worth making.

1.  Much of the trade deficit that exists between the US and China arises from the sale of final goods.  The value added by Chinese firms in these goods, however, is rather small.  So what?  If the yuan rises, it means that Chinese firms will be able to purchase intermediate goods more cheaply than at present; thus, the decrease in the cost of Chinese goods in yuan terms will counter the rise in the exchange rate and limit the change in prices to American consumers.

2.  It’s not clear that changes in the nominal exchange rate drive large changes in purchasing.  For example,  the Japanese yen was forced to appreciate against the dollar in the late 1980s.  Such a rise has had limited impact on trade with Japan.  The U.S. runs trade deficits with virtually all of its major trading partners.  This is a natural outgrowth of diminishing savings relative to (tangible) investment over past three decades.

3.  On a related point, Gillian Tett, in today’s Financial Times argues that the Japanese experience with a rising yuan could be replicated in China.  Unless China reforms its banking and financial system in a way that decentralizes the allocation of capital, it may suffer the economic stagnation that Japan has suffered for the past two decades.  Cheap capital, centrally allocated, tends to yield excess capacity in politically sensitive industries.  I have heard this argument on many occasions in China.  If China’s economy were to suffer a long period of weakness, demand for US, European, and Asia goods would diminish, not rise.

4.  The iron triangle or impossible trilogy restricts countries from having a) open capital markets, b) a fixed exchange rate, and c) independent monetary policy at the same time.  Different countries, based on the depth and breadth of their domestic capital markets and their social time preferences, as well as their desire to attract capital, make different choices.  China chooses some combination of capital controls and limited monetary independence along with a fixed exchange rate.  The US and Europe, with much more developed capital markets, choose to allow exchange rates to float.  Small countries, dependent on world trade and world interest rates, such as Hong Kong and Estonia, forgo independent monetary policy.  There is no right choice.  Each country manipulates the tools it believes give it the highest level of economic welfare.

My advice to US policy makers:  be careful what you ask for.

Is Gladwell’s Perspective on K-12 an Outlier?

I just finished up Malcolm Gladwell’s Outliers: The Story of Success, with a rather unconventional take on the U.S. public schools.  The girl he is discussing, Marita, is from a single-parent, low-income household.  He is concluding a chapter on an experimental public school program in New York City, the Knowledge is Power Program (KIPP, for short).

Marita doesn’t need a brand-new school with acres of playing field and gleaming facilities. She doesn’t need a laptop, a smaller class, a teacher with PhD, or a bigger apartment. She doesn’t need a higher IQ or a mind as quick as Chris Langan’s (a genius discussed earlier in the book). All those things would be nice, of course. But they miss the point. Marita just needed a chance.

That is both a conclusion about our schooling, as well as a conclusion about how our society produces talent.  Gladwell is the master storyteller, and in Outliers he writes convincingly how a combination of arbitrary advantages mixed with an extraordinary work ethic can compound to produce “outlier” talents ranging from Bill Gates to Canadian professional hockey players.

My way or the Norway?

Indeed, Gladwell is explicitly discounting exceptional talent as a significant factor in determining exceptional success.  Instead, he contends that there is some threshold level at which incremental improvements don’t matter.  So, there are many people who could have been Bill Gates, but Bill Gates was the only one with that level of ability that happened to fall into a situation that allowed him to become such a dominant captain of industry.

Those interested in a discussion on this point far outside of my research domain might consult the special issue of Behavior Genetics on people with high cognitive ability.  In that issue, psychologist David Lubinski addresses Outliers and concludes: “The vast majority of scientists in talent development would say that it takes at least ability, ambition, and opportunity; there is no need to minimize the importance of any of these when it takes all three.”

I am certainly not qualified to discuss the literature on talent development, so I will leave it at that.  My feeling is that Gladwell consistently conflates more mundane successes associated with someone like Marita with extraordinary successes of someone like Mario Lemuiex.  This makes it both easier and more difficult to attack his argument.  On the one hand, I completely buy the argument that most successful people are a product of chance and of hard work — there are few truly self-made men.  On the other hand, it’s hard to believe that truly great scientists and mathematicians aren’t blessed with a skill set far beyond the domain of the 95th-percentile student.

Wells Capital Management Positions

The Investment Risk Management team at Wells Capital Management is currently recruiting college seniors for two Associate Investment Risk Analyst positions.  The ideal candidate would have excellent problem-solving skills, a strong math background with a preference for computer science, and an interest in the financial markets.  Strong communication skills and the ability to work effectively as part of a team are also very important.  See Kathy Heinzen in the Career Center or me for details.

The application deadline is September 30; so take action if you are interested.

Is the Dominance of Economics History?

A couple of friends and colleagues have alerted me to a recent Financial Times piece by Gideon Rachman, urging folks to “sweep economists off their throne.”

The basic insight is that economists often model things with the claim that our models can inform the future.  He suggests we are more like historians than physicists, and it’s right time we admitted it already.

With the exception of a few deluded Marxists, historians know that their work cannot be used to predict the future. History can suggest lessons and parallels and provide wisdom – but what it cannot do is provide a sociological equivalent of the laws of physics. Yet this seems to be the aspiration of many economists, who notoriously suffer from “physics envy”.

In our corner, we have The Undercover Economist, Tim Harford, with a robust defense of the good guys, pointing out that there is more to economics than predicting recessions.  In fact, it’s not even clear that the profession pretends that this is of much consequence to “what economics is” (see here for elaboration).

Though, even as a staunch supporter, Harford cannot bring himself to defend macroeconomic, conceding that “macroeconomic models have proved fairly useless.”