Category: Economics
What is going on in China right now?
Given all of the recent publicity, I thought I would re-up on my China video, The Rise and Fall of the Chinese Economy. This is a recent addition to our Everyday Economics series from MRUniversity, and it also will be part of our in-progress macroeconomics course.
The Learn More page features additional resources about this topic. As I say in the video, the key variable to track for whether things get really bad is capital flight. In other words, recent developments have indeed been unsettling.
What we’ve seen is the central government spending down reserves at a much higher pace than virtually anyone had expected…except perhaps the central government. The response to falling stock prices has been to make it legally harder and harder to sell — what do the prices even mean at this point? A barometer of which kind of PR hit the government feels like taking on a given day? And perhaps most importantly of all, more and more people, both in and outside of China, are questioning whether the government really has matters under control. It seems not.
By the way, here is your China fact of the day, Larry Summers informs us:
Over the past year, about 20 per cent of China’s growth as reported in its official statistics has come from its financial services sector, which is now about as large relative to gross domestic product as in Britain, and Chinese debt levels are extraordinarily high. This is hardly a case of healthy or sustainable growth.
That said, China will do everything possible to prevent a financial crisis.
On the (somewhat) cheerier side: “Film market analysts have pointed out that the biggest films have performed similarly in China and the US in recent years.” Star Wars: The Force Awakens had the biggest single-day opener in Chinese history (FT link), let’s see how well the future installments do.
Nudge plus vouchers = “Nanny state”?
Do you like or dislike this mix?:
The prime minister [of the UK] will call for a revolution in child rearing this weekend by suggesting that all parents should attend classes on how to discipline their children.
In a move likely to enrage those fearful of an encroaching “nanny state”, David Cameron will say that it should be the norm for parents to receive instruction on how to behave around their offspring.
As part of a speech on the family, Cameron will announce plans for a parenting classes voucher scheme, claiming that all parents need help and that there is too little state-sponsored guidance on offer.
I believe most Americans at least do not find this an intuitively appealing combination of policies. It seems to “insult” the poor at the same time that it brings the state into what for conservatives is the sacred realm of the family.
I wish I could say a policy which irritates so many people is likely to be a good thing, yet I can’t quite see this one working out for the better. And yes I do know the RCT evidence that personal trainers and coaches can improve the lives of the poor in the developing world.
State-contingent markets in everything
Someone is betting $40,026 on the life of a 73-year-old lottery winner in Michigan.
That amount was the highest bid Thursday in an online auction for a lottery prize that pays $1,000 a month, before taxes. But here’s the hitch: The money is paid only as long as Donald Magett stays alive.
The Portage man won the “Cash for Life” game back in 1984, although the winnings lately have been going to bankruptcy trustee Tom Richardson to pay Magett’s debts.
Richardson auctioned the lottery prize — the last main asset — in an effort to close the bankruptcy case. The auction house, repocast.com, said the top bid was $40,026. At that price, Magett would need to live a few more years for the winner to at least break even.
The winner soon will get the first annual payment of $12,000.
Richardson said he doesn’t know the details about Magett’s health.
“All I know is his lawyer tells me his health is good,” Richardson said.
According to the Social Security Administration, a 73-year-old man can be expected to live another 13 years.
The story is here, via Mohamed Rayman.
Powerball
Today’s Powerball lottery offers a prize of $800 million. Is the prize high enough to make it worth playing for an economist? In other words, is the prize high enough to be a net gain in expected value terms? Almost!
The odds of winning are 1 in 292.2 million. So the expected value of a ticket is $800*1/292.2=$2.73. A ticket only costs $2 so that’s a positive expected value purchase! We do have to make a few adjustments, however. The $800 million is paid out over 30 years while the $2 is paid out today. The instant payout is about $496 million so that makes the expected value 496*1/292.2=$1.70. We also have to adjust for the possibility that more than one person wins the prize. If you play variants of your birthday or “lucky” numbers that’s a strong possibility. If you let the computer choose your chances are better but with so many people playing it wouldn’t be surprising if two people had the same number–I give it at least 25%. So that knocks your winnings down to $372 million in expectation.
Finally the government will take at least 40% of your winnings, leaving you with $223 million in expectation. At a net $223 million the expected value of a $2 ticket is about 75 cents. Thus, a Powerball ticket doesn’t have positive net expected value but the net price of $1.25 is significantly less than the sticker price of $2. $1.25 is not much but to get your money’s worth buy early to extend the pleasure of anticipation.
Very good indeed awesome sentences about economic method
At the end of the day, the great benefit of field experiments to economics and political scientists is that it’s forced some of the best social scientists to try to get complicated things done in unfamiliar places, and deal with all the constraints, bureaucrats, logistics, and impediments to reform you can imagine.
Arguably, the tacit knowledge these academics have developed about development and reform will be more influential to their long run work and world view than the experiments themselves.
That is from Chris Blattman. He concludes:
We are all Albert Hirschman now.
Shout it from the rooftops
…the idea that China services, which are already a large share of output, can and will just take up the slack as industry shrinks overlooks that most services are directly tied to the weakening sectors of property and industry. As George Magnus notes, the tertiary sector is concentrated in finance, property, and wholesale and transport distribution, not in business, IT, professional, health and education services. Despite its large services sector, China is much less diversified than the
Bull-narrative surmises.
And this:
Furthermore, absent new forex controls, if the PBOC broadly holds the band and runs down reserves without sterilizing, any PBOC interest rate cuts would be China-demand-contractionary. So alongside interest rate cuts, the PBOC would have to fully sterilize just to maintain the demand status quo, let alone to stimulate. Alternatively, if it lets the Yuan really float (down), it will be disorderly for lack of a policy framework to back a float, and it will set off major global currency shocks.
That is from Peter Doyle (pdf), with further points of interest, via Dani Rodrik.
Why did the British surpass China in matters military?
Here is an excerpt from the now published Tonio Andrade book, The Gunpowder Age: China, Military Innovation, and the Rise of the West in World History:
Part of the answer of course has to do with industrialization. Steamships destroyed warjunks, towed long trains of traditional vessels into position, reconnoitered shallows and narrows, and, equally importantly, decreased communication times, allowing for minute, systematic coordination of the war effort. Similarly, industrial ironworks made strong, supple metal for muskets and cannons, and steam power was used to bore cannons and mix, crumble, and sort gunpowder.
But industrialization isn’t the only answer. Many of the innovations that most helped the British weren’t about steam power or the division of labor or mechanized factories. They stemmed, rather, from the application of seventeenth- and eighteenth-century experimental science to warfare. During the mid-1700s, new scientific discoveries enabled Europeans to measure the speed of projectiles, understand the effects of wind resistance, model trajectories, make better and more consistent gunpowder, develop deadly airborne missiles, and master the use of explosive shells. These innovations as much as the use of steamship and industrial manufacturing techniques underlay the British edge in the Opium War.
Here is my previous coverage of the book.
For all the talk about recent advances in economics, you don’t hear much about one of the very biggest: how rapidly researchers are filling in the contours of Chinese economic history.
China fact of the day
To recap, China’s total debt is about $28 trillion, or roughly half the world’s entire debt.
Jim Edwards has further information.
How much did World War II boost post-war growth?
Petros Milionis and Tamas Vonyo have a new paper on this question (click through to the first pdf here), the effect was a major and long-lasting one, here is part of the abstract:
…this reconstruction process was an important driver of growth during the post-war decades, not only in Europe but globally, and its impact on growth rates lasted until the mid 1970s. Moreover, a counterfactual analysis suggests that in the absence of the reconstruction effect global growth rates from 1950 to 1975 would have been on average 40% lower and only slightly higher than those observed during the years from 1975 to 2000.
Here is Alex’s MRU video on the Solow growth model, part two here.
Are the disabled less loss averse?
Arbel, Ben-Shahar, and Gabriel have a newly published paper on this topic, here is the abstract:
Research findings show that disabled persons often develop physical and psychological mechanisms to compensate for disabilities. Coping mechanisms may not be limited to the psychophysiological domain and may extend to cognitive bias and loss aversion. In this study, we apply unique microdata from a natural policy experiment to assess the role of loss aversion in home purchase among nondisabled and disabled households. Results of survival analysis indicate that the physically disabled are substantially less loss averse in home purchase. Furthermore, loss aversion varies with other population characteristics and attenuates with degree of disability. Findings provide new evidence of diminished cognitive bias and more rational economic decision-making among the physically disabled.
There are alternative versions of the paper here.
For the pointer I thank the excellent Kevin Lewis.
Book markets in everything, even free internet content
Reddit is collecting some of its best Ask Me Anything interviews — with Bill Gates, Waffle House workers, Spike Lee, nuclear missile operators — in a “beautiful coffee table book.” It’s 400 pages. It’s $35. (Yes, there’s an e-book version, too.)
That is from Michael Rosenwald.
Nobel Prize poll results
The MRUniversity booth at the AEA meetings polled economists on a walk-by basis, as to who should win the next Nobel Prize. The top five on the list were:
Robert Barro
Paul Romer
Esther Duflo
Partha Dasgupta
William Nordhaus
Do check out the whole list at the link. Yoram Bauman was perhaps the dark horse candidate.
China pessimists are China optimists, and vice versa
If you think a lot of China’s growth slowdown already has come, the rest should prove manageable, albeit painful. That is true for both the global economy and for China. And that is in fact my view.
But if you think China has been growing at six to seven percent over the last year…egads! The roof will be falling in all at once, and what a long and steep way it has to tumble. The previous China optimists, provided they are not asleep, should be really worried now.
If you take Australian prices as a kind of bellwether, arguably the Chinese slowdown started about four to five years ago. (Five years ago, the Australian government was forecasting Australian growth rates of seven percent, now the growth rates are at about two percent.)
I call it the Soft Hard Landing.
Obamacare in 2016
During the election season Democrats can’t admit Obamacare is broken and Republicans can’t admit it won’t be repealed.
An excellent post from Robert Laszewski, read the whole thing.
Religion is good for the poor, installment #1437
From Jessica Shiwen Cheng and Fernando Lozano:
What is the role of religious institutions and religious workers in the racial earnings gap in the United States? In this paper we explore the relationship between childhood exposure to religious density, as measured with the number of religious workers at the state level, and the labor market outcomes of the worker thirty years later. We use data that spans over fifty years to identify changes in earnings due to early exposure to religion: our first source of identification uses changes in these two variables within states, and our second source of identification uses states’ differences by following workers who moved to a different state. Our results suggest that living in a state with a an extra clergy member for each 1,000 habitants increases the earnings of black workers by 1.7 to 3.6 percentage points relative to white workers.. In addition we show that this relationship is robust to different measures of exposure to religious density, and that these estimates increase to 7.6 percentage points when the change on religious density is defined exclusively increasing an extra black religious workers for each 1,000 habitants. Finally, we estimate a series of robustness tests that suggest that these results are not due to spatial sorting across states, nor to secular time trends associated with changes in labor market outcomes for black American workers.
You can find a copy of the paper if you dig through this link to the AEA program, look under Jan 03, 2016 12:30 pm, Hilton Union Square, Powell A & B, National Economic Association/American Society of Hispanic Economist. The title of the paper is”Racial/Ethnic Differences in Self-Identification and Income Inequality,” but do any of you know a better, more direct link?
As I see things, to overgeneralize perhaps rather grossly, Democratic economists are more concerned with social and intellectual status, often in good ways, than are many conservatives. The former group therefore is led to violate strictures of science through the omission of inconvenient truths, rather than through outright denialism or simply “making things up.” The benefits of religion, including sometimes extreme religion, are one example of that. On the Left, redistribution is a popular remedy for poverty, religion much less so.