Young Economics.

Archive for June 2009

Interesting Links: The Global Warming Edition

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Here are things that I found interesting, some of which have to do with the environment.

  • George Monbiot doesn’t like the Waxman-Markey climate change bill.  Quoth he: “It would be laughable anywhere else.”
  • While the US passes Waxman-Markey, the Australian parliament is apparently shooting down their own climate change legislation.  According to The Wall Street Journal, this is because “the number of skeptics is swelling everywhere.”  Is it reasonable to expect average voters to be able to form a sound opinion on this matter?
  • Gilbert E. Metcalf says: Use carbon pricing, not technology subsidies.  I agree.
  • Brad DeLong builds the simplest possible behavioural finance bubble model.
  • In this new paper, Telyukova and Visschers try to address the problem of precautionary money demand in a monetary macro model.   In their model, consumers are subject to idiosyncratic risk (modeled as shocks to their utility functions) that requires them to hold money as a precaution.  The matter of precautionary money demand is empirically important, and it plays a major role in the Keynesian understanding of the business cycle that has recently come back into fashion.  Still, this model (if I understood it correctly during my quick read-through) assumes that the distribution of the preference shocks is known.  This is quite different from the Keynesian understanding of ‘fundamental uncertainty.’  Post-Keynesian economists would deny that people have information about the distribution of future shocks.
  • Libertarian feminist Wendy McElroy writes on the ‘fetal rights’ approach to the abortion debate: “Basically, anti-abortionists pit the woman’s rights against the alleged rights of the fetus, and give the latter priority.” She lists nine implications of anti-abortion arguments that the anti-abortion crowd apparently doesn’t like to acknowledge.  I don’t agree with them all because I am not a natural rights libertarian.  Will the abortion issue ever cease to be controversial?  Should it?  Here is an interesting discussion about how the Obama administration should approach the issue.
  • New reports from the OECD, the FAO, and the World Bank say: Africa alone could feed the world.  “Some 1.6 billion hectares could be added to the current 1.4 billion hectares of crop land [in the world], and over half of the additionally available land is found in Africa and Latin America.”  Commenters think that the reports probably ignore energy and environmental issues.
  • Michael Jackson is still dead.  How does it feel?  (How does it feel?)

Written by Alex

June 27, 2009 at 6:30 pm

Posted in Uncategorized

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Jones and Romer’s Facts

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Every student of macroeconomics learns about Kaldor’s facts, the set of ‘stylized facts’ that Kaldor (1961) used to frame the neoclassical research program in economic growth:

  1. Labor productivity (output per worker) has grown at a constant rate
  2. Capital per worker has grown at a constant rate
  3. The real interest rate (the real return on physical capital) has been stable over time
  4. The capital-output ratio has been stable over time
  5. The capital and labour shares of output have been stable over time
  6. Among fast-growing countries, there is considerable variation in output growth rates.

Neoclassical growth theory was considered a successful research program because it was able to explain the first five of these facts — and perhaps the sixth as well, taking into account the idea of conditional convergence.  But as that research program played out, it became clear that factor accumulation alone was not enough to explain all of the cross-country variation in per-capita output.

In a new paper, Charles Jones and Paul Romer lay out a set of ‘new Kaldor facts’ that should frame the next generation of growth theory in light of recent findings.  While Kaldor focussed on physical capital, Jones and Romer shift the focus to other variables: ideas, institutions, population, and human capital.  Their stylized facts are:

  1. Increases in the extent of the market. Increased flows of goods, ideas, finance, and people — via globalization as well as urbanization — have increased the extent of the market for all workers and consumers.
  2. Accelerating growth. For thousands of years, growth in both population and per-capita GDP has accelerated, rising from virtually zero to the relatively rapid rates observed in the last century.
  3. Variation in modern growth rates. The variation in the rate of growth of per-capita GDP increases with the distance from the technology frontier.
  4. Large income and TFP differences. Differences in measured inputs explain less than half of the enormous cross-country differences in per-capita GDP.
  5. Increases in human capital per worker. Human capital per worker is rising dramatically throughout the world.
  6. Long-run stability of relative wages. The rising quantity of human capital relative to unskilled labour has not been matched by a sustained decline in its relative price.

Jones and Romer demonstrate how far our knowledge of economic growth has come since the 1956 papers of Solow and Swan, but also how many unanswered questions remain.  While there are many growth models that deal with one or two of these facts, Jones and Romer challenge the profession to build a theory to incorporate them all, just as neoclassical theory incorporated the original Kaldor facts.  Given the complexity of the variables (particularly institutions) and the relationships between them, this is indeed a daunting challenge.

It’s also worth asking what the shift in focus away from physical capital and toward these more complicated variables implies for growth policy.  If growth is driven by savings and capital accumulation, you can just accumulate capital and achieve economic growth.  This is how the USSR achieved industrialization (not that I am advocating their particular approach), and I think some have argued that the growth miracles in Japan, South Korea et al. were also mainly driven by accumulation.  But I don’t think there’s much good literature on how (or if) countries can generate pro-growth institutions through policy, especially informal institutions like trust, respect for the rule of law, and so on.

Written by Alex

June 26, 2009 at 4:52 pm

Things are bleak for the Tar Sands

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The WTO has offered its first insight into how it will deal with environmental tariff measures.  From the financial times (link):

In a report to be published today, written jointly with the United Nations Environment Programme, the WTO said it was possible to implement border measures for environmental reasons under its rules.

“Rules permit, under certain conditions, the use of border tax adjustments on imported and exported products,” said the WTO. “The objective of a border tax adjustment is to level the playing field between taxed domestic industries and untaxed foreign competition by ensuring that internal taxes on products are trade neutral.”

The issue is crucial to talks on carbon policy.

Some US businesses and politicians argue that to put a price on carbon could put domestic companies at a disadvantage compared with cheaper imports from places with no – or more lax – rules. One possible way of preventing this would be to impose tariffs on imports from states without robust carbon regimes.

This is a critical issue for Canada and our tar sands.  Its been said that oil produced from the sands generates five to seven times the carbon emissions as does that produced from conventional sources.  So could we encounter five to seven times the tariff?

It depends on whether the duty is slapped on specific ‘dirty’ countries, on crude in general, or if the States is willing to catergorize oil imports by source and type.  The first two options shouldn’t pose a huge threat, but if they make a distinction, the party would be over in Alberta.

Written by jk

June 26, 2009 at 7:30 am

Some links

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  • People can marginally improve the accuracy of guesses through dialectical bootstrapping.  The idea is presented as though it were a sort of one-person version of the ‘wisdom of crowds’ principle.  I don’t think this is quite correct; in dialectical bootstrapping, the second guess is not independent of the first.  Nevertheless, the idea is neat.
  • Prominent utilitarian philosopher Peter Singer wonders, “Can business be ethical?” I have never taken a business ethics course or even read much in the field.  Even leaving aside the question of whether ‘ethical businesspeople’ could survive in the competitive business world, what are some precise examples of common business practices that would not survive a shift toward more ethical business?
  • Are we still heading for a new Great Depression?  Gary Burtless at Brookings suggests that it is unlikely.
  • From Maclean’s: Why Barack Obama is bad for Canada.  Their basic point is that Obama’s policies will be bad for the Alberta oil sands industry, and that this would be an economic disaster for Canada.  My view is that carbon energy should be harvested if and only if the marginal benefit exceeds the marginal cost, including the environmental cost.  As long as oil prices trend upward in the long run, it would take a very high carbon price to render the oil sands unprofitable.  Policies specifically designed to punish ‘dity oil’ production would be harmful, and I suspect that Canadian officials will fight them.  But a generalized carbon pricing regime wouldn’t be bad, especially if it is accompanied by reductions in other taxes.  If only we had a politician in Canada who would propose some kind of green tax shift, to prepare us for these developments in the United States. . . .
  • Michael Jackson is dead.  Don’t it make you wanna scream?

Written by Alex

June 25, 2009 at 4:28 pm


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This article makes me queasy (link).  Written by Margaret Chan, Director General of the World Health Organization, and Ban Ki-Moon, Secretary General of the United Nations, the story goes that the world is all in it together while tackling viruses and pandemics, highlighted by the recent ascent of the H1N1 virus.  They use this to jump into their argument for the continued support of investment into global health issues, which goes something like this:

Continuing to invest in global health makes sense both in terms of lives and dollars saved. Healthy people are more productive. They take fewer days off work. They live longer, go further in school, and tend to bear fewer and more prosperous children as they invest more in the children they do have. Studies have shown that investments in health care can yield a six-fold economic return. To offer but one example: the global impact of maternal and newborn deaths has been estimated at US$15 billion a year in lost productivity.

And yet, when hard times hit, spending on health is often among the first things to be cut. During past recessions, especially in developing economies, the best care has tended to go to the wealthy; the poor, too often, have been left to fend for themselves. But the social and economic health of any society depends on the physical health of all its members. When governments cut back on primary health care for their poorer citizens, the entire society ultimately pays a high price. Today, large parts of Africa, Latin America, and Asia have still not recovered from mistakes made during previous economic downturns.

It’s not the subject matter that makes me queasy, but how Moon and Chan have decided to intice  response.  They don’t plead towards our sense of compassion, morality or virtue, but instead stroke our lust for dollars and cents.  Now, I certainly don’t intend to imply they’ve taken the wrong approach to generate action.  It just makes me blue that this is probably the right way to make global society care.

Written by jk

June 24, 2009 at 2:21 pm

Posted in Ideas/Opinions

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Banning the Burqa

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Good or bad idea?  France thinks good (link).

The first was Mr Sarkozy’s firm line on the wearing of the burqa, the Islamic head-to-toe covering, in France. The garment, he declared, was “a sign of subjugation” and as such was “not welcome on French territory”. Underlining the French principle of laïcité, or strict separation of the state and religion, he argued that this protected religious freedom and belief.

The question of the burqa was “not a religious problem”, he said, but a question of “the dignity of women”. In 2004, France banned the wearing of “conspicuous” religious symbols, including the Muslim headscarf, in state schools, hospitals and administrative buildings. A cross-party group of parliamentarians will shortly begin a consultation on whether to ban the burqa, which is by definition already outlawed in public institutions, altogether.

The matter is delicate, not only because some of France’s Muslim groups consider that such a move would further stigmatise Islam. It also touches a principle that Barack Obama laid out in a recent speech in Cairo aimed at the Muslim world. America’s president said that “it is important for Western countries to avoid impeding Muslim citizens from practising religion as they see fit—for instance, by dictating what clothes a Muslim woman should wear.” Muslim women in the French government, however, back the idea of a ban on the burqa. Fadela Amara, the cities minister, has called it “a coffin that kills fundamental liberties”. With his hard line, Mr Sarkozy seems to be behind a ban, although he will now await the outcome of the parliamentary mission.

Written by jk

June 23, 2009 at 7:06 am

Posted in Just News

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Political ideology = f(mathematical tractability)

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One of my favorite things about economics is its attempt at scientific rigour through modeling. A good model makes predictions and can be falsified. A heavy reliance on math helps cut through the sort of semantic bullshit that helps post-modernist professors avoid saying anything in 500 pages.

The general opinion of economists (if there is such a thing) is pretty insensible to unsupported opinions. Every schmo, douche and ragamuffin has an opinion about the economy. To get a Nobel, you need an opinion, sure. But it has to be properly modeled and then give interesting results.

This is the source of much of the mockery concerning economics. All our assumptions about purely rational, self-interested consumers, for example, are clearly wrong. But they do make for some whiz-bang models that do a decent job explaining what’s happening in the economy. Everyone knows that we should also take into account people’s irrational exuberance and despair, their hopes and dreams, their penchant for terrible, terrible decisions. But how do you model any of that? The mathematical challenges are beastly.

Our need that any idea be mathematically tractable before it becomes canon is, I believe, one of the reasons why economists skew to more right-wing economic views. The free market is a gigantic mathematical crutch. A world of rational consumers, all finding their optimal consumption bundles at the tangency point of a separating hyperplane of free-market prices is a sunlit world we can wander at will. Take away the assumptions and it’s a dark, wolf-infested wilderness.

(Incidentally, communism also has some mathematical legs. Economists like to compare real-world results unfavourably with those generated by a wholly theoretical ‘social planner’ who knows all, sees all and is concerned only with the net welfare of the citizens of his domain. In this situation, the inefficiencies caused by public goods and externalities are gone, to the benefit of all. Sadly, when the theoretical social planner becomes the very real Stalin, the optimality breaks down somewhat.)

My point in all this is not “let’s all be sad.” Mathematical economics is developing. We can handle ambiguity, status quo bias, risk aversion, liquidity constraints, inter-dependent utility, expectations, hyperbolic discount rates, institutions, multiple equilibria and on and soporifically on. Each of these are incredibly boring and esoteric, yes, but they all have immense consequences for our ability to model the world more realistically. And the better we get at modeling the world, the more diversity of opinion economic orthodoxy can tolerate.

For example, twenty years ago an economist might look at Russia and say, “hey, they’re not doing so hot. How about we look at our models and see what they say. How shocking, more free markets would be optimal. Let’s buy them some of those.” We can still do that, but now we can say, hey, maybe Russia is in a crummy equilibrium and needs a big push of investment to get it to a better one. Or maybe parasitic institutions and perverse incentives are pushing entrepreneurs towards corruption rather than productivity. Or maybe the economy has insufficient investment because the average Russian is risk averse, has a hyperbolic discount rate, and expects that inflation will gnaw away at any savings he puts in the bank. I don’t actually know much about Russia, but if I actually cared I could make a hypothesis, throw together any number of models and see if they make any accurate predictions. No longer does our own mathematical ineptness constrain us to the most bare-boned skeleton as proxy for the living economy.

If nothing else, improved ability to model the world may just allow us to agree with things we agreed with anyway. Welfare state? Subsidized health care? Gays marrying (I may be over-stating the power of models with that one)? I’m a fan. But now I can be a fan on a professional level.

Written by manopoly

June 16, 2009 at 7:46 pm

Posted in Uncategorized