General Interest

Category: General Interest

In your life expect some trouble, when you worry you make it double…

Those of you interested in international financial markets probably noticed there have been some rather dramatic changes in the the major stock indices over the past week.   The US benchmark Dow Jones Industrial Average stood at 17, 345 last Thursday and subsequently plummeted to 15,666 at the close of business Tuesday.  Following a turbulent Friday and some bad news from China on Monday, the Dow went into a free-fall on Monday, losing over 1,000 points before closing 588 points lower.

On Tuesday, the Dow seemed to regain some of its mojo, soaring 442 points in early trading.  That mojo was a no-go, however, and by the end of the day the Dow had shed another 205 points.  Ouch.

On Wednesday things really did turn around, with the Dow closing 619 points higher, the third-largest gain ever in absolute terms.  As of this writing on Thursday, the Dow is up another 200 points, continuing to scratch back some of the losses from last week.  (Wait, now it’s only up 150 points, better post this picture before it changes again):
 dow

The causes of these wild gyrations are quite varied, and would be difficult to explicate before the market moves a hundred points in either direction (that is, even if we knew what all of those causes were, which I’m not convinced that we do).  The question for the decision maker is what do these market fluctuations mean to you?

Well, many flesh-and-bone economists will tell you with a straight face that you are either in the market or you’re not, so if you want to get out now, you shouldn’t have been in the first place.  If you are in, you should just sit tight.

Although that might seem preposterous to you, what economists will tell you is that the idea that you can either predict or time the market is even more preposterous. More on this after the bump: Continue reading In your life expect some trouble, when you worry you make it double…

River Red

Some of you have certainly read about the mishap at the “abandoned” Gold King mine site in Colorado that left Animas River a peculiar shade of orange — here is a before and after picture that I nabbed from Reddit.

The basic story is that EPA is working to reclaim and shore up a historic mine site, and one of its contractors accidentally breached a dam that led to a spill of several million gallons of toxic water into the Animas River.  The High Country News tells us nine things we need to know about the spill.

In the department of self-promotion, I also used to spend time thinking about cleaning up hazardous waste sites, and recently did a Q&A with PERC about the problem of abandoned mines.   If you are interested in law & economics, or some of the knotty problems of environmental policy, consider taking a look.   The abandoned mines problem could use some fresh thinking, that’s for sure.

A grave note

Канторович
Photo by Tim Dahlstrom © 2015

I had coffee with Tim Dahlstrom ’16 a couple of days ago, which is not very unexpected, except that we had it in a cafe with a view on the Kremlin. I am here visiting family, and he is here practicing his Russian and prepping for the GRE. He shared with me afterwards this photo, which he recently took here in Moscow: It is the grave of a Nobel prize-winning mathematical economist, obviously from Russia. This should probably be enough for you to guess the name, but if you need more, here is a cogent Austrian perspective on his prize. Tim remembered him from the Red Plenty reading group from his freshman year.

Technological Anxiety and Economic Growth

Prominent economic historian Joel Mokyr and two co-authors, Chris Vickers and Nicholas Ziebarth, provide a compelling discussion of the historical relationships among technology, economic growth, and (cultural and other forms of) anxiety.  They address three major forces:

1. Widespread substitution of capital for labor in the short run with beneficial long run trends for employment and living standards

2. Anxiety over the moral implications of technological change on people’s welfare

3. The notion (as posited by economists including Robert Gordon and Tyler Cowen) that economic growth influenced by technological change is behind us.

They argue that the current episode is similar to our experiences with industrial revolutions of the past 250 years.  This time is NOT different.  The complete paper is available from the Journal of Economic Perspectives. 

I encourage everyone to read it.

Event Studies

I was recently chatting with some alumni who shocked me by saying they regularly hit the Lawrence Econ blog for…  Well, I forgot to ask why they came to the blog, but presumably for posts like this.

Today’s question: how can we quantitatively assess the impact of a big event?

The answer, sometimes, is to set up an event study!   Craig MacKinlay has a nice overview in the Journal of Economic Literature  (cited more than 3000 times!) where he shows how to evaluate the impact of an event on the value of a firm (or firms). The basic idea is that if the event is unanticipated, you can look at the value of the firm before and after the event, and see how “the market” assessed the event’s impact.

Leah Libresco at the FiveThirtyEight website recently took a look at how the recent Supreme Court decision on the Patient Protection and Affordable Care Act (PPACA) (a.k.a. “Obamacare”) affected the value of big insurance companies.   The picture is after the bump: Continue reading Event Studies

Data Science for Humans

The last Economics Colloquium of the year, at 4:30 on Wednesday, May 27th, Steitz 102:

Data Science for Humans
Shilad W. Sen Macalester College,Associate Professor, Mathematics and Computer Science

Data scientists mine massive datasets to help software understand our tShilad Senastes, needs, and routines. Want to become a data scientist? Many new data science degrees incorporate coursework in statistics and computation. However, most programs focus shallowly on data, without deeply connecting to existing domain knowledge in the fields in the social science, humanities, marketing, etc.  Continue reading Data Science for Humans

Econ Colloquium — Big Data Monday at 4:30

UPDATE:  Schafer tapped to lead Large Synoptic Survey Telescope(LSST) Informatics and Statistics Science Collaboration.

 

Big Science + Big Data = Big Opportunities: An Overview of Statistics in Astronomy

Chad Schafer

Department of Statistics

Carnegie Mellon University

Progress in disciplines such as astronomy is increasingly being made through large-scale, multi-institution projects, often referred to as “Big Science.” It is only through careful statistical analysis that the massive amount of information (the “Big Data”) produced by these endeavors will be translated into answers to the questions of interest. This talk will make a connection between fundamental statistical concepts and the challenges facing astronomers and cosmologists as they seek to make use of the flood of data that result from modern experiments.

Monday, May 18, 4:30 p.m.

Steitz Hall 102

Money Ball and Medicine

In 2003, Michael Lewis published Moneyball, the story of how a team with a relative small payroll (the Oakland Athletics) was able to be competitive by understanding how a general manager (Billy Beane) should spend money to generate the most wins.  Many major league baseball teams now apply some of the strategies that Beane adopted andmoneyball Lewis articulated.

Moneyball and Medicine

 

 

 

 

 

In today’s “Upshot”, Jeremy Smith applies the same logic to how resources might be spent on improving health.   For a number of years, health economists have argued that death rates and life expectancy provide too limited a way to understand how much value the medical sector generates from its vast expenditures (approaching $3 trillion per year in the United States.)   Smith argues that not all years of life are equivalent and that most efforts by medical practitioners are unrelated to life and death situations.  He proposes DALYs – disability adjusted life years, an indicator that sums lost quality of life and lost life expectancy due to such disabilities, as a better indicator than life expectancy.

Lancet, the British equivalent to the New England Journal of Medicine, recently published an article analyzing 291 diseases and injuries across 21 regions of the world to assess the global burden of disease. Comparisons between rankings based on deaths versus DALYs  for the US in 2010 is quite interesting.

Using deaths, the top five causes are as follows:

1. Heart disease  2. Stroke 3. Cancer of the trachea, bronchus or lung, 4. Alzheimer’s or other dementias and   5. Chronic obstructive pulmonary disease (COPD)

The rankings using most DALYs foregone introduces two major differences:

1. Heart disease 2. COPD 3. Low back pain 4. Cancers of the trachea, bronchus or long, and 5. Major depressive disorder

Low back pain and major depressive disorder are not causes of death, but they generate huge amounts of pain and suffering and billions of dollars of lost productivity in addition to whatever medical services might be employed.

If a “Moneyball” approach to health spending was directed towards the DALY list, the gains in health and productivity would be substantial.  Unlikely baseball, however, there are no league standings based on health outcomes; therefore, the US continues to spend a great deal on clinical care without significant gains in health and reductions in the effects of disability.

 

 

Climate Change References

Selected References:

Initiative on Global Markets www.igmchicago.org

Jeffrey A. Frankel & Andrew K. Rose “Is Trade Good or Bad for the Environment? Sorting Out the Causality,” The Review of Economics and Statistics 87(1):85-91. (2005)

Michael Greenstone and Adam Looney. “Paying Too Much for Energy? The True Costs of Our Energy Choices.” Daedalus141.2 (2012): 10-30.

Alan Krupnick et al. Toward a New National Energy Policy: Assessing the Options, Resources for the Future (2010)

William Nordhaus, The Climate Casino: Risk, Uncertainty, and Economics for a Warming World. (2013)

Nicholas Stern, The Economics of Climate Change: The Stern Review

World Bank World Development Indicators (2014)

 

 

The Evolution of Land Reform in Latin America, Thursday at 4:30pm, Steitz 102

Despite recent improvements, Latin America remains the most unequal region in the world.  Historically, one of the most important determinants of income and opportunity is access to land.  In this seminar Dylan Fitz will discuss the justifications for land reform and the implementation challenges that reforms face. The discussion will draw on his evaluations of recent market-assisted programs in Brazil that build upon previous land reforms. fitz

New Look Econ Blog

Econ Dept Feb192015_0020-X2

New look blog, new look department.

Front (l-r):  Hillary Caruthers, Marty Finkler.

Back: Adam Galambos, David Gerard, Jonathan Lhost.

This was taken before Professor Finkler’s Povolny Lecture, ““China Ranks Number One. Or Does It? Should We Care?”

Wisconsin vs. Minnesota – The Battle for Sustainable Economic Growth

In the years after World War II, Wisconsin leveraged its manufacturing base to keep its income per capita above that of its Minnesota rival.  Since the 1960s, however, the pattern has reversed.  Consequently, Minnesota now ranks among the states with income well above the US average while Wisconsin has fallen below this benchmark.  In a recent article, Roger Feldman, University of Minnesota economist, provides  four compelling reasons for this marked change in economic fortune, largely based on growth pattern differences between the Milwaukee Metropolitan Area and the Minneapolis-St. Paul Metropolitan Area

1feldmanONLINE

1. Minnesota diversified its economy more than Wisconsin has.

2. Minnesota did a better job of educating its residents generating fewer high school dropouts and more college graduates.

3. Minnesotans are much healthier than Wisconsinites with, among other factors, lower adult obesity rates and higher spending on parks and recreation.

4. Minnesota located its primary university and state capital in its economic center; Wisconsin chose not to locate these entities in Milwaukee.

For more details on his arguments, check out the article.  In my view, these arguments support the notion that sustained economic growth comes from a vibrant, diverse, urban economy rather than one that tries to preserve economic advantage of past eras at the expense of supporting innovation and entrepreneurship.

Right to Work

Is that FTW?

Governor Walker signed “right to work” (RTW) legislation earlier this week, which it is fair to say has led to mixed reactions among the electorate.   A Wall Street Journal piece touts the “right to work advantage,” whereas Slate.com teaser says “It has never been more painful and humiliating to be a Wisconsin Democrat.”  Owie.

(Curiously, the sign on the table in the photo is “Freedom to Work,” rather than “Right to Work”).

Right to Work laws generally allow employees to work in unionized workplaces without paying union dues. In principle, the free-rider problems caused by the elimation of compulsory union dues mitigates union bargaining power, hence lowering wages (ceteris paribus), and increasing employment.  Clearly, then, this legislation potentially has fundamental implications for employment, wages, output, and probably a whole lot of other stuff.  How is one to sort all this out?

Fortunately, Ed Dolan at EconoMonitor has taken it upon himself to sort it out for us.  He begins by providing a nice review of the history and basic logic of RTW legislation. Following that, he reaches the conclusion that, well, it’s complicated:

The bottom line is that the economic effects of RTW laws are not nearly as clear-cut as their advocates and opponents make them out to be. Correlations of RTW laws with wages and employment are economically small even when they are statistically significant. Most problematic of all is the question of causation—does RTW cause observed differences between states, or do pre-existing differences cause the passage of RTW laws?

It’s almost too bad that the effects are so benign, as RTW is a genuine political dynamo. In response to Walker’s signature, President Obama took to his Twitter feed today to “blast” the Wisconsin legislation and encourage the 25 states that don’t have RTW legislation to keep it that way.

 

American Household Income Has Been Stagnant Since the 1970s or Has It?

As you might guess, it all depends upon what one chooses to observe.  A new article by Robert Shapiro pulls the pieces apart to show that median household income has not moved much since the 1970s; however, it varies greatly by age group and presidential regime.

http://www.brookings.edu/~/media/Blogs/FixGov/2015/03/shapiro_figure1.png?la=en

For example, 25 – 29 year olds in 1975, 1982, 1991, and 2001 all saw their household incomes rise for at least one decade after those designated dates.  Furthermore, the 1980s and 1990s saw relatively continuous median household income growth for those aged 25-29 at the beginning of each decade with incomes falling since the early 2000s.  Even those 25-29 saw their incomes rise post 2001.

“Shapiro concludes that ‘our current problems with incomes are neither a long-term feature of the U.S. economy nor merely an after-effect of the 2008-2009 financial upheaval.’ Nor are they driven by ‘economic impediments based on gender, race and ethnicity, or even education.’ He identifies two structural causes; globalization and information technologies. But he also asks us to think about what Reagan and Clinton did that the two presidents of the 21st century did not do. ‘The Clinton and Reagan fiscal approaches supported stronger rates of business investment than seen under Bush-2 or Obama. In addition, their support for aggregate demand included public investments to modernize infrastructure, broaden access to education and support basic research and development.’ ”

When pundits discuss the economy in general and “middle class economics” in particular, they should bear the above evidence in mind. As is typically the case, averages hide more than they reveal.

Playing the Market

For those of you interested in financial markets, we have an upcoming talk and a fall seminar that may be of interest.   First up, this Monday, Grinnell College professor, Mark Montgomery, will give a lecture about the ins and outs of “The Notorious Efficient Market Hypothesis,” as he calls it.

The efficient market hypothesis is essentially in two parts:  First, that all publicly available information is immediately internalized into the extant stock price.  Immediately is pretty fast, so it’s tough to beat the market.  So, secondly, it is not possible to earn above average returns without taking above average risks — a disheartening message for any would-be financiers.   I’m certain that Professor Montgomery will give us a lively talk.

The talk is Monday at 4:30 p.m. in Seitz 102.

For those of you interested in learning about how economists think about investments should consider the Investments directed study that we will offer in the fall of 2015.  In the next few weeks we will roll out our 2015-16 schedule, so watch this space for details.

2015 American Economic Association Meetings

Every January, thousands of economists gather for the American Economic Association meetings, to present papers, discuss ideas, and hire new faculty members (!).   Leave it to Nate Silver and his Five Thirty Eight website to send correspondents to cover the proceedings and reports back on what they consider to be the interesting sessions.  These reports include session summaries of Behavioral Economics and Public Policy: A Pragmatic Perspective;  The Economics of Secular Stagnation; and A Discussion of Thomas Piketty’s “Capital in the 21st Century”.  Here is what the last one looks like:

Session Title: A Discussion of Thomas Piketty’s “Capital in the 21st Century”

Presenters: David Weil, Alan J. Auerbach, N. Gregory Mankiw, and Thomas Piketty

Key takeaway: Thomas Piketty, the French economist whose book Capital in the 21st Century — which documented a surge in economic inequality — was a surprising best-seller last year, stood by his work despite some academic economists questioning his statistical analysis and policy recommendations.

Discussion: In his book, Piketty argues that inequality rises when the rate of return on assets (“r”) is higher than the economy’s growth rate (“g”). To him, this is, the principal cause of the current high levels of inequality. He wants to tax wealth to reduce this inequality.

The other economists on this panel had some problems with Piketty’s data, but even more so with his analysis of rising inequality. Specifically, they thought Piketty overestimated “r” in not adjusting for other variables such as taxation and risk.

They further argued that even if he was right, they disagreed with his suggestion for a global wealth tax. Instead, they would favor a progressive tax on consumption — for example, an 80 percent tax on yachts.

Piketty responded that it’s hard to define and measure the consumption of the extremely rich. As he remarked, “billionaires consume more than food or clothes — they consume power, politicians, journalists, and academics.” He argued that a wealth tax has practical advantages over a progressive consumption tax: it’s easier to implement because wealth is easier to define.

Not surprisingly, the Five Thirty Eight correspondents gravitated to some of the high-profile sessions where some of the bigger names in the profession participated.  The  secular stagnation session, for example, includes Greg Mankiw, William Nordhaus, Larry Summers, and Robert Gordon, each “famous” in his own right.

If the titles above have piqued your interest, you can go to the AEA website and check out webcasts of selected sessions, including each of the sessions listed above.

 

FT Best Books List

Professor Finkler points me to The Financial Times ten best books of 2014, including these that have been on my radar in one form or another:

We will be reading an abbreviated version (via Foreign Affairs) of the Calomiris and Haber book in Political Economy of Regulation course this term.  They forward a theory on why some banking systems are stable and have few crises (Canada, Scottland), whilst others are more susceptible to shenanigans and hence are less stable (U.S., England).

The Dixit book might be just what we are looking for in terms of a “textbook” for Econ 100, as the Very Short Introduction series is generally excellent.   I have also been collecting links for the Piketty book for the better part of the last year and a half.   I have read at least ten review pieces, and perhaps this summer I will sit down and slog through it.  More to come on that one.

Finally, I am starting up with John Lanchester, a name possibly more familiar to English majors than economists.  Nonetheless, Lanchester seeks to use “plain language” to convey complicated economics and financial terms to the layman.  More on that later.

Annual Holiday Guide

It is once again that time of year where we bid you Happy Holidays from the Economics profession.  Long-time readers may recognize this post from the past three or four year’s worth of iterations, but I guarantee 10% new content per year.

And, away we go!

Up first, we have a truly heroic figure, Joel Waldfogel, author of Scroogeonomics.*  I don’t know your preferences as well as you do, so whatever I give you is probably sub-optimal, unless you tell me exactly what you want.  And even then, wouldn’t you rather just have the cash anyway?  For those of you who are intermediate micro students, you know that the kids (a.k.a., utility-maximizing agents) always prefer cash over any in-kind equivalent.

Kudos to Professor Waldfogel for willing to be “that guy.”

It is probably noteworthy that the median leading economist probably doesn’t believe this.

Although Berkeley’s Hillary Hoynes is in strong agreement, her colleague Carl Shapiro cries “Balderdash!” Princeton’s Angus Deaton goes so far to say that “This is the sort of narrow view that rightly gives economics bad name.”  Harvard’s David Cutler is not sure what to say, but he is sure that he doesn’t “want to be a Scrooge”. (See here for a complete summary, replete with Christmas Cards!).

Speaking of Scrooge, was he really such a bad guy?  Not so, says Steven Landsburg. Let’s give it up for our annual Scrooge endorsement from this classic Slate piece:

In this whole world, there is nobody more generous than the miser–the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer–because you produced a dollar’s worth of goods and didn’t consume them.

Ah, I just feel all warm and fuzzy inside.

Moving on to The Atlantic, where we have “The Behavioral Economist’s Guide to Buying Presents.” Now this is some truly indispensable advice.  Like Waldfogel above, the money point is to just give money. But, for the true romantics who feel compelled to give a gift, the behavioralists recommend this:

Buying for a guy? Get him a gadget. Buying for a girl? Get her something expensive and useless.

The gadget I get.**  The expensive and useless? That’s from Geoffrey Miller’s, The Mating Mind.  Here’s a brief explanation of courtship:

The wastefulness of courtship is what makes it romantic. The wasteful dancing, the wasteful gift-giving, the wasteful conversation, the wasteful laughter, the wasteful foreplay, the wasteful adventures.  From the viewpoint of “survival of the fittest” the waste looks mad and pointless and maladaptive… However, from the viewpoint of fitness indicator theory, this waste is the most efficient and reliable way to discover someone’s fitness. Where you see conspicuous waste in nature, sexual choice has often been at work.

This presents something of a conundrum because “expensive and useless” seems to be at odds with Waldfogel’s hyper-utilitarian cold, hard cash suggestion.

So if you want to hedge your bets, give her Euro!***

…

* The book is a follow up to the classic, “The Deadweight Loss of Christmas.”  Clearly, the book title Scroogonomics can be chalked up to the value-added of the publishing house.

**Conceptually, that is. I generally get ties and socks. This year I expect shoelaces.

***Okay, that was a solid joke back when I wrote it and the Euro was doomed.