Category: Economics

Pet ashes become art.

Here is my Wall Street Journal review of Clair Brown, John Haltiwanger, and Julia Lane, Economic Turbulence: Is a Volatile Economy Good for America?  Excerpt:

In short, America is not becoming
a nation of part-time Wal-Mart cashiers or burger flippers.  In four of
the five sectors studied by the authors–semiconductors, software,
financial services, retail food and trucking–the growth rate for
full-time jobs exceeds the growth rate for jobs in general.  (Retail
food is the exception.)  Separate research, conducted by Ann Huff
Stevens at the University of California, Davis, shows that the average
tenure for employed U.S. male laborers has been broadly stable over the
past 35 years.

Insofar as individuals move to
lower-paying jobs, the turnover of firms is not the driving cause.  The
most original proposition in "Economic Turbulence" is the claim that a
big part of measured wage declines derives from job downgrades within
firms–sticking with the same employer but moving from, say, mid-level
manager to gopher. 

Here is my New York Times column; the topic is familiar but the slant is new: I consider the problematic incentives for Mexican education.  Here is the beginning of the problem:

A high school diploma brings higher wages in Mexico,
but in the United States the more educated migrants do not earn
noticeably more than those who have less education. Education does not
much raise the productivity of hard physical labor. The result is that
the least educated Mexicans have the most reason to cross the border.
In addition, many Mexicans, knowing they may someday go to the United
States, see less reason to invest in education.

Here is another commonly neglected point:

Unfortunately, we cannot expect a wealthier Mexico to resolve migration
problems, at least not within the short- or even medium-run. The
evidence suggests that good times in Mexico give the poor the means to
leave, while keeping the better-educated males at home in good jobs.

Since World War II, our economy has evolved in ways that reinforce the
financial differences between strong families and weak families.

There are more good sentences here.  You’ll find some bad sentences here, which summarizes the economic plans of the Democrats to address inequality.

One of my favorite Friedman papers is "The Effects of Full-Employment Policy on Economic Stability: A Formal Analysis" which you can find in Essays in Positive Economics.

Friedman sets up a very simple model, Z(t)=X(t)+Y(t) where Z(t) is income at time t, X(t) is what income would be if there were no counter-cyclical government policy and Y(t) is the amount added to or subtracted from X(t) by the history of government policy.

You wouldn’t think that much could come out of such a simple model but Friedman takes the model, notes that the formula for the variance of two random variables is V(Z)=V(X)+V(Y)+2 r(X,Y) Sd(X) Sd(Y) (where V is variance, r correlation and Sd is standard deviation) and proceeds to show that:

In order to cut the variance of income fluctuations in half (which would cut the standard deviation by less than a third), r(x,y) must exceed .7.

The result is powerful because once you start thinking about the correlation coefficient, r, it’s hard to see how it could be as high as .7.  Very few government actions taken in time t have an effect in time t – there are lags between recognizing a problem, deciding what to do about the problem and implementing a policy.  Once the policy is implemented there are lags before the policy takes effect.  All of these lags are of uncertain and changing length so actions taken in t-5, t-4, t-3, and t-1, may influence Y(t) making a high correlation between X and Y unlikely.  Moreover, Friedman’s bound is an upper bound, requiring optimally sized interventions – when we recognize that the size of the intervention might be too little or too much and that in both cases this will reduce the decrease in variance we have a strong case for skepticism about the efficacy of counter-cyclical policy.

But was Friedman right?  In the thirty or so years after he wrote, when counter-cyclical policy was in vogue, the variance of the US economy was much lower than in the pre-World War I years.  Reality it appeared, refuted Milton Friedman.

Friedman, however, lived to see his simple model proved correct (Essays in Positive Economics!).  In a series of papers beginning in 1986, Christina Romer showed that the pre-WWI volatility was an artifact of the way the data was collected.  Once the pre-WWI and post-WWII data were collected consistently, using the same methods, the post-WWII economy showed no big drop in volatility.

Almost nothing in, a surprising and powerful result out, and an implicit prediction proven correct after thirty years.  That’s the Friedman magic. 

Jeff Sachs gives a one-page argument for "yes." 

I lean toward a more disaggregated approach, in which the success of aid is not just a matter of political will.  The question is when and where aid will work.  From another direction, this is an insightful paper:

Incumbent political leaders risk being deposed by challengers within existing political rules and by revolutionary threats.  I examine how the survival incentives created by these dual threats shape the e¤ects of aid on government policy.  I use Bueno de Mesquita et al’s (2003) selectorate politics theory to examine the relationship between winning coalition size — the number of supporters a leader requires to retain office — and policy choice.  In large winning coalition systems, the public goods focus of public policy means that foreign aid improves societal welfare and economic development.  In contrast, in small coalition systems the private rewards focus of policy induces a loyalty norm towards incumbents which enables leaders to skim off aid resources for themselves and their cronies.  Further since in small coalition systems aid generates few of the societal benefits that it would under large coalition institutions, aid increases the desire of citizens to rebel.  Leaders can respond to such revolutionary threats by either buying off potential rebels by increasing the supply of public goods or retarding their ability to organize by suppressing public goods.  Aid increases the relative attractiveness of the latter option because aid provides governments with "unearned" revenues that are relatively isolated from the economic decline induced by the suppression of public goods.  The model also implies that aid can retard democratization.

I read that and I thought "today I learned something."  Both pointers are from www.politicaltheory.info.

Addendum: Here is more Sachs, via Mankiw.

Polonium, no license required, as far as I can tell this site is real.  Only $69, just click on "Add to Cart."

Here are the legitimate uses of polonium.  Here is a less than legitimate use.

Thanks to Natasha for the pointer; she pursued some leads from Russian web sites.

Here is Bill Nordhaus’s critique of the Stern report.  Nordhaus argues that Stern’s "new" results boil down to the choice of a lower discount rate.

I agree with Stern that the discount rate should be zero or near-zero for resources which will not be reinvested but rather represent alternative consumption streams across the generations.  If we are doing normative analysis, however, and considering alternatives to controlling global warming, a’ la Copenhagen Consensus, we are by definition considering other investments.  In that case the correct rate of discount is given by opportunity costs, which might be quite high, provided the alternative investments will in fact be undertaken.  (On this topic, there are a few really good comments here.)

Having pondered the report a bit more, my main question is what it would cost for China and India to cut back on carbon emissions, all relevant institutional changes included in the calculations.  In other words, that figure should count costs of persuasion, enforcement, and implementation, not just the cost of one technology rather than another in the abstract.  We do not have a good sense of these costs, and given how many basic tasks these economies fail at, I can imagine the cynic citing the figure of infinity.  (To consider one analogy, what is "the cost" of getting avian flu out of China?)  Furthermore China in particular has a high rate of savings, and both economies have high rates of return on capital.  Current compliance costs should thus be compounded, when considering their future importance, at rates considerably higher than zero. 

America has done so well, we need less in the way of precautionary savings, and so we spend more on imports:

The early 1980s marked the onset of two striking features of the
current world macro-economy: the fall in US business cycle volatility
(the "great moderation") and the large and persistent US external
imbalance.  In this paper we argue that an external imbalance is a
natural consequence of the great moderation.  If a country experiences a
fall in volatility greater than that of its partners, its relative
incentives to accumulate precautionary savings fall and this results in
an equilibrium permanent deterioration of its external balance.  To
assess how much of the current US imbalance can be explained by this
channel, we consider a standard two country business cycle model in
which households are subject to country specific shocks they cannot
perfectly insure against.  The model suggests that a fall in business
cycle volatility like the one observed for the US relatively to other
major economies can account for about 20% of the current total US
external imbalance.

Here is more.  Here is a non-gated version.  Of course the risk here is that if things finally do go bad, the ex post costs are especially bad, even if the lack of insurance was ex ante optimal.

This was on ebay:

You are bidding on the contact information for my friend who acquired a PS3 by waiting  in line outside Best Buy for two days in advance. I was there with him the entire time, but already sold mine. He has in his posession a PS3, extra controller, extra charger, three games (Resistance, Madden, and Ridge Racer), and a 2 year replacement plan. Keep in mind that you are not bidding on an actual system, but only the information where you might obtain one. You will be able to contact him and he is very willing to sell if the price is right. The unit is in the Atlanta, GA area and he would be willing to deliver in person if close by. PayPal is the only payment form accepted.

There were 20 bids and the final price was $1,100.

The Friedman-Savage piece starts with an obvious puzzle: why do people both buy lottery tickets and insurance against losses?  That would seem to make them both risk-loving and risk-averse at the same time.  The proffered answer is simple: part of the utility function is concave, and part is convex.  Across the lower range we wish to play it safe, but above a certain margina we are willing to take gambles (by the way, here is some evidence, and why it might follow from market constraints).

For years this approach rubbed the "foundationalist Tyler" the wrong way.  "Surely there is a more general approach which will allow us to derive both behaviors from a few axioms concerning risk and utility.  We can’t just postulate arbitrary shifts in the curve across the utility space.  Maybe both parts of the curve follow from the "temporal resolution of uncertainty," that missing variable from so much of expected utility theory.  The Friedman-Savage approach will someday be seen as a diversion from the path which led to truth."

Many articles explored these routes, most notably Mark Machina’s 1982 piece on generalized expected utility theory.  None of them caught on.  A subsequent dose of empirical and experimental work indicated that behavior toward risk is strongly context-dependent.  Neuroeconomics implied that different decisions in fact may stem from different parts of our brain, thereby challenging the assumption of a unified agent.  Probably there is no overarching approach to all of the so-called violations of expected utility theory.  People simply behave differently toward risk in different situations.

In other words, Friedman and Savage were ahead of their time.  This is no accident, but rather it stems from Milton’s wise pragmatism, and from his general lack of interest in foundations.  He also never explained "why people hold money," or "what money really is," yet he charged ahead with monetary theory and indeed monetary policy.  The monetary foundationalists have been just as unsuccessful as the utility foundationalists.

Wuhan, my hometown in Central China, plans to sell the right to name streets, bridges, public plazas and high-rise buildings to businesses in exchange for money the municipal government desperately needs to make up for a "funding shortage in government operations."

Here is the story, and thanks to Petras Kudaras for the pointer.

Robert Tagorda sends along a story of governments doing the buying rather than the selling:

State leaders have tried for years to get more minority and low-income high school students to take tougher classes. One group Thursday proposed an eye-opening idea: Pay students to take the classes.  The Minnesota Private College Council called on the state to spend $50 million a year to pay eligible high school students who take and pass college-prep classes.

Alex once blogged on Roland Fryer, and paying students to get better grades.

Here.