Has Robert Barro solved the equity premium puzzle?
My macro class should read this blog post. Here is another good paper on the topic. If you want my view of the equity premium paradox, we have to ask whether Bryan Caplan is stupid. Choice is context-dependent, and we should not be too worried if no single utility function can account for all of our investment decisions.
How to teach microeconomics
The initiative was inspired by the discovery that there is no better way to master an idea than to write about it. Although the human brain is remarkably flexible, learning theorists now recognize that it is far better able to absorb information in some forms than others. Thus, according to the psychologist Jerome Bruner, children "turn things into stories, and when they try to make sense of their life they use the storied version of their experience as the basis for further reflection." He went on, "If they don’t catch something in a narrative structure, it doesn’t get remembered very well, and it doesn’t seem to be accessible for further kinds of mulling over." Even well into adulthood, we find it easier to process information in narrative form than in more abstract forms like equations and graphs. Most effective of all are narratives that we construct ourselves.
The economic-naturalist writing assignment plays to this strength. Learning economics is like learning a language. Real progress in both cases comes only from speaking. The economic-naturalist papers induce students to search out interesting economic stories in the world around them. When they find one, their first impulse is to tell others about it. They are also quick to recount interesting economic stories they hear from classmates. And with each retelling, they become more fluent in the underlying ideas.
Many students struggle to come up with an interesting question for their first paper. But by the time the second paper comes due, the more common difficulty is choosing which of several interesting questions to pursue.
The paper is not a complete substitute for the traditional syllabus. But the lasting impact of the course comes mainly from the papers. When students come back to visit during class reunions, the equations and graphs long since forgotten, we almost always end up talking about the questions they have posed and answered during the intervening years.
Having written this blog for over two years now, I feel qualified to agree completely.
Africa fact of the day
Estimated wealth of African wealth held in foreign accounts, expressed as a percentage of African GDP: 172
That is from Harper’s Index, October 2005 issue, p.11, the figure is based on UN sources.
The economics of magazines, and their economists
Arnold Kling criticizes National Review magazine, but don’t bother working through the argument. It will only make your head hurt. Perhaps you have read Brad DeLong on NR as well. Arnold suggests that:
NRO clean out its stable of economics writers and instead choose from some of the other bloggers around. James Hamilton or Andrew Samwick or Russ Roberts or Don Boudreaux or Tyler Cowen or Alex Tabarrok.
I have not been reading NR, so I will not offer an independent assesssment. But consider the basic economics. Most popular political magazines live and die by direct mail. The "burn rate" of non-renewals is very high, and either advertisers or donors will care about subscription numbers. So new subscribers must be found frequently (NB: the real culprit is lack of loyalty of previous subscribers). Given their natural constituencies, that makes it hard for a right-wing magazine to come out against George Bush. The tendency is toward boosterism and taking sides. That is one reason why I — a "small l" libertarian who preferred the economic policies of the Clinton years — am unlikely to receive some particular writing assignments.
On average "out of power" magazines (Reason, American Prospect) should be better than "in power" magazines. But if NR, or NRO, wants a piece on how the Bush years have eaten into our economic, political, and institutional capital, I would be happy to oblige.
Headlines to make me laugh
"Fairfax Maps Tourist Gems"
Fairfax County rolled out a new slogan yesterday — "FX Marks the Spot" — designed to help tourists discover its "buried treasures" of historic sites, museums, art centers and other destinations.
The soon-to-be ubiquitous brand — a play on pirates’ tradition of drawing an X on their maps to indicate stashed gold — is the centerpiece of an unprecedented $1 million campaign, presented to the County Board of Supervisors, to promote Fairfax as a tourist attraction.
The emphasis should be on "buried." Very buried. Here is the story, and yes this will involve them spending the money I cough up for property taxes.
Russian admiral named patron saint of nuclear bomber arsenal
Historic Russian admiral Fyodor Ushakov — a hero of Russia’s wars against Turkey and Napoleon Bonaparte — was designated the patron saint of nuclear-armed, long-distance Russian bombers by the Orthodox Church…
"I am sure he will become your intermediary as you fulfil your responsible duties to the fatherland in the long-range air force," the patriarch said.
"His strong faith helped Saint Fyodor Ushakov in all his battles," the religious leader said, reminding his audience that the famous admiral of the 18th and 19th centuries never lost a battle.
Check out the photo. Thanks to Dave Wells and Yana for the pointer.
The car alarm just went off
Want to get off the phone? Buy these sound effects. There are many good options, such as "Deposit 25 Cents" or "I Can’t Hear You (Helicopter Noise)". But I don’t think "This fly is bothering me" will do the trick. There is also a new section for responding to telemarketers, how about "I am Listening"?
Here is the link, and thanks to Joseph Weisenthal for the pointer.
New history of economic thought blog
What could be a better name than AdamSmithLives? The writer is Sandra Peart, professor of economics at Baldwin-Wallace College and sometimes visitor at George Mason. My colleague David Levy will be guilted into contributing as well. Here is a post on exaggerated reporting about New Orleans, and its parallels in the history of economic thought. Here is the mission statement. Welcome to the blogosphere!
More Nobel Prize ideas
1. Nobel prize in environmental economics to Weitzman, Nordhaus
2. Nobel prize in trade theory to Bhagwatti and Dixit
3. Nobel prize in President Bush praising to Krugman and David Brooks
4. Nobel prize in behavioral stuff to Richard Thaler
5. Nobel prize in contracts to Hart, Holmstrom, and Oliver Williamson
6. Nobel prize in development economics to Dasgupta and Deaton
7. Nobel prize in finance to Fama
8. Nobel Price in mechanism design to Milgrom, Myerson and Maskin
9. Nobel prize in family economics to Mincer and Pollak
10. Prize in Political Economy to Alesina, Persson and Tabellini
11. Prize in Modern Macro to Barro and Sargent
More sexual Giffen goods
These demand curves are the exception rather than the rule, but nonetheless they appear to exist:
One sex worker…explained why she no longer offered her favorite clients free sex or cheaper rates: "They pretend to be flattered, but they never come back!…There was one client I had who was so sexy, a tai-chi practitioner, and really fun to ****. Since good sex is a rare thing, I told him I’d see him for $20 (my normal rate is $250). Another guy, he was so sexy, I told him "**** for free." Both of them freaked out and never returned…They don’t believe they can have no-strings-attached sex, which is why they pay. They’d rather pay than get it for free."
That is from The Purchase of Intimacy, by Viviana Zelizer. I take the main point of this book to be yes you can love your prostitute and perhaps you can like your maid as well. A commercial transaction is compatible with holding deeper feelings for the other party.
Here is a Richard Epstein review of the book. I liked the book, but it is sad that the current debate needs such a tract. Here is my previous post on Giffen goods.
My macro class has been asking me what kind of exam they can expect
Try this question:
"Simon Grant and John Quiggin argue that taking the equity premium seriously–-the well-known fact that the average annual historical return of stocks is seven times that of government bonds and other debt-–has many implications, the most robust of which is that recessions are extremely costly even if they don’t lower average consumption and that macroeconomic stabilization policies are more important than has been thought."
True or false, and why? Under what conditions is your answer wrong (always the proper query)? Here is a relevant link, though registration is required.
Why you buy insurance
I won’t call Bryan Caplan stupid:
By way of analogy, consider these two scenarios:
1. You lose $1000 in some unforeseen way.
2. You lose $1000 in a way your spouse specifically warned you might happen.
The man needs some voodoo flags. In the meantime, here is a testimony to Bryan’s wisdom. And scroll down Econolog to read the whole discussion.
Brad DeLong, polytheist
Ever since the Mexican peso crisis of 1994-1995, I have been well aware that the Gods of the Dismal Science are cruel and capricious, at times punishing small sins against them with disproportionate retribution.
Here is the full post. Here are a few of my voodoo flags. Here are two more. Here is my favorite.
Opportunity cost
Visits to hospital emergency rooms in Boston plummeted during the city’s most nail-biting sports moments, according to a group of local doctors.
The team found that visits went down to as little as 80% of the average for the key Boston Red Sox games that attracted the most TV viewers. But ER visits rose above the average for games that had fewer viewers.
Is it safer to be watching TV, or do people with emergencies simply wait? Here is the link.
What happened to the Orange Revolution?
Remember the democratization of the Ukraine? Anders Aslund offers a sorry update:
For the past eight months…Ukraine’s economic policy has been nothing short of disastrous. Economic growth has plummeted from an annual 12 per cent last year to 2.8 per cent so far this year, driven by a fall in Âinvestment.
The blame for this startling deterioration must lie with the government’s economic policies. By agitating for widespread nationalisation and renewed sales of privatised companies, the government undermined property rights. In addition, it raised the tax burden sharply to finance huge increases in welfare spending and public wages. Very publicly, Ms Tymoshenko interfered in pricing and property disputes, criticising individual businessmen. Chaos and uncertainty prevailed. This populist policy had little in common with the electoral promises of Viktor Yushchenko, the president, about liberal market reforms.
There is much more, read the whole thing.