Month: October 2009

Preface to the Students

Here is the preface to the students from Modern Principles:Microeconomics, just now out. 

We love economics. We talk economics, argue economics, and think about economics every day. We use economics in our lives, not just when we choose whether or not to refinance our mortgage but also when we choose strategies for dating, keeping a good marriage, and parenting. Yeah, we are weird. But now a warning. If you are afraid of being a little weird, Do Not Read This Book. Once you have been exposed to the economic way of thinking there is no going back — you will see the world differently and that will make you different.

Will what you learn be worth the price? That is for you to decide. But we think economics is important. We need economics to make better investments and better life choices. Citizens in a democracy must evaluate issues of taxes, deficits, trade, health care policy and inflation. These issues and many more cannot be understood without an understanding of economics. Do you want to vote ignorantly or intelligently? The economic way of thinking will help you to understand the issues of the day and to explain them with confidence to others.

We won’t lie: economics can be difficult. Few things worth knowing come easily and to understand economics well you will need to master new tools and new ideas like supply and demand curves, marginal thinking, and equilibrium. We have worked hard, however, to strip away as much jargon and unnecessary verbiage as possible. We are going to give you what is important and not much else. We are also going to have fun.

Welcome to the world of economics.

Tyler and Alex

Under- and over-explored areas in economics

Hamilton, a loyal MR reader, requests:

Of those questions in economics whose answers interest you, which
question do you think is most under-explored, given its importance? And
why do you think that is?

Or, going the other way, to what question or questions has economics
been over-applied? Where have economists put too much effort?

Under-explored; Empirical studies of signaling behavior, peer effects, the kind of "questionnaire macro" pioneered by Alan Blinder on price stickiness.  Economic anthropology.  Neuroeconomics other than brain scans.  The economics of the emotions, an area started by Robert Frank.  Status and fame motivations.  Economic history.  The economics of the non-profit sector.  The economics of science.  How IQ and other cognitive measures interact with economic decision-making and economic rationality.  Behavioral economics of politics and public choice.  Anything Alex does.

Over-explored: VAR, most structural macro, "another open economy model," auction theory, auctions in experimental economics.  There's more, but today I'm not so interested in complaining.

That's my list, what's yours?

My favorite guitarists

"Ar" wants to know who they are.  When I was young I studied guitar for seven years (multiple styles), so it's an area I've long had an interest in.  I was never very good but I learned a lot about it.  Here goes:

Classical: Segovia, Eduardo Fernandez.  I enjoy the transcriptions of Yamashita and Larry Coryell's covers of Stravinsky, though he isn't usually considered a classical guitarist.

Jazz: Django Reinhardt, Joe Pass's Virtuoso album, Wes Montgomery live (no strings), and George van Eps.  Charlie Christian deserves a mention.  Today, Kurt Rosenwinkel, and the guy who plays for Trio Saudade.  There are plenty of others, including Jim Hall and John McLaughlin.

John Fahey-Leo Kottke: They deserve their own category and indeed they dominate it.  For Kottke try 6 and 12-String Guitar Music, and then his 1981 Guitar Music.  For Fahey try the 1959-1977 Greatest Hits collection.  This is some of my favorite music.

Electric blues: Muddy Waters, Robert Cray (live), Johnny Winter (live only).  Amadou of Amadou and Miriam.  The player from Orchestra Baobab.  Does Lonnie Mack count here?

Acoustic blues: Reverand Gary Davis, Son House and many others.  Jorma Kaukonen also.  Bob Dylan is much underrated in this area.  Can Richard Thompson go here?  d'Gary, from Madagascar, is one of the greatest and most original guitarists that few people have heard of.  Bola Sete too, from Brazil.

Bluegrass: Clarence White and also Doc Watson.

Rock: Jimmy Page, Brian May, Chuck Berry, Bo Diddley, of course Jimi Hendrix as #1.  van Halen and his ilk never much impressed me.

Les Paul deserves mention but he straddles a few of these categories, as does Chet Atkins.  Hawaiian guitar deserves its own post.  Dick Dale.  The Carnatic slide guitar players, including Bhattacharya.  Roger McGuinn.  The Zairean tradition, including Franco.  Neil Young has his moments, as does Thurston Moore.

Eric Clapton was impressive for a while but overall I wish to be contrarian and leave him off.  Who am I forgetting?  Duane Allman?

In general guitar is an instrument which works relatively well on YouTube.  Most of the names above can be found there.

Pedigree bias in economics

Coastal Elite, a loyal MR requester, requests:

Why is there more "pedigree bias" for hiring of Economics faculty than
in other disciplines? For example, at any top 30 school, 95% of the
faculty will have their PhD from a top 10 school. In other fields, this
will not be the case. Some other disciplines have a much stronger
tendency to co-author than Economics, which should decrease the signal
to noise ratio on a CV. This should imply that pedigree bias should be
even stronger in disciplines with more co-authoring, but anecdotally
this does not seem to be true.

And very often it is the top six rather than the top ten.  I don't myself see the factor of co-authoring as the path to an answer here.  The default answer is to invoke a relatively high importance for IQ, in economics, combined with the relative absence of prodigies, compared to say math.  When prodigies and autodidacts are possible, top performers can come from anywhere.  But smarts and training and networking are all required.  The combination of those barriers give a big advantage, justified or not, to the very top schools.  It is usually believed that a candidate from a lesser school is lacking in at least one of these yet all are required for a big career success.  So maybe a "multiplicative model" of achievement in economics plays a big role in pedigree bias.

On top of that, economics is a relatively unified field with relatively homogeneous metrics of quality.  A school ranked #23 can "play it safe" by hiring a lesser MIT grad, rather than the best student coming out of Emory, and more or less know what they are getting and agree on that.  This tendency in the market is probably inefficient, relative to a first-best with a higher degree of intellectual innovation and less concentration of rewards across the top graduate programs.

Also, the top programs are good at doing admissions — surprisingly good in my view — and pre-selecting the kind of talent the rest of the profession is looking for.

Which other fields have a comparable "pedigree bias"?

A different way of discussing global imbalances

Chinese workers save a lot, maybe forty to fifty percent of their incomes.  There are some demographic reasons for that but it also suggests fear and foreboding.  They wonder if the Chinese economic miracle can continue.  There aren't full contingent claims markets in China but this quantity (of savings) is reflecting an implicit price for transferring wealth into possible bad world-states.  That implicit price suggests a fair amount of worry.

In the U.S. T-Bill market, in contrast, there is relative optimism and froth.  Lots of securities can be sold at rates close to zero.  That explicit price suggests not so much worry about the creditworthiness of the U.S. government and not so much worry about China.

The two prices contradict each other and they continue to do so because explicit arbitrage is not possible.  (Ideally, at least in neoclassical fantasy land, the U.S. government should be borrowing money from the Chinese and selling them back insurance at a higher price.)

From this portrait you can see why it is so hard to unwind the imbalances.  (Many expositions of imbalances focus on quantities and thus may obscure this point somewhat.)  If the Chinese workers are dealing with the correct price (implicit price), that means the worries are real and rates in the T-Bill market have to spike.  Ouch.  If the auction market for T-Bills is showing the correct price, that means the worries are false and at some point Chinese workers won't save nearly so much.  Again, rates in the T-Bill market have to spike.  Ouch.

Either way it ends in ouch.  There's a reason why, rhetoric aside, no one wants to end these imbalances.

So who has the right price?  The Chinese workers or the T-Bill bidders?  As usual, the truth probably lies somewhere in between.

Green jobs

Here is a report from Gabriel Calzada Alvarez, on green jobs:

Optimistically treating European Commission partially funded data, we find that for every renewable energy job that the State manages to finance, Spain’s experience cited by President Obama as a model reveals with high confidence, by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created.

And this:

The study calculates that since 2000 Spain spent €571,138 to create each “green job”, including subsidies of more than €1 million per wind industry job.

You can quibble with those numbers for a long time but when you admit opportunity cost basically he has the right idea.  This topic came up a few times in Edmonton and in the U.S. there is a guy named Bracken Hendricks pushing the "green jobs" argument.  To be sure, there are very real benefits from limiting climate change.  But if it takes more jobs to produce "green energy," that is a net cost to the economy, not a benefit.  Hendricks notes:

We estimate this sustained expansion in clean-energy investments
triggered by the economic stimulus program and the potential
implementation of Federal climate and clean-energy legislation, can
generate a net increase of about 1.7 million jobs nationally.

We're dealing now with something beyond the Keynesian short run and so those extra jobs are a drain of resources from elsewhere.  If you wish, sub out the word "energy" and sub in the word "agriculture" and then reevaluate the sentence from the vantage point of 1900.  Would it truly create net jobs — much less good jobs — to trash tractors and industrial fertilizer?  The ideal situation would be a technology where very few jobs were required to create and distribute the nation's energy supply.  Remember Bastiat's candlemakers' petition against the sun?  It's turning out to be a better hypothetical example than Bastiat himself ever realized.

Not in my department

[Ernest] Rutherford was outgoing, down to earth, given to volcanic temper tantrums and dismissive of grandoise theorising.  "Don't let me catch anyone talking about the universe in my department," he growled.

That is from Graham Farmelow's excellent new book The Strangest Man: The Hidden Life of Paul Dirac, Quantum Physicist.  This isbook  one of my two must-read biographies of this year, the other being the book on Garcia Marquez.

Where the Wild Things Are

There are moments of great beauty and wonder in Where the Wild Things Are and also moments of fear and anger.  It's not a kid's movie but the 11-year old liked it and the 8-year old thought it pretty good.  I thought it was great but unlike my sons I have lived all the roles.  The movie has a libertarian sub-theme that I don't recall from any of the 10 sentences in the book. 

Edmonton notes

The biggest surprise is how many Newfoundland accents I have heard.  There truly is backwards time travel — at least into the 1980s — and it is called the West Edmonton Mall.  The real estate bubble here has yet to pop.  It's a better place to live than to visit.  There is better dim sum than anywhere near NoVa.  I have crossed all the major bridges.  During my stay the weather has been warmer and nicer than back home.  Many new hardcover books cost $32.99 in a Chapters bookstore.  I have a theory that any Thai restaurant attached to a motel is excellent.  I had a conversation with Brad Humphreys and Jane Ruseski as to why an activity must have an intrinsically competitive aspect to qualify as a sport, thus ruling out bass fishing.  "Minus 40" is about the same in either Centigrade or Fahrenheit.  Everyone has treated me very well.