Category: Economics

Here is Brad DeLong, on Slate.com, on the new Bush proposal. 

If you don’t like getting your paper rejected before it even reaches peer review, ask David Egilman how to get around the process: In what may be an unprecedented move, when the Brown University researcher’s paper was recently rejected from an occupational medicine journal, he simply bought two pages of ad space and printed the entire article in the same journal.

Here is the full story, and thanks to Newmark’s Door for the pointer.

Addendum: If you care about "Conferences in Everything," try this one.

During his Daily Show appearance Steve Levitt said that in estimating the effect of abortion on crime he controlled for other variables like police and prisons.  Jon Stewart pressed Steve for an explanation of how someone could "control" for other variables – amazingly, Stewart seemed genuinely interested in an answer but, wisely, Steve demurred.  The exchange got me to thinking, What is the shortest, non-technical, yet reasonably accurate explanation of how this is done?

I think the way to go is to use the Frisch-Waugh-Lovell Theorem.  Here’s my attempt:

Suppose you want to figure out the effect of weight on life expectancy.  Heavy people tend to be tall so you have to control for height.  You can do this with a two-step procedure.  First, calculate how height correlates with weight.  Let’s say that you discover that every 1 inch increase in height above say 5’7 correlates with a 5 pound increase in weight; you now subtract from each person’s weight that portion which can be explained by height.  For example, you would subtract 5 pounds from everyone in the data of height 5’8 and 10 pounds from everyone who is 5’9.   Since height doesn’t explain weight perfectly, you are left with a new variable, weight2.  In the second step, you calculate how life expectancy correlates with weight2, since weight2 is "weight after controlling for height" you have now calculated the effect on life expectancy of weight after controlling for height.

To be clear, I am not suggesting that this is what Steve should have said!  (If asked I would have said, "Well, I could tell you that Jon, but then I would have to bore you.")  I’ve opened the comments section if you have some other ideas.

By the way the ubiquitous Steve Levitt will be here on Wednesday, but I repeat myself.

The ever-insightful Henry Farrell asks whether (modern, left-wing) liberals can express their core attitudes in one simple sentence.

My version of his attempt is: "We don’t want to rake people over the coals with risk."

Some conservatives and libertarians, believe: "Risk strengthens your moral fiber, and induces you to work hard for others."

My sentence is a bit different: "Trying too hard to limit risk will increase the number of global people who are just outright screwed over."

My sentence is the least politically palatable or salient of the three.  But the more globalized the world becomes, the greater its relevance.  It is imperative to keep the United States — the number one generator of global public goods — as a highly productive, innovative economy.

The modern liberal vice is to think that everyone can be taken care of, and/or to rule out foreigners from the relevant moral universe.  Too many issues are (incorrectly) framed as "taking care" vs. serving the avarice of the wealthy. 

In turn, a conservative and libertarian vice is to get too obsessed with "desert."  Another conservative and libertarian vice is come up with some better means of helping people — usually involving markets — and if that doesn’t happen, to be content with doing nothing.  I am most sympathetic with modern liberalism when it buys into libertarian analysis, but then wants to do something through government anyway.

Note that conservatism and libertarianism, whatever their major differences may be, tend to share emotional vices.  That is why libertarianism remains more of a right-wing than left-wing point of view.

On net, yes, but it is not simple:

…institutions such as NAFTA are problematic for many of the indigenous groups in Mexico.  While the economic case for free trade is a strong one, politics matters as well.  The long-run benefits of NAFTA, most of all for Mexico, are likely to dramatically outweigh the costs, but trade can worsen some political problems in the shorter run.

…greater wealth sometimes brings greater confiscation in response.  NAFTA, and economic development more generally, has attracted much foreign investment to Mexico.  The land in Guerrero is suddenly more valuable than before, or at least potentially so.  If better roads were in place, Oapan [the village] would be no more than two and a quarter hours from Mexico City.  The Mexican government therefore would like to get the villagers off the land, whether by legitimate means or not. 

The Mexican state and federal governments also favor foreign investment when the villagers do not.  Any foreign investment that came into Guerrero would likely involve significant payoffs, of one form or another, to the various levels of government involved.  The villagers would not expect to see any of this money.  NAFTA therefore has increased the conflict of interest between the villagers and higher levels of Mexican government. 

Here is my previous post on my new book, Markets and Cultural Voices: Liberty vs. Power in the Lives of Mexican Amate Painters.  You can (and should) buy it here.

Are you worried about a housing bubble?  Go buy that house anyway.

Let’s say you buy and the price of housing then goes up.  Surely you are happy.

Let’s say the price of housing, including your house, falls.  Well, in absolute terms that is not so bad either.  You can simply stay put.  Even better, you might buy another house.  Consider the polar case where houses fall to a nickel a piece.  Yes you wasted 600K on an overpriced big box.  But now you can buy your favorite mansion for a dime.

In technical terms, consider the changing price as a budget constraint rotating around a fixed status quo point (you can always stay in the house you bought).  The rotating budget constraint will put you on a higher indifference curve.

So go ahead and buy that house.  Yes, you might be better off by waiting for the price to fall.  But don’t worry about bursting bubbles, you won’t end up worse off.

And let’s assume you won’t have to move anytime soon.

So buy, buy, buy.  And don’t stop at homes.

I’ve opened up the comments section, and don’t forget the title of this post.

In a written statement, the [American Economic] association praised Mr. Acemoglu, 37, as a "broad and productive economist" who has made "valuable contributions" in the fields of labor economics, macroeconomics, institutional economics, and political economy. "Especially innovative," the statement says, is his recent work on the role of institutions in development and in political economy.

Mr. Acemoglu was one of the authors of a paper, "Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution," that appeared in the Quarterly Journal of Economics in 2002. The authors argue that among countries colonized by European powers, those that were relatively rich in 1500 are now relatively poor because of colonial policies — an argument against the notion that geography is destiny.

In a working paper published in March by the National Bureau of Economic Research, Mr. Acemoglu and other authors argue that there is no evidence that countries that increase their levels of education are likely to become more democratic.

That is from the Chronicle of Higher Education, through the Division of Labor blog. 

This is a very good choice.  Acemoglu is an economist who starts with, and sticks with, the critical questions about development and institutions.  He does not let himself get distracted by a model he knows he can solve or a technique he knows he can use.  Here is his home page, with links to research.  Here is an earlier MR post on his work.  Here is David Warsh on Acemoglu.

With two simple questions Bill Gates provides us more insight into globalization than half-a-dozen books.

Twenty years ago would you rather have been a B-student in Poughkeepsie or a genius in Shanghai?  And today?

That’s Bill Gates, according to Tom Friedman in an interview in the April issue of Wired.      

Raves for deaf people:

Aurally frustrated, some deaf hip-hop DJs in East London started setting up their own parties. The kids went mad for it, and soon deaf raves ["Rave" in the UK just means loud DJ party of any sort–Ed.] were drawing hundreds of people from all over the country. I went to one recently at Hackney Ocean and the music was so loud I had to make myself deaf using earplugs.

Inside the club the walls were pulsing to the music but the 500-strong crowd was silent because everybody was just doing excited, drunken sign language. I had no idea what…they were talking about but they were partying way harder than people with ears that work. After years of not being invited to the party, these kids had finally created their own scene and it was exploding.

On stage there was live deaf karaoke where hot deaf girls were frantically signing the lyrics to R&B hits.

Then there was the deaf dance-off, where breakdancers battled to see who was the best at body-popping out of sync to the music.

But the highlight of the night had to be Britain’s first deaf rapper, MC Geezer, who signs-rhymes and raps out of time…

Yes, fixed costs are falling.  And thanks to Nacim Bouchtia for the pointer, my apologies if you find the language in the link offensive.

Here is the link, I am debating Max Sawicky. My first installment reads as follows:

Whether or to what extent we should have an estate tax will depend on other fiscal choices we make.  But the case for an estate tax is not as simple as Max thinks:

1. It is not clear if the estate tax raises much if any revenue.  The very rich engage in tax avoidance strategies.  The apparent revenue raised is often offset by a lower intake from income and capital gains taxes.  Furthermore it has been estimated that the costs of implementing tax avoidance strategies are roughly equal to the (gross) revenue raised.

2. The estate tax does not do much for equality.  In fact it increases consumption inequality — presumably the relevant measure — by encouraging the rich to spend more money before they die.  Joseph Stiglitz and Alan Blinder have raised this concern.

3. Estate taxes add yet another layer of taxation on savings and investment.  Imagine that you must first pay taxes on earned income.  You then pay taxes on the income derived from savings and investment.  You then face estate taxes when the funds or resources are passed down to the next generation.  Savings and investment, of course, are a well spring of economic growth.  It is no wonder that the fairness and efficiency of the estate tax has come under such question.

In the early 1990s, Henry Aaron and Alicia Munnell — two liberal economists — wrote: "In short, the estate and gift taxes in the United States have failed to achieve their intended purposes.  They raise little revenue.  They impose large excess burdens.  They are unfair."

Addendum: Here is the permanent link.

Bryan Caplan trots out all the usual arguments, you know the ones I use myself when debating opponents of the market.  Start with legal laissez-faire and let airlines weigh conflicting preferences and then implement the profit-maximizing policies.

I still don’t want cell phone use on planes, but I’m not going to tell you some fancy-wancy academic story about externalities imposed on infra-marginal consumers.  I am still, however, looking for a good argument to use against him.  Can I claim that cell phone calls are a socially wasteful means of signaling to your spouse that you care?  Can I claim that commercial airplanes are modern (short-term) monasteries, and that markets undersupply such temples of silence?

The study, by James M. Poterba, an economics professor at the
Massachusetts Institute of Technology, has found that changes in the
proportion of retirees in the population have only a modest impact on
stock market returns. So while the market is likely to come under some
downward pressure from the retirement of boomers over the next couple
of decades, he says he believes that there is no reason to expect the
effects to be severe.

Professor Poterba’s study, "The Impact
of Population Aging on the Financial Markets," has been circulating
since last autumn as an academic working paper. A copy is at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=609226.

He compared the market’s year-to-year returns from 1926 to 2003 with
the annual changes in a number of demographic indicators, including the
proportion of the population in retirement – a phase of life when
investors are presumably net sellers of stock. He also looked at the
share of the population in the 40-to-64 age group – people who tend to
be net buyers of stocks. Regardless of the statistical test used,
however, he found little evidence to support a forecast of a long-term
bear market over the next couple of decades.

That is Mark Hulbert, here is The New York Times link.  Surely it is odd that macroeconomics (or finance, for that matter) has so little to say about the determinants of the absolute level of stock prices, no?