Category: Economics

At the AEAs Tyler and I would ask our job candidates what countries do you think are currently overvalued and what countries do you think are currently undervalued (in terms of growth prospects, reasons for investment optimism etc.)  Many candidates were surprised by this question.

Of those able to give an answer, China was repeatedly picked as overvalued as to a lesser extent was Argentina.  Good reasons were given for both cases.  Fewer people were able to articulate a case for undervalued nations.  My own pick for undervalued nation was Germany while Tyler chose Mexico.  No one thought that Iran, Iraq or Saudia Arabia was undervalued but these are the surprising picks of
Glenn Yago and Don McCarthy writing in today’s Wall Street Journal (and available online here).  Yago and McCarthy point primarily to rising stock markets but also increased FDI:

Regionally,
stock markets rose over 30% in 2004 and represent a market
capitalization of $470 billion. This has been accompanied by a surge in
regional property values and a higher number of tourists. The main
Egyptian equity index has increased 165%, while that of Saudi Arabia
has gone up by 158%. The Saudi market’s stellar performance is
especially striking given the great amount of attention paid at the
moment to that country’s security problems. Israel’s leading index has
risen by 32%, the benchmark index of Kuwait’s exchange by 73%, Jordan’s
by almost 60%, and that of the United Arab Emirates by 110%.

What countries do you think are overvalued or undervalued and why?  I have opened the comments section up for this post.

Alex and I learned during this weekend’s job interviews that behavioral economics remains "hot."  Frequently a behavioral model will find some imperfection in individual choice or aggregate market outcomes.  Behavioral economics often is used to argue for paternalism, for the relevance of sticky wages and prices, and against the efficiency of asset markets.

I’ve been a fan of behavioral economics from the beginning, as you might expect from a former student of Tom Schelling’s.  But behavioral economics has overemphasized market failure at the expense of government failure.  I would like to see more behavioral investigations along the following lines:

1. A productive entrepreneur exploits behavioral imperfections to defeat a blocking coalition.

2. A market that would otherwise have no equilibrium "core" in fact becomes quite stable, due to behavioral frictions.

3. A politician self-deceives and builds a self-aggrandizing "empire" rather than serving the median voter.  Voters know that the potential political competitors will end up doing the same, and so they accept this tendency.

4. Median voters pick politicians on the basis of looks, height, or behavioral quirks, not expected policy or past performance.

5. Behavioral models often stress how choices can make people worse off.  How about a model where welfare payments lead to a breakdown in self-restraint and community?

Brad DeLong, Irwin Stelzer and many others complain that the payroll tax is unfair because it is regressive.  True, but twice misleading. 

The payroll tax is regressive but benefits are progressive and on net
the social security system is progressive – a 45 year old male with an income twice the
national average, for example, will in present value pay into the
system $243,700 more than he will receive in benefits (Murphy and Welch, 1998, Table 2 (JSTOR)).   (Part of this net loss comes from progressivity and a larger part from the fact that all currently young workers will pay more in present value taxes than they will receive in benefits).

More fundamentally, if you want to complain about the regressivity of the payroll tax, go ahead, but then you ought to admit that the social security system is a welfare program and defend it, and reform it, on those grounds (as usual, Tyler has the right idea).

It makes sense to complain about a regressive welfare system but it makes no sense to complain about a regressive social insurance or forced savings program.  Is the unemployment insurance system unfairly regressive because construction firms, and thus construction workers, pay higher UI tax rates than professors?  Are IRAs unfair because people who put more in get proportionately more out?

Savings are hard to measure; the government’s Bureau of Economic Analysis almost surely understates the true figure…

Perhaps the biggest problem with the way the government measures
savings is its failure to take account of changing asset values like
rising home prices. If we looked at the balance sheets of American
families, instead of just subtracting consumption from income, we would
find a more favorable picture, despite some short-term volatility.

In
a speech last fall, Roger W. Ferguson Jr., vice chairman of the Federal
Reserve, expressed concern that households weren’t saving more, but he
acknowledged that the ratio of household net worth to disposable income
"has been essentially trendless over the past two decades," adding in a
footnote that "this alternative concept of the personal saving rate
has, in fact, shown a slight positive trend since the early 1950’s."

The
treatment of capital gains in the widely cited saving figure leads to a
number of problems. Consider pensions. Employer contributions are
counted as personal income, but later – and larger – payouts to
retirees register as consumption, while the capital appreciation that
substantially finances these payouts registers nowhere.

That’s
according to a Dartmouth economist, Steven F. Venti, who contended in a
2003 report written with two Dartmouth colleagues, Annamaria Lusardi
and Jonathan Skinner, that the treatment of pensions had played a large
role in dragging down savings to record levels, "accounting for over 40
percent of the total decline in the personal saving rate from 1988
through the turn of the century."

Other measurement issues also
play a role. In a paper on alternative measures of personal saving,
Marshall B. Reinsdorf, a research economist at the Bureau of Economic
Analysis, asserts that adjusting the calculation for several such
factors, including the treatment of spending on durable goods and the
effect of inflation on interest rates, can account for much of the
apparent decline in personal saving in the 1990’s.

Daniel Akst at The New York Times offers more; I’ve added the links in the above quotation.

Note also that the U.S. spends more on education than most countries, but this is counted as consumption not savings (admittedly we wish to measure outputs, not inputs, but U.S. higher education is excellent).  R&D investments do not count toward national savings figures either; on these facts see the Michael Mandel article in 17 January Business Week.

Robert Heilbroner, author of Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers and among the most influential economic historians of the 20th century, has died in New York. He was 85.

Dr
Heilbroner, who had suffered for the past three years with Lewy Body
disease, a rare Alzheimer’s-like illness, died of a stroke last
Wednesday, according to his son, David.

Here is an obituary.

I have just returned from the annual meeting of the American Economic Assocation.  I was mostly stuck in a hotel room interviewing job candidates but what David Warsh reports about the conference I can also say was true of our interview candidates.

When historians look back on economics in the last quarter of the 20th century, one of its more striking features will be the explosion in the quantity and quality of empirical work that was done…

[T]he advent of the desk-top computer made it possible to make a distinguished career doing something besides theory, namely sorting through the rich details of the real world in hopes of illuminating underlying mechanisms that are supposed to exist, or even finding relationships whose existence was unexpected.   

That much was on conspicuous last week when the American Economic Association and its many affiliates held its annual meeting here….

Work was presented on all kinds of of practical topics. For example: cars,  gas and pollution policies; downtown parking and traffic congestion;  kidney exchange; private funding in china’s education system; patent examiners impact on enforcement;  rural and urban poverty in Africa; the sources of racial differences in health care in the United States; the relationship between wealth and democracy; the U.S. gender pay gap; the growing population of postdoctoral students in U.S. universities; the question of who receives IPO allocations and why  — all of them buttressed by careful empirical work….

And in the forthcoming spring 2005 issue of the Journal of Economic Perspectives, David Colander of Middlebury College reports the results of a survey of students in seven top graduate schools of economics that he conducted, first in the early 1980s, then again last year….

The proportion of those reporting a belief that empirical work was very important had doubled (to 30 percent), while those describing excellence in math as vital to a successful career halved (to 30 percent). 

Which prediction markets ("information futures") had the best year last year?  Worst?  Which contract performed the best or was the most interesting?  What was the best academic paper in the area?

Find the answers to these questions, and many others here.

Thanks to Robin Hanson for the pointer, I will note that Robin was named (deservingly) as person of the year in this area, even though he bet Saddam would not be captured.

After more than a year of delay, Toll Collect, Germany’s high-tech system of road pricing for big trucks, started operation earlier this week and appears to be working well.  Some 800,000 trucks use Germany’s 12,000 km of highways every day – all of these trucks will soon be tracked by GPS (i.e. from outer space!) and the big ones will be billed.  The toll system will also be tied into traffic reports and routing systems.

In other tolling news, Texas is considering a massive superhighway project that would be privately built, operated and tolled.

I see toll roads, most privately operated and some privately owned, as the road of the future.  Road pricing can not only reduce congestion it can also help with accident externalities.

Previous posts on this topic including my debate with Tyler can be found here.

Swofford, a postal worker from Seminole County, claimed his prize Tuesday in a $34.7 million lump sum payout, ending weeks of mystery about who won the November 24 drawing.

Swofford, 53, and his wife separated three years ago. But two weeks after the winning numbers were announced, Ann Swofford served him with divorce papers and claimed a share of the prize.

Just before Christmas, the Swoffords and their lawyers hammered out an agreement. His wife will get $5.25 million and $1 million will be set aside to support their 11-year-old son. In return, she agreed not to seek any more of Swofford’s winnings.

Swofford said he remembered reading about a divorce case where a lottery winner kept it a secret and was penalized in court.

Here is the full story.  And here is a very different discussion of how incentives can matter.

Gerard Debreu, 83, a former University of California
at Berkeley economist who won a Nobel Prize for breakthroughs in the
study of supply and demand, died Dec. 31 in Paris. No cause of death
was reported.

Dr. Debreu taught at Berkeley for more than 30 years.
He won the 1983 Nobel Prize in economic sciences for his theoretical
work on how prices operate to balance supply and demand.

Here is an obituary.  Here is The New York Times account.

Wednesday I reported on the Bush Administration plan to check the growth of social security benefits.  To take an extreme version of the idea, what if nominal benefits rose with the price index rather than with the general level of wages?  Real benefits then would be constant rather than rising over time.

I see the following possible problems:

1. Perhaps the elderly face rates of price inflation (e.g., health care, personal servants) above and beyond the measured CPI.

2. It is unjust to keep our real contribution to the elderly constant over time.

3. The elderly will suffer a negative relative status effect.  Everyone else will have nanotechnology robots, but the elderly in 2075 will not.  They will be left behind.

4. The value of the social security program will grow small, in real terms, relative to the economy as a whole.

On #1, we should be willing to make all required differential adjustments (email me if you know a good source on rates of price inflation faced by the elderly, and yes it must adjust for changes in medical technology).  On #2, I will grant the point but dollars can be used to fight many injustices.  Rising real benefits, although "automatic" on today’s books, are in fact a new expenditure and should be evaluated as such.  It is unlikely that this is the best anti-poverty program we can devise.  Plus the elderly will enjoy a rising standard of living, over time, as the economy grows wealthier and they can save more when young.  #3 boils down to #2.  #4 is not a problem per se, if it results from growing riches.  And note that price indexing would not kick in until the more distant future.

The real issue, I suspect, boils down to medical care.  Many life-saving improvements are falling in price in real terms (what did a triple bypass cost in 1940? — infinity).  So we encounter more opportunities to prolong lives.  But if benefits are fixed in real terms, not all of these opportunities can be exploited.  That is, more people will use the new improvements, but constant benefit levels mean that access will be more differential than if real benefits would rise.  Are you prepared for this?

If you are a critic, here is the real problem.  The most important service for many of the elderly is health care.  Yet price indices are notoriously inaccurate and unjust when many prices are falling from levels of "infinity" to "very high."

The bottom line: I am ready to push the "yes button" on this change.  That being said, I would use the money to address our broader fiscal problems, and not to finance a transition to government-run personalized accounts.  As the economy grows, over time, we would in any case move toward a greater importance for private saving.  And if you wish, bundle the whole thing with greater means-testing.

Here is a good discussion on how social security indexing works and would work under possible reforms.  Here is further useful commentary.  Here is Matt Yglesias on tinkering with the retirement age, another good idea.  Russ Roberts offers general comments on the problem of social security, try Arnold Kling as well.  Brad DeLong lays down the party line.