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Archive for March 2009

Incentives

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The problem with blogs is that they are generally self-absorbed, irrelevant and horribly boring. Even worse than that, however, is that their owners don’t post on them enough. Allow me to reproduce the progression of post titles common to 90% of blogs, from inception to unnoticed demise:

12/04/2003 – New blog!
13/04/2003 – School is so boring
14/04/2003 – Can you believe Tim?
18/04/2003 – Pictures of my trip to North Dakota
24/04/2003 – What’s up with you guys? (0 comments)
17/05/2003 – Sorry I haven’t posted for so long
05/07/2003 – I’ve been really busy with bowling…
02/09/2005 – Sorry I haven’t posted for so long

You see the pattern. Posting is powerfully fueled by enthusiasm, then weakly by guilt, then finally by nothing. I am certainly not accusing this blog of approaching the stage of life when it waits and waits for family to visit and/or death. But I think that we, as economists, can establish an incentive structure that prevents this from ever happening.

Here is my proposal. We declare open season on the person whose latest post is the least recent. Everyone who has posted more recently, i.e. everyone, is allowed to gently rib the least prolific of our friends. Now, every post should have a chance to breath at the top for a while, so a few days or a week are an acceptable gap. But as time passes, this gentle ribbing can become a little rougher, moving up to drawing penises on the offender’s face when they fall asleep. If one of us has been ignoring the blog for some ridiculous amount of time, say a year, we might have to bring out the big guns and leave him hanging when he goes for a high five. Let’s hope it never comes to that.

But it shouldn’t have to. Much like central bank guarantees, the best part about credibility is that once established, it never has to be used. Hopefully fear alone will suffice to keep everyone hopping. Because fear is a far more powerful motivator than enthusiasm or guilt.

As of now the clock is ticking on… Alex. That jerk.

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Written by manopoly

March 31, 2009 at 11:05 pm

Posted in Uncategorized

Stupid Media…

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I have a love/hate relationship with the Globe and Mail, one of Canada’s premier national newspapers.  Today it’s all about the hate.  This morning I woke up to an article about Harper traveling to the States to conduct a series of media interviews (link).  Here’s the lovely little spin they’ve decided to put on it:

It’s part of a strategy to limit his Canadian interrogations – where the questions tilt toward the specifics of Canada’s troubled domestic economy – in favour of foreign media who can be expected to compare this country favourably to its international partners.

It’s nice how the Globe embraces reporting drawn out of thin air.  The sad thing is that millions of Canadians will wake up and most likely take this idea at face value.  They will believe they now have insight into Harpers master plan to manipulate us all.

The really sad thing is that the article contradicts itself completely.  In the direct paragraph before they write:

Mr. Harper did provide Radio-Canada with a rare interview on Thursday evening and is scheduled to give another tomorrow to CTV.

It’s just so dissapointing that this is from one of the premier news sources in Canada.  To close, I’ll offer a few oher spins on why Harper may be headed South.

  • Talk up the Canadian American trade relationship to help dissolve protectionist sentiment.
  • Try and garner American support for the initiatives Canada wants to push at the upcoming G20 summit.
  • Return the courtesy president Obama showed Canada in his latest visit.

Written by jk

March 28, 2009 at 8:36 am

Posted in Ideas/Opinions, Just News

Tagged with , ,

Incentives

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I recently became the last Facebook hold-out among my circles of friends.  I am really feeling the pressure to become an active user now.  (If Tom Schelling has taught us anything, it’s that we’ll inevitably converge to the extreme equilibrium in which everyone signs up.)  Social pressures provide strong incentives.

I do have an account, which I have very, very rarely used.  Today, I decided to log in to see how it felt.  I didn’t feel much desire to send any friend invitations or write on any walls, but I did notice a delightful pair of ads on the sidebar that beautifully illustrated different forms of incentives — and perhaps explained why the Conservative Party is so much more successful than the NDP:

Get involved?  Eh, I'll take the money...

Get involved? Eh, I'll take the money...

So there you have it.  Five minutes of thinking about Facebook provided two examples of incentives at work.  Maybe I have been missing out.

Written by Alex

March 27, 2009 at 6:57 pm

Posted in Uncategorized

Tagged with

Evolutionary Economics

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I’m confused. Over the last little while we have had some truly scary commentary. We’ve heard about how dire the current recession is via the IMF (link). How world trade has fallen off a cliff (link). How Britain couldn’t unload its recent debt offering (link) . And lots on how bad the Geithner plan is to reform the US banking system. (1) (2) (3).  What’s confusing me are the signs of life starting to show in the economy. Markets have roared in March (link). Consumer spending is improving (link). And housing starts show signs of a bottom (link).

From my point of view, there appears to be a disconnect between what the experts are reporting and hypothesizing (ala the doom and gloom above) and how the regular Joe is actually reacting in the marketplace. Granted, those at the top will come out chucking terms like ‘Bear Rally’ to explain what we’re seeing. They claim it’s all happened before in the past, and our data continues to point us down. But I wonder how relevant the empirics can actually be.

At this point, I imagine Patrick is sitting slack-jawed and stunned, wondering why he agreed to write a blog with me. He loves data. And rightly he should. Economists distinguish themselves from other social scientists by interpreting history methodologically. We cast our eyes over past figures, crunch a few numbers and present sound conclusions from logical study. It’s great. Power over the data has given us power over the economic laws and principles past generations have followed. But here is where the problem lies.

In an earlier post, I briefly sketched the conclusions Rogoff and Reinhart came to in a paper detailing an empiric study into past major financial crises (link). To sum it up, they produced observations about how long recessions typically last, and classified our current situation as quite early in its lifecycle vs. historical precedents. But aren’t there problems with comparing today with yesterday? For instance:

  • Today, we are expansively networked, with current news, results and reports travelling globally within seconds.
  • The crisis is taking place in the US, the world’s economic hub. Every new event has direct implications for every economy, investor and labourer.
  • The US dollar serves as the world’s choice currency reserve, making every monetary decision crucial to central banks everywhere.

To me, these points imply that every statistic an economist could collect today will be much more sensitive to the underlying atmosphere than in the past. The cliff-diving we’ve seen in the data seems to support this hypothesis. But couldn’t this also mean that the bottom could come much faster than before? That recovery could take hold at a faster pace? Unfortunately, we just won’t know until it happens. It would be wonderful to try and quantify the effect of the internet revolution on markets and relationships. To see how defeating the Y2K demon, and fully embracing an open and connected world has changed how people react and relate to things. But we just can’t do it. If you try and build any scientific, economic conclusion from looking at 5 years of data, you are setting yourself up for failure. There’s just no way to make inferences about what’s going since each year is prone to random disturbances.

In my opinion, this is where modern economics fails. The history of the field has placed so much value and weight on method and logic that to step outside the framework would threaten any expert’s status. Imagine the administration is accepting applications to hire a new chief-of-staff economist to solve the crisis. On one, the applicant writes “it appears that x may be occurring, and thus I propose…”, while another contains “the situation is similar to the past, where y was proven to have occurred so I propose…” Today, the second would be seen as the more able economist, and hired to combat the problem.

Of course, to hire the first has its problems. Anyone can formalize an opinion about what’s happening right now, but only a few have conducted rigorous study in the application of economic law. What’s needed is a compromise between the two approaches. This is not so different from the Lucas critique, which criticized using past data realized under older policies to evaluate regime shifts. Here, I am criticizing the reliance on empirically proven economic relationships to hypothesize the current state of affairs. We live in an evolving system which operates under constantly changing rules, norms and beliefs. Shouldn’t we then rely on economists and experts who look at the world from an evolutionary perspective other than an empirically driven one?

Going forward, I believe economists should study history not in hopes of finding any definite laws or outcomes, but looking for signs of trends and change. They can then use their understanding to formalize logical guesses about where we are today that won’t need a structured model to validate the conclusion. In doing, we would be accepting that nothing is the same as before, and nothing will be the same as now. We would be accepting that economics is not a science of law, but a science of evolution.

Written by jk

March 27, 2009 at 10:00 am

Marxism 2009!

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I trust that you’ll all be joining me there this July.

All right, I’m not actually going.  I could perhaps justify traveling to London for a Michael Jackson concert, but not for Marxism 2009.  Still, I think it would be fun to attend a conference of Marxian economists.  I wonder if Vancouver ever hosts any?

On a related note, I have never been able to find a good blog written by Marxian economists.  Or post-Keynesians, for that matter.  Where are all the radical leftist economics blogs??

Written by Alex

March 25, 2009 at 4:59 pm

Maximizing the benefits of public spending

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This evening I discovered that the Health Council of Canada is endeavoring to gather information and promote discussion of “value for money” in Canadian health care.  They kicked things off last month with the release of this non-technical document that outlines the sorts of questions they hope to address.

The fundamental issue is how best to allocate resources in the health care sector.  Resources are finite and have to be rationed somehow.  In Canada, the political process has determined that we should try to avoid using the market mechanism to do the rationing in health care.  That’s fine, but it means that the resources have to be rationed via some other mechanism.  The question is: is the current allocation of government resources – both within the health care sector and between health care and alternative areas of government activity – acceptable?

According to the Council’s document, about forty percent of provincial government revenues are spent on health care, and spending continues to increase as consumers demand more services.  I guess there’s nothing wrong with those facts, but it seems that we don’t have any good information about what kind of return we are getting on the marginal dollar of health care spending.  If the marginal dollar (or several thousand marginal dollars) goes toward keeping an elderly dying person alive for one extra week, isn’t it likely that we would increase social welfare by reallocating that spending to some other target that would deliver longer-term returns?  I have heard (though I have never investigated the claims) that some non-negligible proportion of the increase in health care costs comes from spending on things like new drugs which don’t have any demonstrable benefits relative to the old drugs but which cost much more.  If that’s true, then I should think that a well-run system of socialized health care would prevent doctors from prescribing these new drugs.  Those dollars could be spent elsewhere – on infrastructure, education,* social assistance, tax cuts, etc.

It seems to me that these are the kinds of decisions that someone has to make if we are not going to allocate resources according to willingness (or ability) to pay.

I’m not really making any claims about how the Canadian health care system should be run.  I don’t know anything about it.  I merely wonder:

– how seriously do policymakers take these questions?
– what incentives do policymakers have to address these questions?
– do we have any good measurements of the marginal benefits of various types of government spending in Canada?
– how much of government spending delivers negative net benefits to society at the margin, taking into account opportunity cost?

None of these issues is new.  I was reminded of them when I found the Council’s web page and I decided to post about it because I don’t know the answers to these questions.  We have several co-bloggers here at Young Economics who have studied the economics of government activity.  Is it possible that they have any insights to offer?

* This post could just as easily have been written about the marginal benefits of government spending on education.  However, I decided that I should refrain from suggesting that such spending could be anything but beneficial – at least until I am no longer a beneficiary of the state’s largesse in that respect.

Written by Alex

March 24, 2009 at 9:19 pm

The Strategic Bean Reserve

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James and I recently had a very rational debate about ideal agricultural policy. I was smashing beer bottles and screaming that subsidies were an abomination, and he was holding me back with a chair and saying that they were a justifiable cost to ensure that our food supply cannot possibly be interrupted. He makes a good point, and now that I’ve sobered up I’ll admit that there are some rare subsidies that aren’t nightmarish shambling horrors.

Still, it seems to me that the fact that there is a reasonable argument in defense of ag subsidies actually makes things worse. What happens is that the reasonable argument goes to Parliament and gets ambushed by interest groups who savagely irradiate it. It gets cancer and grows to grotesque, unhealthy dimensions far beyond its original proportions. Then it destroys Tokyo. That’s bad policy.

(I’ve heard other justifications for agricultural subsidies of course, but they’re mostly along the lines of preserving ways of life. I’ll back those up as soon as I get my first subsidy for preserving the lifestyle of the ‘smart-alecky drunken irishman.’ The other one you hear a lot is that agricultural earnings are highly uncertain and variable. That’s true, but no more so than prostitutes, prospectors and used car salesmen.)

So let’s say our objective is to avoid a food shortage, what then would be the best policy? First, it would be best to trade with other nations. Otherwise we’d be subject to the vagaries of our own food supply. There’s no justification for protectionism.

Even within a global trading system, subsidies are not the cheapest way to preserve a constant food supply. In the unlikely event that all our trading partners close their borders because of war or their own domestic famines, we of course would want to ensure that we don’t starve to death. Just like the US has a strategic oil reserve, we could have a strategic bean reserve, stored in massive weevil-proof silos.

The bean reserve would be sufficient to feed the nation long enough for more farms to become operational. To speed this process up, we might want to have a farm equipment reserve and some cryogenically frozen farmers kept in storage. (If the technology doesn’t work out, we can eat them too.)

The best part is, you wouldn’t even need to keep the bean reserve filled (which is for the best, because no silo is truly weevil-proof). Theorizing that subsidies are keeping us out a famine situation is already far-fetched (no democracy has ever, ever had a famine), but to expect that such an eventuality would come about without any advance notice is even unlikelier. If you accept that, we could keep the bean reserve below capacity until certain conditions are met. For example, if agricultural production in Canada drops below 60% of domestic consumption, fill the beanery to 50% capacity. Or, if a trade war starts brewing with a major food trader, fill the beer silo an additional 10%. By increasing demand in times of low production, this would also serve as a temporary subsidy to farmers, though it wouldn’t be restricted to domestic farmers. In fact, since other nations would probably still be subsidizing their farms, we would get our strategic bean reserve filled at bargain-basement prices.

What’s clear to me is that across-the-board agricultural subsidies are not the solution to any problem other than a shrinking agricultural sector. But I don’t consider that to be a problem.

Written by manopoly

March 22, 2009 at 9:39 pm

Posted in Uncategorized