Category: Economics

One of Mexico’s biggest drug cartels has launched a brazen recruiting
campaign, putting up fliers and banners promising good pay, free cars
and better food to army soldiers who join the cartel’s elite band of
hit men.

From USA Today.  Hat tip to Peter Gordon.

Here is my latest New York Times column.  Here is the conclusion:

Lately, it’s become fashionable to assert that, in this time of financial market turmoil, the market-oriented teachings of Milton Friedman
belong more to the past than to the future. The sadder truth is that
when it comes to food production – arguably the most important of all
human activities – Mr. Friedman’s free-trade ideas still haven’t seen
the light of day.

Here is the most interesting paragraph:

The reality is that many of today’s commodity shortages, including that
for oil, occur because ever more production and trade take place in
relatively inefficient and inflexible countries. We’re accustomed to
the response times of Silicon Valley, but when it comes to commodities
production, many of the relevant institutions abroad have only one foot
in the modern age. In other words, the world’s commodities table is
very far from flat.

Here is the most tragic part of the piece:

Poor rice yields are not the major problem. The United Nations
Food and Agriculture Organization estimates that global rice production
increased by 1 percent last year and says that it is expected to
increase 1.8 percent this year. That’s not impressive, but it shouldn’t
cause starvation.

The more telling figure is that over the next
year, international trade in rice is expected to decline more than 3
percent, when it should be expanding. The decline is attributable
mainly to recent restrictions on rice exports in rice-producing
countries like India, Indonesia, Vietnam, China, Cambodia and Egypt. 

Addendum: Also from today’s NYT, read this supporting article, which covers grain in Argentina.  And from Duke, here is a related piece on Africa.

Another way of investigating the relationship between inequality and
trade with poor countries implies that China may actually help the
poor, suggests new work from University of Chicago economists Christian Broda and John Romalis.

Instead of focusing purely on what’s produced outside of the
country, Broda and Romalis turn their attention to an interesting but
obvious relationship between imports and consumption within our border:
The goods exported by poorer countries are typically consumed by
lower-income Americans. Our typical methods of quantifying inequality,
however, don’t take this into account.

At the same time, inflation in the price of these goods has fallen
behind inflation in services, which make up a greater portion of what
wealthier people buy. Taken together, these trends imply that official
measures may be overstating the rise in inequality.

Looking at trade data between 1994 and 2005, Broda and Romalis
construct inflation rates for different income groups and find that
rates for the richest outpaced rates for the poorest by about 4 percent
over the period. Since income inequality between the top and bottom 10
percent of earners grew by about 6 percent, the different inflation
rates among income groups wipes out about two-thirds of the rise in
inequality.

The emphasis in that last sentence is mine.  It continues:

China’s role in this new way of analyzing inequality is large, accounting for about 50 percent of the total reduction.

And scream this part from the rooftops too [how do you scream a parenthesis?]:

(A very interesting aside. Broda and Romalis also find that the poor
are more likely than the rich to buy newer goods. Because of the lag in
how quickly the CPI tracks new products, the researchers argue that
once this "new goods bias"
which serves to keep official inflation rates higher than they actually
are since newer goods are typically cheaper, is factored out,
inequality between the rich and the poor between 1994 and 2005 may not
have changed at all.)

Here is the link.  Again, here is the Broda and Romalis paper.  If this holds up it is big, big news and we must revise many claims that have been made about inequality, trade, and China.

Who better to ask than Air Genius Gary Leff:?

…the usually sober, sometimes brilliant, and certainly prolific judge
and scholar offers up an unusually misguided rant on why he believes
“airline service is so bad” over at the Becker-Posner Blog…

Here is Posner’s charge, which I might add calls for air travel reregulation.  Read Gary’s whole response.  I don’t, as they say, have a horse in this race (noting that Gary and I work together at GMU).  What I do know points to two major problems: badly run airports (rather than air travel deregulation per se) and too many flights clustered at peak hours.  That puts me closer to Gary’s analysis than Posner’s.  Congestion pricing and true markets for all airport services would solve many of the problems, in my view.

Ahem:

At a time when the world’s top climate experts agree that carbon emissions must be rapidly reduced to hold down global warming, Italy’s major electricity producer, Enel, is converting its massive power plant here from oil to coal, generally the dirtiest fuel on earth.

Over the next five years, Italy will increase its reliance on coal to 33 percent from 14 percent. Power generated by Enel from coal will rise to 50 percent.

And Italy is not alone in its return to coal. Driven by rising demand, record high oil and natural gas prices, concerns over energy security and an aversion to nuclear energy, European countries are expected to put into operation about 50 coal-fired plants over the next five years, plants that will be in use for the next five decades.

Here is the full story.

A loyal MR reader requests coverage:

On mainstream versus "fringier" economic schools of thought (and schools themselves too if you like); and on different schools of thought generally, and your take on them; where economic theory is at present.

Here is me on Sraffa and the neo-Ricardians and also post-Keynesians and the Cambridge capital debates.  The Austrians I cover all the time.  Here is my post on what is new and essential in economics.  Overall I don’t believe in schools of thought for modern economics.  Think of the notion of a school of thought as a brand.  The whole point of the internet is to break down branding into the evaluation smaller units, including individuals and their very particular ideas, even doing cite counts paper by paper.  Why move toward more macro branding in that kind of environment?  You can think of trustworthy bloggers as another means of branding and also as substitutes for schools of thought.

Today I see neuroeconomics and personality psychology as two frontiers, plus economic history, but I wouldn’t call any of those schools of thought, nor should they be.

Here is the Post obituary.  Here is Houthakker at scholar.google.com, most of all on consumer behavior and conditions under which revealed preference is a coherent theory of individual behavior.  Here is another obituary; not only did he serve on the CEA twice but he was selected by the Pope as Knight Commander with Star in the Papal Equestrian Order of St. Gregory the Great.

A large share of the special green issue of the NYTimes Magazine was closely tied to economics.  I find this encouraging.  Here is one interesting bit:

…demand response has become one of the most powerful
green techniques for protecting the nation’s overtaxed power grids. When
a blackout looms, utilities call a small coterie of demand-response firms. These
firms prearrange for major users of electricity – factories, shopping
malls, skyscrapers – to shut down all nonessential electricity in exchange
for payments, often totaling tens of thousands of dollars each year. It’s
expensive, but far less so than a blackout that cascades across the country….ConsumerPowerline controls 300 huge buildings in
New York alone, where hastily brokered turnoffs by Macy’s
and major hotels prevented the spread of a 2006 blackout in Queens
– a blackout that lasted for more than a week – into Manhattan.

Paul Krugman writes:

You might say that this is my answer to those who cheerfully assert that human ingenuity and technological progress will solve all our problems. For the last 35 years, progress on energy technologies has consistently fallen below expectations.

It’s worth noting that if we had to build today’s energy infrastructure working under the current regulatory and NIMBY burden, it probably could not be done.  So it shouldn’t be surprising that building a new energy infrastructure is proving so hard.  There’s a reason why many of us think deregulation is a big issue and it’s not because we want to see people poisoned by Chinese botchagaloop.

Megan McArdle gives one bottom line, referring to Paul Krugman’s somewhat pessimistic column.  I would say that China has been massively productive but not so much in producing commodities.  That means the demand for commodities has gone up much more rapidly than the supply.  You could imagine an alternative universe in which China grew by figuring out ways to produce oil, copper, and rice much more cheaply.  Of course that’s not what happened and it is relatively easy to see why not.  Following some good policy changes, Chinese growth has been driven by a massive rural to urban migration and yes we are talking about hundreds of millions of people.  It’s plastic basketballs that have become cheaper, not the products of farms.

The mere addition of labor inputs to urban areas doesn’t, in the short run, help you produce commodities more cheaply.  Think of the Solow model where K and L have gone up lots but the rate of generating new ideas is only slightly higher.

When all those new Chinese engineers and scientists are at the peak of their creative powers, this relationship will reverse itself and commodities prices will plunge.  But it’s quicker to produce another toy than to bring about a new Green Revolution, so in the meantime commodity prices are very high.  I give the current price trend another ten or fifteen years or so to run.  Eventually high commodity prices will seem permanent and then the bottom will drop out.

We’ve never had a rapid and successful migration of hundreds of millions before, ever.

Who knows, maybe I’ll try to get to them all.  Here’s the first:

What impact will algorithmic game theory have on economics?

I’d start by asking: will game theory pure and simple have (further) impact on economics?  And I’d say basically "no."  The common concepts and tricks of game theory are invaluable but we already have those and I don’t see any more coming down the pike.  Algorithmic game theory will address problems internal to game theory and within that context it will flourish.  Finding equilibria, and discriminating among multiple equilibria, are otherwise very difficult problems and AGT is a natural way to crack those nuts.  So AGT will have continued practical applications in computer science and problems of engineering.  But it won’t much affect how most economists think about the world or do their research.

As for NBA analysis, I’ll just say that a) Boston is still an odds-on favorite, b) No one ever really told us what happened to Andrew Bynum, and c) Even though Phoenix probably won’t make it, the Shaq trade was very clearly a good idea and all you doubters should offer up mea culpas.

At Bet2give, an online electronic prediction market, anyone can “bet”
real money on the outcome of these events but with a twist – the
“winnings” go to a charity of the person’s choice.

Here is the full article, and here is Bet2give.com.  One of the "problems" with prediction markets is that they are zero-sum investments and traders cannot on average hope to come out ahead.  So why trade?  If only people really "in the know" trade liquidity will be low.  If too many "betting for fun" fools trade, the prices don’t mean that much.  You might get the right mix of informed and uninformed but who knows?  So the idea of doing these in charitable form might make some sense.

What’s missing is a recognition of how mysterious the secret of
economic growth remains, despite all the energy that economists have
poured into solving it.

That’s James Surowiecki, reviewing Ha-Joon Chang’s Bad Samaritans and writing on free trade; the piece is interesting throughout.  The pointer is from Ben Casnocha.

David Cass, formerly an economist at the University of Pennsylvania, has passed away.  His contributions were notable:

He made singular
contributions to economic theory, including the introduction of the "Cass-Koopmans"
growth model, the discovery of the "Cass" criterion for Pareto efficiency in overlapping
generations models. With Karl Shell, he discovered the importance of extrinsic uncertainty (sunspots)
in economic dynamics.  His work with many
coauthors on incomplete financial markets was extremely influential.

The main idea of sunspots models is that when multiple equilibria are present, expectations can determine which equilibrium comes to pass.  This is a twist on rational expectations; under RE people expect the true model but Cass showed that what is the true model will depend on what people expect.  If I recall correctly, Cass also helped figure out when problems with infinities will render growth models incoherent or invalid.  Cass’s version of "high theory" is exactly what is out of fashion today but in the 1980s it was the rage.  I believe some of his work will return in importance.  Here is Cass on scholar.google.com.

Thanks to Chester Norman for the pointer.