Month: October 2015
Angus Deaton of Princeton University wins the Nobel prize. Working with the World Bank, Deaton has played a huge role in expanding data in developing countries. When you read that world poverty has fallen below 10% for the first time ever and you want to know how we know— the answer is Deaton’s work on household surveys, data collection and welfare measurement. I see Deaton’s major contribution as understanding and measuring world poverty.
Measuring welfare sounds simple but doing it right isn’t easy. How do you compare the standard of living in two different countries? Suppose you simply convert incomes using exchange rates. Sorry, that doesn’t work. Not all goods are traded so exchange rates tend to reflect the prices of tradable goods but a large share of consumption is on hard-to-trade services. The Balassa-Samuelson effect tells us that services will tend to be cheaper in poorer countries (I always get a haircut when in a poor country but I don’t expect to get a great deal on electronics). As a result, comparing standards of living using exchange rates will suggest that developing countries are poorer than they actually are. A second problem is the cheese problem. Americans consume a lot of cheese, the Chinese don’t. Is this because the Chinese are too poor to consume cheese or because tastes differ? How you answer this question makes a difference for understanding welfare. A third problem is the warring supermarkets problem. Two supermarkets each claim that they have the lowest prices and they are both right! How is this possible? Consumers at supermarket A buy more of what is cheap at A and less of what is expensive at A and vice-versa for B. Thus, it would cost more to buy the A basket at store B and it would also cost more to buy the B basket at store A! So which supermarket is better? Comparing standards of living across countries isn’t easy and then you want to make these comparisons consistently over time as well! Deaton, working especially with the World Bank, helped to construct price indices for all countries that measure goods and services and he showed how to use these to make theoretically appropriate comparisons of welfare. Deaton’s presidential address to the American Economic Association in 2010 covers many of these issues.
I see Deaton’s work on world poverty as a tour de force, he made advances in theory, he joined with others to take the theory to the field to make measurements and he used the measurements to draw attention to important issues in the world.
Earlier in his career, Deaton developed tools to bring theory to data on consumption. A key contributions is the Almost Ideal Demand System. We all know that demand curves slope down which means that a fall in the price of the good in question increases the quantity demanded but in fact economic theory says that the demand for good X depends not just on the price of good X but at least potentially on the prices of all other goods. If we want to estimate how a change in policy will influence people’s choices we need to allow demand curves to interact in potentially many ways but we still want to constrain those reactions according to economic theory. In addition, economic theory tells us that an individual’s demand curve slopes down but it doesn’t necessarily imply that the aggregation of individual demand curves must slope down. Aggregation is tricky! The Almost Ideal Demand system, due initially to Deaton and Muellbauer, in 1980 and further developed since then shows how we can estimate demand systems on aggregates of consumers while still preserving and testing the constraints of economic theory.
The study of consumption leads naturally to the study of savings, consumption in future periods. Here we have Keynes’s famous propensity to consume theory (consumption is a fraction of current income), Milton Friedman’s permanent income hypothesis (consumption is a fraction of estimated lifetime income), Modigliani’s Life Cycle Hypothesis (borrow young, save when middle aged, dissave when old). Robert Hall, building on the work of Ramsey, showed in the 1970s that rational expectations implies the famous Euler equation that bedevils graduate students, which shows that suitably discounted changes in marginal utilities should follow a random walk. Deaton played a big role in testing the new theories, mostly finding them wanting.
Deaton’s book, The Great Escape, on growth, health and inequality is accessible and a good read. A controversial aspect of this work is that Deaton falls squarely into the Easterly camp (Deaton’s review of Tyranny of Experts is here) in thinking that foreign aid has probably done more harm than good.
Here is Deaton on foreign aid:
Unfortunately, the world’s rich countries currently are making things worse. Foreign aid – transfers from rich countries to poor countries – has much to its credit, particularly in terms of health care, with many people alive today who would otherwise be dead. But foreign aid also undermines the development of local state capacity.
This is most obvious in countries – mostly in Africa – where the government receives aid directly and aid flows are large relative to fiscal expenditure (often more than half the total). Such governments need no contract with their citizens, no parliament, and no tax-collection system. If they are accountable to anyone, it is to the donors; but even this fails in practice, because the donors, under pressure from their own citizens (who rightly want to help the poor), need to disburse money just as much as poor-country governments need to receive it, if not more so.
What about bypassing governments and giving aid directly to the poor? Certainly, the immediate effects are likely to be better, especially in countries where little government-to-government aid actually reaches the poor. And it would take an astonishingly small sum of money – about 15 US cents a day from each adult in the rich world – to bring everyone up to at least the destitution line of a dollar a day.
Yet this is no solution. Poor people need government to lead better lives; taking government out of the loop might improve things in the short run, but it would leave unsolved the underlying problem. Poor countries cannot forever have their health services run from abroad. Aid undermines what poor people need most: an effective government that works with them for today and tomorrow.
One thing that we can do is to agitate for our own governments to stop doing those things that make it harder for poor countries to stop being poor. Reducing aid is one, but so is limiting the arms trade, improving rich-country trade and subsidy policies, providing technical advice that is not tied to aid, and developing better drugs for diseases that do not affect rich people. We cannot help the poor by making their already-weak governments even weaker.
Here is Tyler’s post on Deaton.
Addendum: Chris Blattman offers a very good perspective and appreciation.
A brilliant selection. Deaton works closely with numbers, and his preferred topics are consumption, poverty, and welfare. “Understanding what economic progress really means” I would describe as his core contribution, and analyzing development from the starting point of consumption rather than income is part of his vision. That includes looking at calories, life expectancy, health, and education as part of living standards in a fundamental way. I think of this as a prize about empirics, the importance of economic development, and indirectly a prize about economic history.
Think of Deaton as an economist who looks more closely at what poor households consume to get a better sense of their living standards and possible paths for economic development. He truly, deeply understands the implications of economic growth, the benefits of modernity, and political economy. Here is a very good non-technical account of his work on measuring poverty (pdf), one of the best introductions to his thought.
He brought a good deal of methodological individualism to the field of consumption studies, most of all by using household surveys more than macroeconomic data.
I think of this as a prize for “a whole body of work” rather than for one or two key papers. David Leonhardt has a good NYT summary of some his work and its deep underlying optimism about the situation of the poor in the global economy.
Deaton was born in Scotland but has taught at Princeton for some time. Here is Deaton on Wikipedia. Here is Deaton’s home page. Here are some recent working papers, he even has published in Review of Austrian Economics, an interesting review of Bill Easterly on experts. Here are previous MR mentions of Deaton, there are many of them. Here is Deaton on Google Scholar. Here is a Russ Roberts EconTalk with Angus Deaton. I think of Deaton as someone who is relatively willing to share himself with the world, let’s hope the Prize doesn’t ruin that openness. Here is 21 minutes of Angus on YouTube, on his core ideas.
Deaton has long had a special working relationship with India and South Africa. Here are his key pieces on measuring poverty and poverty reduction in India. Here is his work on the Indian health survey. Here is his 2010 AER piece on how to measure poverty globally in a consistent manner, by the way he suggests that asking people should be part of the answer.
He also has written on gender discrimination within the family in developing nations. Some of his work has helped direct our attention to the viability of cash transfers as a way of fighting poverty.
At first, say circa 1980, he was known for his work in developing Almost Ideal Demand Systems for analyzing consumer expenditures; much of this early work was with Muellbauer. That made a big splash, but it was more of a theoretical and technical advance than what was to follow. One message was that studies based on the idea of a “representative consumer” were likely to prove misleading.
It is interesting to note the trajectory of his career, as Alex noted on Twitter. He first did theory, then filled in the numbers and did empirics, applying the theory. Eventually he took theory + empirics and used it to tackle some of the big issues of poverty and development.
Here is his long survey piece on foreign aid and growth. He favors the move away from project evaluation, is skeptical of instrumental variable methods, and believes that RCTs need to be supplemented with a better theoretical understanding of mechanisms. He knows a lot about many, many topics.
I do not know him, but he is described by many as a colorful character. Dani Rodrik has strong praise for Deaton as a teacher.
Here are short, popular essays by Angus Deaton; you can call that the “what he really thinks page.” He is critical of the Republican war against ACA and connects that topic to Downton Abbey. He argues for regional price indices for the United States. He discusses American inequality and why it is often ignored as an issue. He warns against the creeping regulation of science. And he considers why the Stern report had a greater impact in the UK than in America.
I very much liked Deaton’s recent book The Great Escape, which focuses on how modernity revolutionized standards for consumption.
This award is no surprise at all and he has been on the short list for a while. Is it a slight surprise that Deaton won this prize on his own? Many thought he would be paired with Anthony Atkinson, but I see Deaton as worthy of a stand-alone prize and Atkinson’s chance has not passed him by. In any case, Tirole was a stand-alone prize too, so maybe in that regard there has been a shift in the Swedish regime.
Last but not least here is Alex’s post on Deaton.
His very good point does not receive enough attention:
“I thought that the zero interest rate, the decrease in the price of oil, the depreciation of the euro, the pause in fiscal consolidation, would help more than they have”, he said.
Perhaps we should consider the possibility that many of the European economies are at margins where “one offs” just don’t help very much. That is perhaps easiest to rationalize in a multiple equilibria model where investors are waiting for signs that the European economies are truly committed to growth, but not finding so many such signs. And this:
But Mr Blanchard, who departed the IMF two weeks ago, said radical visions for a full-blown “fiscal union” would not solve fundamental tensions at the heart of the euro.
“[Fiscal union] is not a panacea”, Mr Blanchard told The Telegraph. “It should be done, but we should not think once it is done, the euro will work perfectly, and things will be forever fine.”
The article is here. Today is Nobel day! (later)
Yesterday Alex outlined the facts, which I take to be not in dispute. Firms at the frontier have seen significant productivity gains, the others not so much. Alex calls this a “lack of innovation diffusion” and considers whether IP law might be one cause.
My framing is somewhat different. The result reminds me of the international trade literature on why so few firms export. The notions of increasing returns to scale, and fixed costs to trade abroad, provide the beginnings of an answer. In such a setting, let’s say the world has become more globalized, more IRS, and more based on learning curves, much of those trends being attributable to information technology. In that case we would expect a growing bifurcation of firm productivity outcomes, just as we find a strong bifurcation of export outcomes, with a relatively small percentage of firms doing most of the international trade, or innovating, as the case may be. The “only a small percentage of firms export” and the “only a small percentage of firms are on the productivity frontier” may sometimes even be the same way of describing the same basic fact.
The on the ground reality I observe is that the large, famous, exporting firms put together fantastic O-Ring teams of talent in a way the smaller, medium-size enterprises do not. That is the relevant diffusion barrier, but of course there may be limits on that diffusion as well. Eliminating barriers across firms is a good idea but not enough either.
And does the presence of relatively strict IP law subsidize such O-Ring teams, or limit their diffusion? You can argue it either way.
With fewer and fewer young Argentinians getting married for real, groups of friends in their 20s and 30s are instead paying around $50 (£32) each to attend staged events.
“It all started two years ago with a group of friends: we realized we hadn’t been to a wedding in a long time because hardly anybody is getting married anymore,” says 26-year-old publicist Martín Acerbi. Together with four friends from the university town of La Plata, 32 miles (50km) south of the capital city of Buenos Aires, Acerbi decided to organize a fake wedding instead.
To their surprise the event was a roaring success, and the one-off wedding became a business: Acerbi and his friends founded the Falsa Boda company in November 2013 – and have had steady work ever since.
The company hires real wedding locations, caterers and DJs for the parties, Acerbi said. “These wedding professionals have become our strategic allies, we organize it like it’s the real thing, except the marriage itself is fake,” he said.
Hired actors play the bride, groom and a surprise third party: a spurned lover or secret boyfriend who arrives “unexpectedly” – and with dramatic results.
“Our guests get all the fun of a wedding party with none of the commitment, or the problem of finding someone who is actually getting married,” says Acerbi.
A typical “fake wedding” hosts about 600 or 700 paying guests, with soap-opera style drama and a party lasting until 6am the next morning – the normal timetable for a real wedding in hard-partying Argentina.
The full story is here.
The trouble with most of our social thinking is that, being done in terms of eighteenth century rationalism, it takes dynamism for granted and assumes that the chief social problems are those of knowing what you want and how to get it. The chief social problem is that of generating and unifying the social will that creates activity, change and what we have been wont to call progress.
That is from his 1940 book The Dynamics of War and Revolution, p.53. It’s an ever so slightly fascistic version of a common critique of neoclassical economics. Is it entirely wrong?
Our research shows that the slow productivity growth of the “average” firm masks the fact that a small cadre of firms are experiencing robust gains. OECD analysis shows that the productivity of the most productive firms – those on the “global productivity frontier” in economic terms—grew steadily at an average 3.5% per year in the manufacturing sector, or double the speed of the average manufacturing firm over the same period. This gap was even more extreme in services. Private, non-financial service sector firms on the productivity frontier saw productivity growth of 5%, eclipsing the 0.3% average growth rate. Perhaps more importantly, the gap between the globally most productive firms and the rest has been increasing over time, especially in the services sector. Some firms clearly “get it” and others don’t, and the divide between the two groups is growing over time.
What this means is that the problem is not a lack of innovation it’s a lack of innovation diffusion. Note that a failure of innovation diffusion is also consistent with the argument that much of the rise in income inequality can be attributed to greater inequality among firms.
Why this is happening is unclear. Patents and other intellectual property being locked up in the frontier firms is one possible answer. Greater diffusion of ideas and people could thus increase innovation.Another possibility is that innovations are embedded in capital so you need new investment to diffuse innovation and business investment has been low for some time perhaps for “cyclical” reasons.
In one sense, these views provide some grounds for optimism. It’s easier to spread good ideas than to create good ideas. My Australia report discusses many levers we can pull to increase innovation diffusion.
If the future is here just not evenly distributed then increasing the speed of diffusion holds the promise of a highly productive catch-up period in which the average advances to the frontier.
Diane Coyle mentions some possible picks:
Update: Twitter folks strongly recommend adding Martin Weitzman in this category.
Growth: Paul Romer, Robert Barro
Innovation (and much else): Will Baumol (now 93!)
Econometrics: David Hendry
All good guesses. I’ll add Diamond and Dybvig for banking, and possibly an early grant to Banerjee, Duflo, and Kremer for development and RCTs. That would make economics look scientific, for a year at least. I expect Bernanke, Woodford, and Svensson to get a prize as well for monetary economics, although probably not right now. It is too close to Bernanke’s memoir and Svensson’s tenure at the Swedish central bank.
Here is a WSJ list. What do you think? Since I’ve never once been right about a particular year, trying to pick someone would only curse them. The award will come this Monday of course.
I enjoyed many passages in this book, here was my favorite:
As well as these untranslatable terms, I have gathered synonyms — especially those that bring new energies to familiar phenomena. The variant English terms for ‘icicle’ — aquabob (Kent), clinkerbell and daggler (Wessex), cancervell (Exmoor), ickle (Yorkshire), tankle (Durham), shuckle (Cambria) — form a tinkling poem of their own. In Northamptonshire dialect ‘to thaw’ is to ungive. The beauty of this variant I find hard to articulate, but it surely has to do with the paradox of thaw figured as restraint or retention, and the wintry notion that cold, frost and snow might themselves be a form of gift — an addition to the landscape that will in time be subtracted by warmth.
Also of note is the discussion of how places names in Gaelic (and many other languages and dialects) are becoming unintelligible, even if much of Gaelic is surviving. And so:
The nuances observed by specialized vocabularies are evaporating from common usage, burnt off by capital, apathy and urbanization. The terrain beyond the city fringe has become progressively more understood in terms of large generic units (‘field’, ‘hill’, ‘valley’, ‘wood’). It has become a blandscape…It is not, on the whole, that natural phenomena and entities themselves are disappearing, rather that there are fewer people able to name them, and that once they go unnamed they go to some degree unseen.
Definitely recommended, buy it here.
Inquiring minds wish to know for the purposes of the next few days…I have my own views, but first would love to hear yours.
7. Don’t focus on the critique of Bryan Caplan, or even the discussion of mental illness, this is an interesting short essay on the limits of the economic method, via Gordon.
8. Alan Krueger on a $15 minimum wage. He wouldn’t do it.
The veteran forward [Jared Dudley] explained concessions are sometimes necessary and the Suns purposely awarded opponents easy buckets occasionally to speed games up, which he emphasized the Wizards are not considering.
Here is more from Jorge Castillo, who is writing about the desire of the Wizards to speed up their offense, and take more three point shots, and all that entails.
Is the way forward here to model the Suns, the Wizards, Dudley, or all of the above?
Named Robocoach, the fitness-minded cyborg will be deployed to over 20 senior activity centres to help caregivers run exercise classes for residents.
The project is sponsored by Singapore’s Infocomm Development Authority as part of the government’s Smart Nation plan — a large-scale multibillion dollar government initiative to use Internet technologies to modernise different facets of Singaporean life and infrastructure.
There is more here.