Economics

Kevin Vallier, a philosopher, considers on Facebook the optimal journal submission strategy:

I was implicitly assuming the best strategy was to start with the best journals, receive rejections, and then work my way down, lest my piece get accepted by a sub-par journal first. But now I’m thinking it may make more sense to start from “the bottom” or at least mid-tier journals and work my way “up” if I can assume that my pieces will generally be rejected several times, even by the mid-tier journals. I think I was overestimating the risk of publishing my work in mid-tier journals and underestimating how much rejections can improve the quality of the paper. In light of this, I want to construct a “journal ladder” that political philosophers and political theorists can “climb” towards the best journals. 

Let’s put some numbers on this to see what makes sense. The expected utility from submitting to a high quality journal first is:

HighFirst = Ph* HV + (1 – Ph)*(Pl*mult)* 1

The first term, Ph*HV is the probability of acceptance at a high quality journal times the value of acceptance at a high quality journal. If the paper is rejected, which happens with probability (1-Ph), then you go to a low-quality journal where the paper is accepted with probability Pl times the multiplier which you get because of suggestions and comments from the referees at the high quality journal. The value of the low-quality journal is set to 1 so HV>=1.

Now what about low first:

LowFirst = Pl*1 + (1 – Pl) (Ph*mult)*HV

if you submit to the low quality journal and are accepted you get Pl*1, if the low quality journal rejects which will happen with probability (1-Pl) you submit to the high quality journal which accepts with probability Ph*mult and if accepted you get HV.

Now let’s put some numbers on this. The probability of acceptance at a high quality journal is 5-10%. The rate at the AER in recent years, for example, has been about 7.5%. Let’s say 10% and for a low-quality journal 20%. These rates are conditional on being the type of paper that is submitted to the AER not any random paper. (These rates are also reasonable for philosophy journals.). What’s the value of HV, the high quality journal relative to the low quality journal? Let’s say between 1 (equally valuable) and 10. And the multiplier? 1.5 would be very generous. 1.1 might be reasonable on average, 1.2 if you are lucky. Given these numbers let’s consider LowFirst-HighFirst so positive numbers mean that the LowFirst strategy is better, negative numbers that the HighFirst strategy is better. Here’s what we get:

OptimalStrat

The way to read this is that if the multiplier is a hefty 1.5 then LowFirst is superior to HighFirst if a high quality journal has a value of at least 3.5 (relative to the low quality journal at 1). If the multiplier is 1.3, however, then LowFirst is optimal only if the high quality journal is more than 8 times as valuable as the low-quality journal. And for a multiplier of 1.2 LowFirst is never optimal.

Thus the LowFirst strategy is better the higher the relative value of a high-quality journal, the bigger the multiplier and also the lower the acceptance rate at the low quality journal . The lower the acceptance rate at the low-quality journal the lower the cost of submitting it there in order to earn the multiplier.

I conclude that the high-value first strategy is usually optimal. All the more so since there are good substitutes for submitting to a low quality journal. Namely, submit the paper to a conference, circulate the paper to friends, enemies (especially) and others to get comments. The multiplier with this approach will be at least as large as with the submission approach and the opportunity cost will be lower.

Their new paper is here, ungated here (pdf), here is the key passage:

We have shown that in the model with capital, the presence of productive assets carrying a positive marginal product does not eliminate the possibility of a secular stagnation. The key assumption is that capital has a strictly positive rate of depreciation. In the absence of depreciation, capital can serve as a perfect storage technology which places a zero bound on the real interest rate. It is straightforward to introduce other type of assets, such as land used for production, and maintain a secular stagnation equilibrium. For these extensions, however, it is important to ensure that the asset cannot operate as a perfect storage technology as this may put a zero bound on the real interest rate.

Let me recapitulate the basic problem.  Secular stagnation models are supposed to exhibit persistent negative real rates of return, but how is this compatible with economic growth and positive investment?  Just hold onto stuff if need be and of course the goverment can help you do this with safe assets, if need be.  The earlier models had no capital, which ruled out this possibility.  The new model assumes storage costs for capital are fairly high, or alternatively the depreciation rate for capital is high.  Since you can’t sit on your wealth, you might as well invest it at negative real rates of return.

But at the margin, storage costs for goods (and some capital) are not that high.  My cupboard is full of beans and cumin seed, but I eat the stuff only slowly.  In the meantime it is hardly a burden, nor is it risky since I know it will be tasty once I make the right brew.  Art has negative storage costs (for the marginal buyer it is fun to look at), although its risk admittedly makes this a more complicated example.  Advances in logistics, and the success of Amazon, show that storage costs are getting lower all the time.

Secular stagnation might be a good model for Liberia and Venezuela and Mad Max, but not for the United States today or other growing economies with forward momentum.  But a credible stagnation model for America needs to recognize that rates of return will be lower than usual but not negative in real terms.  And there won’t be a long-run shortfall of demand because eventually market prices will adjust so that demand meets the supply we have.  That is a supply-side stagnation model of the sort promoted by myself, Robert Gordon, Peter Thiel, Michael Mandel, and others.  In the secular stagnation model as it is now being discussed by Keynesian macroeconomists, you end up twisting yourself in knots to force that real rate of return into permanently negative territory.  Of course if you allow the real rate of return to be positive albeit low, the economy is not stuck in a perpetual liquidity trap as people move out of cash into investment assets.  The demand-side stagnation mechanisms fade away into irrelevance once prices have some time to adjust.

Izabella Kaminska comments here.  Josh Hendrickson has a very good blog post on the model here.  I’ve already cited Stephen Williamson here, he notes the model is really about a credit friction and would be remedied with a greater supply of safe assets for savings, an easy enough problem to solve, for instance try the Bush tax cuts.  Here is Ryan Decker on the model, and here is Ryan arguing that investment is aggregate demand also and many of us seem to have forgotten that, a very good post.

This is an important and interesting paper, but only because it shows the model doesn’t really hold and requires such contortions.  The discussion of policy results is premature and way off the mark.  The authors should have included sentences like “storage costs aren’t very high, and the economy as a whole does not exhibit negative real rates of return, so these policy conclusions are not actual recommendations.”

Explorationsineconomics.com.

Here you can watch a video about Alan Krueger not being able to get a mortgage on a second home.

Maybe that welfare cost is not very high at all.   After all, if Amazon does not carry a book you can sign up at the Barnes & Noble website and that takes a few minutes at most.

There is a tension in most criticisms of Amazon.  On one hand, the critic wishes to argue that a “not carry” decision by Amazon has a big impact on how a book does.  On the other hand, the critic wishes to argue that the loss of access to particular titles is a big deal.  You cannot easily have it both ways.  If readers won’t switch to B&N.com, they must not care very much about particular titles, in which case the Amazon refusal to carry (or delay in shipping) is small even relative to the size of the (small) trade in books.

Krugman’s column today, which covers Amazon vs. Hachette, appears terrible at first glance, but in fact he presents a new and original argument.  Get past the mood affiliation and you come to this:

…what Amazon possesses is the power to kill the buzz. It’s definitely possible, with some extra effort, to buy a book you’ve heard about even if Amazon doesn’t carry it — but if Amazon doesn’t carry that book, you’re much less likely to hear about it in the first place.

If I may fill in some blanks, one possible version of the hypothesis — to pull an idea from Gary Becker and Steve Erfle — is that readers consume both “books” and “buzz around books” as complements.  The marginal gains from books can be low but the marginal gains from the bundled package may be much higher and those higher gains will not be measured by the (high) price elasticity of book purchases.

In the early stages of this war, Amazon boycotts have often increased the buzz for a book, such as with Beth Macy’s Factory Man.  But if these practices continue, they will cease to be news stories and an Amazon refusal to carry or promote plausibly will damage how books will do, without much potential for upside.

How much of the value in a book/buzz package is due to the buzz?  65 percent?  That would explain the concentration of reading interest among bestsellers and books your peers are reading.  But if Amazon won’t carry or promote a book, does the total supply of buzz fall?  Or does the buzz simply transfer to other titles?  In the latter case we are again back to small welfare costs from an Amazon refusal to carry.  Krugman’s idea is fun, but I am still inclined to think the welfare cost of Amazon supply restrictions on individual books likely is small, again even relative to the size of the book sector, much less relative to gdp.

It is fine to argue that Amazon is being unfair to some authors and to object on ethical grounds.  The economist also should add that readers don’t seem to mind very much.  Most of the objections I am seeing are coming from authors and publishers, who of course in this sector are much less diversified in their interests than are readers.

There is a new NBER paper by Campbell R. Harvey, Yan Liu, and Heqing Zhu, and it is a startler though perhaps not a surprise:

Hundreds of papers and hundreds of factors attempt to explain the cross-section of expected returns. Given this extensive data mining, it does not make any economic or statistical sense to use the usual significance criteria for a newly discovered factor, e.g., a t-ratio greater than 2.0. However, what hurdle should be used for current research? Our paper introduces a multiple testing framework and provides a time series of historical significance cutoffs from the first empirical tests in 1967 to today. Our new method allows for correlation among the tests as well as missing data. We also project forward 20 years assuming the rate of factor production remains similar to the experience of the last few years. The estimation of our model suggests that a newly discovered factor needs to clear a much higher hurdle, with a t-ratio greater than 3.0. Echoing a recent disturbing conclusion in the medical literature, we argue that most claimed research findings in financial economics are likely false.

The emphasis is added by me.  There are ungated versions of the paper here.

For the pointer I thank John Eckstein.

The Germans lecture the periphery to engage in structural reform and increase their exports.  A variety of IS-LM Keynesians strike back and note that not all nations can increase their net exports, therefore it is a kind of zero-sum game which won’t boost aggregate demand overall.  This is sometimes followed by blaming the Germans for soaking up aggregate demand from other parts of the world.

But that Keynesian counter is a mistake, perhaps brought on by the IS-LM model and its impoverished treatment of banking and credit.

Let’s say all nations could indeed increase their gross exports, although of course the sum of net exports could not go up.  The first effect is that small- and medium-sized enterprises would be more profitable in the currently troubled economies.  They would receive more credit and the broader monetary aggregates would go up in those countries, reflating their economies.  (Price level integration is not so tight in these cases, furthermore much of the reflation could operate through q’s rather than p’s.)  It sometimes feels like the IS-LM users have a mercantilist gold standard model, where the commodity base money can only be shuffled around in zero-sum fashion and not much more can happen in a positive direction.

Second, the higher (gross) exports and higher quantity of trade overall would produce positive wealth effects.  This too would reflate economies through a variety of well-known mechanisms, including but not restricted to the easing of collateral constraints.

In other words, it can help reflate all or most of the economies if they increase their gross exports, even though net exports are a zero-sum magnitude.

This interpretation of the meaning of zero-sum net exports is one of the most common economic mistakes you will hear from serious economists in the blogosphere, and yet it is often presented dogmatically or dismissively in a single sentence, without much consideration of more complex or more realistic scenarios.

This is from Larry Summers and Lant Pritchett:

…knowing the current growth rate only modestly improves the prediction of future growth rates over just guessing it will be the (future realized) world average.  The R-squared of decade-ahead predictions of decade growth varies from 0.056 (for the most recent decade) to 0.13.  Past growth is just not that informative about future growth and its predictive ability is generally lower over longer horizons.

The main point of this paper is to argue that Chinese growth rates will become much lower, perhaps in the near future, here is a summary of that point from Quartz:

Summer and Pritchett’s calculations, using global historical trends, suggest China will grow an average of only 3.9% a year for the next two decades. And though it’s certainly possible China will defy historical trends, they argue that looming changes to its  authoritarian system increase the likelihood of an even sharper slowdown.

The piece, “Asiaphoria Meets Regression Toward the Mean,” is one of the best and most important economics papers I have seen all year.  There is an ungated version here (pdf).  I liked this sentence from the piece:

Table 5 shows that whether or not China and India will maintain their current growth or be subject to regression to the global mean growth rate is a $42 trillion dollar question.

And don’t forget this:

…nearly every country that experienced a large democratic transition after a period of above-average growth…experienced a sharp deceleration in growth in the 10 years following the democratizing transition.

As Arnold Kling would say, have a nice day.

The Ebola risk premium

by on October 19, 2014 at 1:48 am in Current Affairs, Economics, Law, Medicine | Permalink

Underpaid or overpaid?:

They’re looking for the few, the proud — and the really desperate.

For a measly $19 an hour, a government contractor is offering applicants the opportunity to get up close and personal with potential Ebola patients at JFK Airport — including taking their temperatures.

Angel Staffing Inc. is hiring brave souls with basic EMT or paramedic training to assist Customs and Border Protection officers and the Centers for Disease Control and Prevention in identifying possible victims at Terminal 4, where amped-up Ebola screening started on Saturday.

EMTs will earn just $19 an hour, while paramedics will pocket $29. Everyone must be registered with the National Registry of Emergency Medical Technicians.

The medical staffing agency is also selecting screeners to work at Washington Dulles, Newark Liberty, Chicago O’Hare and Hartsfield-Jackson Atlanta international airports.

There is more here, via Matthew E. Kahn.  How much does the regular (non-Ebola) staff earn?

So argues a new paper (pdf) by Ekrame Boubtane, Dramane Coulibaly, and Christophe Rault, the abstract is here:

This paper examines the causality relationship between immigration, unemployment and economic growth of the host country. We employ the panel Granger causality testing approach of Konya (2006) that is based on SUR systems and Wald tests with country specific bootstrap critical values. This approach allows to test for Granger-causality on each individual panel member separately by taking into account the contemporaneous correlation across countries. Using annual data over the 1980-2005 period for 22 OECD countries, we find that, only in Portugal, unemployment negatively causes immigration, while in any country, immigration does not cause unemployment. On the other hand, our results show that, in four countries (France, Iceland, Norway and the United Kingdom), growth positively causes immigration, whereas in any country, immigration does not cause growth.

This result reflects two broader lessons.  First, at the margin the major benefits from migration are to the migrants.  Second, again at the margin, most policy changes matter less than you think they will.

Hat tip goes to Ben Southwood.

The economic value of misbehavior

by on October 17, 2014 at 3:52 am in Economics, Education | Permalink

There is a new paper by Papageorge, Ronda, and Zheng, with a very interesting thesis, namely that preparing rowdies for better schooling results may not help their long-term prospects in life:

Prevailing research argues that childhood misbehavior in the classroom is bad for schooling and, presumably, bad overall. In contrast, we argue that childhood misbehavior reflects underlying traits that are potentially valuable in the labor market. We follow work from psychology and treat measured classroom misbehavior as reflecting two underlying non-cognitive traits. Next, we estimate a model of life-cycle decisions, allowing the impact of each of the two traits to vary by economic outcome. We show the first evidence that one of the traits capturing childhood misbehavior, discussed in psychological literature as the externalizing trait (and linked, for example, to aggression), does indeed reduce educational attainment, but also increases earnings. This finding highlights a broader point: non-cognition is not well summarized as a single underlying trait that is either good or bad per se. Using the estimated model, we assess competing pedagogical policies. For males, we find that policies aimed at eliminating the externalizing trait increase schooling attainment, but also reduce earnings. In comparison, policies that decrease the schooling penalty of the externalizing trait increase both schooling and earnings.

For the pointer I thank the excellent Kevin Lewis.

As of 2004, only 16.7% of the cost of Korean higher education was picked up by government, as opposed to an OECD average of about 77% (see this paper).  That’s a relatively low level of subsidy.  And yet Korea has one of the highest degree-granting rates in the world, the status of the school you go to is all-important, tiers of quality are fairly rigid, admission is closely linked to exam performance, and doubts have been raised about how much people actually learn in those schools.  At least when it comes to surface phenomena, it appears Korean higher education has a lot to do with signaling.

In Germany they just made the universities completely free, and in the past they were quite cheap, which of course means subsidized.  Germany also sends a relatively high percentage of its population to vocational training, where presumably the students learn some concrete skills.  Could it be there is too much slacking in German universities (which I have interacted with twice, both as student and as professor) for attendance to serve as a very effective signal?

Can it be the case that a government subsidy, by limiting privately-perceived quality and returns, can lower private signaling costs?  Should advocates of the signaling model therefore be more favorably inclined toward subsidies?

Here is a very good piece by The Mitrailleuse, though I do not agree with all of it.  Here is the conclusion:

In summary, the libertarian discussion surrounding immigration shouldn’t be viewed as an all or nothing proposition and as Sanandaji has argued, it should take real world empirical patterns into account rather than assume away voting, the public sector, and social externalities. Libertarians should adopt the same skeptical economist’s view they apply to all other subjects when weighing questions about immigration to determine if we can actually affect the changes we would like to make.

It is perfectly acceptable for libertarians to disagree on such a complex subject and to hold opinions in favor of more marginal change. There are plenty of modest ways libertarians can criticize the existing immigration system without being in favor of open borders. These libertarians shouldn’t be vilified for their humility and prudence. There is no academic consensus on the subject and the issue is too complex and contextual for there to be a clear-cut libertarian position. The burden of proof lies on advocates of open borders to engage these criticisms.

For the pointer I thank Andrea Castillo.

California’s Water Shortage

by on October 16, 2014 at 7:30 am in Economics, Law | Permalink

In the 1970s the US faced a serious shock to the supply of oil but the shortage of oil was caused by price controls. Today, California is facing a serious water drought but the shortage of water is caused by price controls, subsidies and the lack of water markets. In an excellent column, The Risks of Cheap Water, Eduardo Porter writes:

Water is far too cheap across most American cities and towns. But what’s worse is the way the United States quenches the thirst of farmers, who account for 80 percent of the nation’s water consumption and for whom water costs virtually nothing….

Farmers in California’s Imperial Irrigation District pay $20 per acre-foot, less than a tenth of what it can cost in San Diego….This kind of arrangement helps explain why about half the 60 million acres of irrigated land in the United States use flood irrigation, just flooding the fields with water, which is about as wasteful a method as there is.

Tyler and I discuss water subsidies in Modern Principles:

Farmers use the subsidized water to transform desert into prime agricultural
land. But turning a California desert into cropland makes about as much sense
as building greenhouses in Alaska! America already has plenty of land on which
cotton can be grown cheaply. Spending billions of dollars to dam rivers and
transport water hundreds of miles to grow a crop that can be grown more cheaply
in Georgia is a waste of resources, a deadweight loss. The water used to grow California cotton, for example, has much higher value producing silicon chips in
San Jose or as drinking water in Los Angeles than it does as irrigation water.

The waste of subsidized water is compounded by over 100 years of rent-seeking and a resulting legal morass that makes trading water extremely difficult (see Aquanomics for a good analysis). A water trading system is slowly taking form in the American West but the political transaction costs are immense. Australia, however, faced similar difficulties but has managed to develop a good water trading system and Chile has long had a robust market in water. Subsidies to farmers are politically sustainable when everyone has as much water as they want but when faced with continued shortages and an ever-intrusive water Stasi consumers and industry may eventually demand a more rational, less wasteful system based on incentives, markets and prices.

Victor Mallet writes:

Amid gloom over global economic growth and uncertain prospects for emerging markets, India is beginning to stand out as uniquely well-placed to gather the windfall benefits of an international slowdown.

Unlike Brazil, Russia or South Africa, India reaps immediate advantages for its terms of trade and its domestic budget from the fall in commodity prices triggered by renewed concerns about the world economy.

And unlike China, India will not suffer much from any decline in global demand for manufactured goods because its export sector is relatively small.

Commodities – mostly oil – account for more than half of India’s imports but only 9 per cent of its exports, mainly food. The current account deficit falls by about $1bn a year for every $1 decline in the price of a barrel of oil, and the reduced cost of fuel subsidies is also easing the burden on the budget.

Another benefit of weaker commodity prices is falling inflation, long the bane of the Indian economy.

I have supported the various QEs from the beginning, while seeing them as limited in their efficacy.  At the time, and still, I feared deflationary pressures more than high inflation.  Still, recently the question has arisen whether those QEs boosted the risk of high inflation.  Ashok Rao looks at options data to pull out the best answer I have seen so far:

…did the risk of high inflation increase after the Fed engaged in QE2? (Note this establishes a correlation, not causation)…

And you see two very interesting trends: the probability of high inflation (that above 6%, which is the largest traded strike) sharply increased over the latter half of 2010 and early 2011, the time period over which the effects of QE2 were priced in. This is a general trend across all maturities. While the 3, 5, and 10 year option follow a similar path afterwards, the 1-year cap is much more volatile (largely because immediate sentiments are more acute). Still, you see the probability of high inflation pic up through 2012, as QE3 is expanded.

The takeaway message from this is hard to parse. This market doesn’t exist in the United States before 2008, and isn’t liquid till a bit after that, so it’s tough to compare this with normal times. While the sharp increase in the probability of high inflation would seem to corroborate the Hoover Institution letter, that wouldn’t mean much if it simply implied a return to normalcy. That’s just a question we’ll have to leave for a later day.

What about the probability of deflation? We’ll the interesting point is that for the three higher maturity options, the probability for high inflation and probability of deflation were increasing at the same time. This was a time of relatively anchored 5 year implied inflation, but the underlying dynamics were much more explosive, as can be seen in the above charts.

There are some very useful pictures in the post, and do note the variety of caveats which Ashok wisely (and characteristically) offers.  He notes also that for the United States deflationary risk was never seen as very likely, but the QEs lowered that risk even further.