Month: July 2011

What will happen with Greece?

by  Tyler Cowen in

Here is my latest NYT column, excerpt:

If you are a euro optimist, you might believe that the day of reckoning for Greece will be stalled long enough for Portugal, Ireland, Spain and possibly Italy and Belgium to recapitalize their banks and trim their government budgets. You might believe that of the Greeks will eventually default, but that by the time the contagion effects are checked, the Greeks will have pulled in some aid, and the global impact will be a mere hiccup instead of a new financial crisis. But that still will leave Greece with no clear economic path forward. For a best-case scenario, that’s not very good.

If you are a pessimist, you might see such a response as an unworkable plan of naïve technocrats. Here’s your line of reasoning: At some point along the way, democracy is likely to intervene: either Greek voters will refuse further austerity and foreign domination, or voters from northern Europe will send a clear electoral message that they don’t support bailouts. And there’s a good chance one or both of those events will happen before a broader European bank recapitalization can be achieved. In the meantime, who wants to put extra capital into those ailing Irish, Portuguese, and Spanish banks anyway?

In an even bleaker scenario, bank recapitalization won’t be realized anytime soon and those same economies will show few signs of growing out of their debts. A broader financial crash will result, and it won’t be contained by an easily affordable bailout.

In case you don’t know by now, I see the pessimistic scenario as more likely.

How quickly do people adjust to nominal changes?

by  Tyler Cowen in

Eric Barker sends me this very interesting article:

Turkish monetary reform, which took effect in January 2005, introduced the New Turkish Lira (NTL) by deleting six zeros from the former currency, the Turkish Lira (TL). Two experiments investigated how the introduction of the NTL might affect price estimation. In the first, conducted in December 2004, 202 students were first presented with high or low anchor values and then estimated the average price of a “new Turkish mid-sized car” in different currencies (TL, NTL and Euro). Although anchoring bias was not significantly different across familiar (TL) and unfamiliar currencies (NTL and Euro), price estimates in Euro and NTL were significantly higher than those in TL. In the second experiment, carried out 6 months later, 212 adult consumers estimated the prices of 13 items in one of three currencies. For five items prices estimated in Euros were significantly higher than those expressed in either TL or NTL. However, there were no significant differences between TL and NTL, suggesting that Turkish consumers had quickly adapted. Such ease of adaptation is consistent with a rescaling hypothesis: when one or more zeros are dropped from a currency, consumers rescale all prices relatively quickly rather than relearn them selectively through gradual exposure.

It is much harder, I think, when the nominal change is either uncertain or not common knowledge or not distributed evenly across economic sectors.  In those alternative cases the signal extraction problem is multi-dimensional and not necessarily solved by a quick social conversation.  In other words, I would not expect all nominal adjustments to run so smoothly.  Still, this is a nice test of an old proposition from David Hume (and others).

 

Further papers on signaling and education

by  Tyler Cowen in

Pursuing this topic, here are some of the good or interesting papers I discovered:

This UK piece reframes the David Card IV literature in terms of signaling and with UK data estimates that signaling accounts for one-third of the educational wage premium.  It uses a “compulsory” instrumental variable from earlier UK schooling reforms.

Here is the Hanming Fang paper (IER): “…productivity enhancement accounts for close to two-thirds of the college wage
premium.”  It uses very different techniques, based on simulations, not IV and the like.

This paper shows that rank measure in class doesn’t affect earnings, contrary to what signaling theories should predict.  This may be a puzzle for learning theories as well.

Here is a good piece (it ended up in the JPE) which shows signaling must have some import; it does not attempt to estimate how much of the educational wage premium is due to signaling.

This paper suggests that signaling may be especially important for MBAs.

German education helped drive their Industrial Revolution.

This Carneiro, Heckman, and Vytlacil paper I found impressive.  It redoes much of the IV Angrist and Card work with greater emphasis on heterogeneous agents and also heterogeneous margins.  It seems to be the current peak of the IV approach and finds rates of return in the 15-20 percent range and that is for college.  It also finds that lower ability individuals are harder to educate and therefore reap lower (though still high) marginal rates of return, contra some of the simpler IV papers.

This very interesting Kevin Lang paper argues that signaling theories do not diminish the case for education and also that they do not create particular problems for measuring the social rate of return on education.

A new novel about an economist, by an economist

by  Tyler Cowen in

The author is Michael W. Klein, the title is Something for Nothing, and it is coming September from MIT Press.  Here is the catalog description:

David Fox (Ph.D. Economics, Columbia, Visiting Assistant Professor at Kester College, Knittersville, New York) is having a stressful year. He has a temporary position at a small college in a small town miles from everything except Albany. His students have never read Freakonomics. He thinks he is getting the hang of teaching, but a smart and beautiful young woman in his Economics of Social Issues class is distractingly flirtatious. His research is stagnant, to put it kindly. His search for a tenure-track job looms dauntingly. (The previous visiting assistant professor of economics is now working in a bookstore.) So when a right-wing think tank called the Center to Research Opportunities for a Spiritual Society (CROSS)–affiliated with the Salvation Academy for Value Economics (SAVE)–wants to publish (and publicize) a paper he wrote as a graduate student showing the benefits of high school abstinence programs, fetchingly retitled “Something for Nothing,” he ignores his misgivings and accepts happily.  After all, publication is “the coin of the realm,” as a senior colleague puts it.

But David faces a personal dilemma when his prized results are cast into doubt. The school year is filled with other challenges as well, including faculty politics, a romance with a Knittersville native, running the annual interview gauntlet, and delivering the culminating “job talk” lecture under trying circumstances. David’s adventures offer an instructive fictional guide for the young economist and an entertaining and comic tale for everyone interested in questions of balancing career and life, success and integrity, and loyalty and desire.

Are we using tax cuts to make up for declining median household income?

by  Tyler Cowen in

DeptofNumbers reports:

I’ve long wondered what median income would look like after taxes were taken into account and if the structure of Lane’s chart might change given the dynamic nature of tax policy. Bruce Bartlett’s recent post on average tax rates for four-person families pointed out the data I needed to make such a comparison. The Tax Policy Center produces annual average tax rates for four-person families at the median income level. Using their historical data I can back out the growth of after-tax median family income since 1980 (just after GDP per capita and median family income start to diverge) and add that data to the chart that Lane produced.

…The results, though not earth shattering, are interesting. Prior to 2000, both real (i.e. inflation adjusted) median family income and real median family income after taxes grew at about the same rate. Real median family income has actually declined since 2000, but when you look at after-tax dollars received by households it’s been relatively flat. In other words, the median family has been able to avoid a more substantial decline in income by paying somewhat less in taxes. [emphasis added by TC]

There are useful graphs at the link.  This of course is one big reason why raising taxes — or even ceasing to cut them — is an unpopular idea with the American electorate.

One of the very best articles on the AD shortfall

by  Tyler Cowen in

From The Irish Times, the implicit economics are excellent throughout, here is one paragraph:

First, the Irish criminals the Spanish gang were supplying were finding it harder to sell drugs, as pay cuts, tax rises and job losses left recreational users with less money. The Irish gangs were unable to shift larger hauls and, in any case, lacked the resources to buy in bulk, so they were ordering smaller quantities. This liquidity crisis was an unfamiliar problem for criminals used to having a river of money at their disposal.

Yet it’s not all driven by a sticky wage effect, wealth elasticities matter too:

The value of drugs seized in 2010 was the lowest for 15 years, at €30.9 million, indicating a return to the levels of activity common before the boom. Long term, the drug-seizure trend has mirrored the wider economy: after rising steadily from the mid-1990s, it peaked in 2007 and 2008, with Garda seizures of more than €100 million worth of drugs in each of those years, before declining rapidly.

Garda sources point out that most people who use drugs do so for recreational reasons and are not addicted. “It means that when they have less money in their pockets to buy drugs, they are able to stop. And that’s what we’re seeing now all over the country,” says a senior garda.

We are not as wealthy as we thought we were, and that’s especially true for the Irish.

Government size and economic growth

by  Tyler Cowen in

I thought the new paper by Andreas Bergh and Magnus Henrekson was both useful and wise:

The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach – of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time – reveals a more consistent picture. The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: (i) that countries with higher social trust levels are able to develop larger government sectors without harming the economy, and (ii) that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by current research.

That is the working paper version, there is a published and gated version in Journal of Economic Surveys.  By the way, here is a new video on economic freedom.

The new Y2K problem?

by  Tyler Cowen in

Felix Salmon writes:

…it’s far from clear that it’s even possible to stop making the 3 million payments that Treasury makes automatically every day. Doing so involves a massive computer-reprogramming effort which I’m sure could not be implemented overnight — and for political reasons nobody is going to get started on such an effort until after all hope is lost for a deal in Congress.

Now that’s what I call government precommitment.  The post is interesting throughout.

Wolfers on Happiness

by  Alex Tabarrok in

Excellent talk on happiness by Justin Wolfers. Robert Frank and discussion which follow are also good but Wolfers is outstanding.

A couple of things I learned. The flat happiness line in the United States over time is often contrasted with rising GDP per capita to assert a paradox. The paradox goes away once you take into account that median earnings haven’t risen (ala TGS).

Wolfers also shows that income matters not just for happiness but for a large number of correlates, inputs and outputs of happiness. Compared to people in poorer countries, people in richer countries, for example, more often say their food tastes good, they report less pain and they smile more.

 

How good is the Oregon Medicaid study?

by  Tyler Cowen in

Michael Cannon writes:

On subjective measures of health, the likelihood of screening positive for depression fell from 33 percent to 25 percent, and the share reporting their health to be good or better rose from 55 percent to 68 percent. However, two-thirds of the improvement in self-reported health occurred almost immediately after enrollment, before any increases in medical consumption. The authors posit that much of this improvement could reflect “an improved overall sense of well-being” rather than “changes in objective physical health.”

For the pointer I thank Robin Hanson.

Sentences to ponder

by  Tyler Cowen

From Jeff:

There is an alternative to pain as an incentive mechanism:  dispensing with incentives altogether and just programming the organism with instructions to follow. And if the organism doesn’t already have “feelings” as a part of its infrastructure then the instructions are the only alternative.  The big question for theories of pain and pleasure as an incentive mechanism is why mother nature as Principal bothers with incentives at all.