Ecuador's Eco-Econ Gimmick: Pay Us NOT to Drill

Ah, Ecuador, home of central bankers with fake degrees and would-be destination of Edward "And the Truth Shall Set You Free" Snowden. Regardless of its harrumphing and chest-thumping, there's no getting away from the fact that Ecuador is a really, really hard-up nation. Just a few days ago, some faction of the Ecuadorian government claimed that it would unilaterally walk away from trade preferences given to it by the United States. More recently, though, Rafael Correa has implied that no such thing will happen and that Edward Snowden is not being granted asylum in Ecuador. Can't afford to upset the flower growers who provide one of Ecuador's few sources of foreign exchange, right?

So what is it, really? Let's just say these guys lurch from flights of fancy to the cold light of reality in the blink of an eye. Speaking of which, our friends over at the Bulletin of Atomic Scientists have an interesting feature wherein Ecuador's government--supposedly mindful of the environmental consequences of oil drilling but dependent on oil revenues at the same time--has a unique gambit to solve the environment / state revenue quandary. Get this: it is asking others to pay it NOT to drill, baby, drill in its ecotourism sanctuary known as Yasuni National Park:

This poses a quandary for Ecuador, a poor country that relies heavily on oil exports for income but is also an eco-tourism destination. As oil development continues to push deeper into the Ecuadorian rainforest, the government has put forth a unique proposal to protect a still-pristine tract covering about 700 square miles: It has invited other nations—most pointedly, those that grew rich on fossil fuels and are now worried about global climate change—to pay to leave the oil underground. At a time when the United States and other relatively wealthy nations are doing far too little to combat climate change, Ecuador’s proposal represents an innovative way to reduce emissions, and to protect habitat for monkeys, other wildlife, and indigenous humans in the process...

One-fifth of Ecuador’s known oil reserves are located beneath the three easternmost blocks of Yasuní National Park—the Ishpingo, Tambococha, and Tiputini sections, collectively known as ITT. They lie beyond the Tiputini Biodiversity Station in a remote area populated by only a few small groups of native people, some of whom live in voluntary isolation from the rest of the world. In a proposal called the Yasuní ITT Initiative, Ecuadorian president Rafael Correa has offered to forego oil drilling in these blocks in exchange for $3.6 billion from the international community. In so doing, the country would leave some 850 million barrels of oil untouched, and about 400 million tons of carbon dioxide un-emitted.

And how many takers have there been for this blackm...indecent prop...flimf...rack...I mean, financial arrangment? Few and far between. You see, it estimates the value of its 846 million barrels of recoverable oil in Yasuni National Park at $7.2 billion. If it collects half this amount in contributions for it not to drill by 2024, it won't do so. Otherwise, you know the, ah, drill::

The initiative was announced in 2010 and is hugely popular within Ecuador, but only a few European and South American nations have agreed to support it, promising about $50 million to the fund so far. Major outreach efforts just began this year, though, and Ecuador has a 13-year timeline for reaching its $3.6 billion goal.

The financial details on this fund to keep Ecuador from drilling are hosted by UNDP. You can even make a donation there if you wish. Me? I am generally sceptical of all things that have the words "official" and "Ecuador" in some combination.

Maybe that Snowden guy will "expose" the contrivances behind this plot if and when it becomes evident to him that he's been well and truly spurned by Ecuador.

The New CEA Chair

Click here to read my column in Sunday's NY Times.

Byebye Google Reader

Goodle Reader is set to close on Monday, and like me many have complained about the selfish decision of Google to trim services that are not profit making. People were hoping Google would reverse its decision given the loss of goodwill, but to no avail.

While I have a good substitute in the Old Reader, one can wonder what less substitutable Google service could be next on the choppimg block. That would be a service that provides little ad revenue and little information useful for ad optimization. Among the services I find most useful, Gmail and Google Maps seem safe. Google Scholar is not, as I do not see how Google an find something profitable in this rather niche product. But at least there is a good substitute for economists. Google Translate. however, has no viable substitute and I see no business case for it.

Raising the bar of falsifiability in Economics

Economists do not dismiss theories easily. Although Popper taught us that once a falsifiable theory is reject by the data we should move on to better theories, it takes a lot of rejections for economists to move on. This may have two reasons: first, we all know that there can be serious issues with the data as we almost never have clean experiments to draw from. We are thus more tolerant for theories. Second, we tend to think that if a theory is rejected, we need to also propose a new one that is consistent with the data. That is quite a challenge.

Ronen Gradwohl and Eran Shmaya build on this second argument to amend the falsifiability criterion of Popper by adding a new one: that each rejection by the data be accompanied by a short proof on the inconsistency. If I understand this right, it would not be sufficient to show that the theory predicts, say, a positive relation between two variables, and the data finds a negative one, one also needs a convincing sketch of a proof that would convince a court that the data is indeed identifying the right relation and that it is relevant for the the theory. And this needs to be short because courts (or the scientific community) are busy. It seems we are doing it all wrong in Economics, as our arguments are excessively long, and getting longer. This is at least in part due to the fact that we require not just a short proof, but an extensive, complete one, and then we are still not convinced. Are we overdoing it? Possibly, at least the length and complexity of papers in Economics are becoming too much.

Snowden Files: Ecuador Cuts US Trade Benefits + More

It's probably not the wisest thing to do, but at least Ecuador may be accepting the consequences of putting its foot in its mouth. Famously harbouring WikiLeaks' Julian Assange in its London embassy, it appears ready to up the stakes in testing America's (quite frankly idiotic) "Internet Freedom" concept by also harbouring former NSA contractor Edward Snowden. He famously leaked documents showing massive data gathering on Internet users on behalf of the US government and is under a global interdict from US authorities.

While this erstwhile hero to the nerdcore set has been sitting around in a Moscow airport waiting for a flight to Ecuador, a US senator threatened to remove American trade preferences granted to Andean nations:

The head of the U.S. Senate Foreign Relations Committee said on Wednesday he would seek to end preferential treatment for Ecuadorean goods if the South American nation offers political asylum to fugitive former spy agency contractor Edward Snowden.

Senator Robert Menendez [D-New Jersey], chairman of the foreign relations panel, warned in a statement that accepting Snowden "would severely jeopardize" preferential trade access the United States provides to Ecuador under two programs that are up for renewal in Congress. Our government will not reward countries for bad behavior," Menendez said.

The trade preferences, by the way, are a continuation of a 1991 pact (the Andean Trade Preference Act) wherein the US granted Bolivia, Colombia, Ecuador and Peru improved access to the American market in exchange for better cooperation fighting drug production. In Iran-Contra lingo, it was a "trade for drugs" deal. As it turns out, it needs to be renewed every two years by lawmakers, thus occasioning Menendez's threat of non-renewal the next time around. Given its meagre trade, Ecuador benefited from this trade benefit with the US significantly as demonstrated by lobbying quite hard to continue it despite a steady stream of anti-American rhetoric. Really, Correa, like his purported opponents, is quite the hypocrite.

But I suppose things may have changed and Latin brio has overcome common sense: Ecuador's government has recently said, "go ahead, make my day":

Ecuador's leftist government thumbed its nose at Washington on Thursday by renouncing U.S. trade benefits and offering to pay for human rights training in America in response to pressure over asylum for former intelligence contractor Edward Snowden. The angry response threatens a showdown between the two nations over Snowden, and may burnish President Rafael Correa's credentials to be the continent's principal challenger of U.S. power after the death of Venezuelan socialist leader Hugo Chavez.

"Ecuador will not accept pressures or threats from anyone, and it does not traffic in its values or allow them to be subjugated to mercantile interests," government spokesman Fernando Alvarado said at a news conference.

I especially like the part about how Ecuador will gladly pay for the human rights training of Americans who keep yakking about them while acting in...let's just say inconsistent ways:

In a cheeky jab at the U.S. spying program that Snowden unveiled through leaks to the media, the South American nation offered $23 million per year to finance human rights training.

The funding would be destined to help "avoid violations of privacy, torture and other actions that are denigrating to humanity," Alvarado said. He said the amount was the equivalent of what Ecuador gained each year from the trade benefits.

The Latin Left is alive and well. If it weren't, then nobody would be making PR stunts of this nature to contest the seat vacated by the late Hugo Chavez. That said, let's just say that Ecuador has some way to go before topping Chavez's stunt of subsidizing heating oil purchases of poor Americans via the CITGO subsidiary of state-owned firm PVDSA.

Meanwhile, like his immediate predecessor, Obama should just shut the hell up and think before making more retarded statements about "Internet freedom" and so on if his government is always so hellbent on prosecuting these evildoers. Making folk heroes out of ninnies is a quintessentially American government pastime. This guy isn't even on Ecuadorean soil, fer cryin' out loud.

UPDATE: Note that the US has already cut Andean Trade Preference Act benefits with Bolivia, another repeat transgressor of the Will of America. However, Bolivia's case was over its nonchalance in combating drug production there whereas Ecuador's concerns...unusual and unrelated things.

Economic History at MIT

Peter Temin tells the story in a new paper called The Rise and Fall of Economic History at MIT.

Income divergence in the face of faster technology adoption

We live in an increasingly global world. As production moves to where capital and labor are the cheapest, we should be expecting a convergence of incomes across the world. Know-how and technology also flow more rapidly from leaders to followers, which should reinforce this convergence. Thus, unless something is really messed up with other factors of production (institutions, climate, ...), we should observe convergence. Yet it has not happened as much as one would have expected, quite to the contrary. What is wrong with my reasoning above?

Diego Comin and Martí Mestieri focus on the diffusion of 25 technologies across 132 countries over two centuries. They conclude that the adoption speed of new technologies has indeed increased faster in poor countries, but not the penetration rates (once diffusion is completed). That means that while countries first use new technology earlier than before, especially developing ones, the later use the technology relatively less throughout the economy. This has an ambiguous impact on convergence, but with a simple model Comin and Mestieri show that the latter effect is predominant, and how. With their numbers they can justify a multiplication by 3.2 of the income gap between rich and poor countries over the last two centuries, that is, almost all of the fourfold increase in that gap observed in the data. One more reason to wean the poorest countries off the illusion that they must grow a healthy agricultural sector, which uses little technology on land that is not well suited for agriculture in the first place (more). They need to jump to stronger manufacturing and adopt more technology throughout the economy.

Home production vs. unemployment insurance

Many are worried that generous unemployment insurance benefits lead to moral hazard: the unemployed do not search hard enough for a new job because the benefits give them excess security. These benefits may also have other consequences. It is known that people become much better with managing a smaller budget once they retire because they have the time to look for shopping bargains and they can substitute goods bought on the market with good produced at home. In the case of the unemployed, we covered bargain shopping before, now let us discuss home production.

Bülent Güler and Temel Taşkın use the American Time Use Survey and find that more more generous state unemployment insurance benefits are, the less time unemployed workers spend productively at home (We have shown before they spend a lot of unproductive time). Indeed we can understand home production as a different insurance mechanism which can be a substitute for unemployment insurance. Of course, there is also the extreme case in home production insurance, living with your parents.

Insider bank runs

Bank runs occur when depositors believe a bank is insolvent. They rush to withdraw their deposits before everyone else as funds dry up. Who is first in the queue at the wicket? When such panics break out, they must originate somewhere, whether justified or not. In particular, somebody must have had some privileged information that there is a problem with this bank. I doubt bank runs start as the bank releases its latest numbers and everybody is surprised.

Rajkamal Iyer, Manju Puri and Nicholas Ryan got access to the deposit withdrawal logs from a bank that has been subject to two runs. The last one is particularly informative, as a regulatory audit found the bank insolvent, and despite this information being private the bank run ensued. It is then no surprise to see bank employees as the first ones to withdraw their funds, followed by depositors with uninsured funds, who are the most vulnerable and may have been tipped off by some employees. Insider information appears unavoidable and leaks to the public. It appears difficult to avoid a run when a bank is indeed insolvent, unless it comes as a sudden development over the week-end. As a policy maker, this means that you better make sure banks never become insolvent, or you end up always insuring the bad risks, those that do not have insider information.

The Performance of a Lifetime

EconRhymes

An excerpt from a new poetry collection on economics:

An Economist

Economists study how society produces and distributes its scarce resources.

An economist pretends to know
Why things are made and how they flow.
He studies men’s biggest woe,
He wants it all, what to forego.

Like a machine with unseen gears
Through greed a solution appears.
By making what men hold most dear
Profits are earned by serving peers.

To boost theirs and the common's gain
Become experts in their domains.
To make one thing well they attain,
Through trade the rest they obtain.

But their profits diverge by much.
Those with great tools earn a whole bunch.
Tools like machines, schooling and such
Boost production so very much.

homo socialis

Everyone is familiar with homo œconomicus, the greedy economic agent that brings an economy to its most efficient allocation under perfect circumstances. But circumstances are less than perfect (externalities, imperfect competition, lack of commitment, asymmetric information, etc.) and Adam Smith's invisible hand needs a little help from some authority. Through regulation, taxation, subsidies and punishment, that authority can try to get closer to the first-best allocation, but at a cost.

According to Dirk Helbing, this cost is now overwhelming, because in current societies top-down management of an economy is not computable anymore. One should rather find a bottom-up approach, following the craze about Web2.0 and social media. Thus enters homo socialis, an economic agent who is very aware of all the ills of unfettered markets. If this sounds like one of those revolutionary solutions that would end world hunger, it is. It even comes with a new type of money, a must for these types of exercises.

So, how does this work? Homo socialis is an economic agent with other-regarding preferences. He needs institutions that allow him to express such preferences instead for reverting to the greedy homo œconomicus. Hence the institution of "qualified money" that rewards good behavior by this friendly and altruistic market participant by giving him "reputation." But if he is that altruistic, why does he needs such rewards? That is not clear. And who gives them? Is there any budget constraint here? It would really help to formalize a little bit all the author's ideas, but it is quite confusing. For example, the value of qualified money depends on its history. In other words, every single banknote may have a different value, depending on the context in which it was used. How is that simplifying the problem of complexity?

Helbling gives as as example the management of traffic lights in a city, a rather bizarre example. In the homo œconomicus scenario, an authority sets traffic light patterns and does not adapt them when lines become too long somewhere. In the homo socialis, this adaptation happens, presumably from a feedback coming from car drivers. Why the restriction in the first scenario? In fact cities do have feedback rules in place (notice the cameras along the roads?) without the drivers needing to do anything. But foremost, why such an example? It is unrelated to the question at hand. The argument that the computation would be too complex for a central planner fails because at least he has a complete picture. Individual car drivers suffer from a lot of asymmetric information when taking decisions, even altruistic ones. Note also that the example does not use the crazy qualified money scheme.

What a confusing and confused paper. You would think this would be a first draft for someone who works for the first time in the area. But no, except for the methodological silliness and conceptual errors, this paper is actually quite well written and the literature well researched, including 22 self-citations.

Is the IMF Beating Colleges at Online Learning?

There is a big debate raging in academia about the relevance of university education as we know it today: First, it is becoming increasingly expensive as salaries remain stagnant or even decline as in the US and other Western nations. Second, do what universities offer have relevant course content, or are they becoming increasingly isolated in ivory towers without much practical application? Third, doesn't a higher education degree become obsolete far more quickly nowadays with the rate of advancement in all fields of human endeavour?

More and more educators believe that today's university paradigm is outmoded--and I am one of those who are asking this same question. That is, what value-added does having a college degree really offer? One of the solutions proposed, of course, is delivering course content online via what they call Massive Online Open Courses (MOOC) that can potentially deal with the issues raised above. First, delivering courses digitally allows universities to deliver courses--save for face-to-face interaction, of course--more cheaply and to a geographically broader audience. Second, material can be more readily tailored online to reflect the latest real-world trends and developments in various subject areas instead of sticking to the inbred world of folks who've been stuck in academia for years and years--like me! Third, updating of content is easier when you're not stuck with using sporadically updated textbooks and other dated course materials.

A potentially surprising vote of confidence in this idea is coming from, of all sources, the IMF. It faces the challenge of providing knowledge to many stakeholders in far-flung nations who wish to train officials better in matters of public financial management. Delivering technical assistance (i.e., advice) after all is one its main lines of business--see the table above taken from this 2011 IMF survey. What's more, it is in fact not hard up given steady incoming funding at this time because of various financial crises in different parts of the globe, but it is nonetheless moving with the times in trying to shift more courses online. Say what you will about the IMF--its critics are legion and include me--but it definitely has a 'brand' when it comes to public financial management. Unlike many middling universities, the IMF also does not lack takers for its educational services regardless of your opinion of its content:

The International Monetary Fund will make its training sessions on financial policy and debt sustainability available online this year to government officials worldwide, allowing it to reach a bigger audience at lower cost, it said on Wednesday. IMF financial workshops are meant to help governments address economic dilemmas and are currently held in eight training centers worldwide, meaning officials must travel and remain onsite for weeks, said Sharmini Coorey, director of the IMF's Institute for Capacity Development. That model is expensive for the IMF and its donor countries - and the classes fill quickly, Coorey said. In 2012, the IMF trained 7,800 officials in 270 workshops held in places like Singapore, Brazil, Kuwait and the African island of Mauritius.

"We have a lot of demand for our training and we don't have the scale to meet that demand," Coorey said. The online courses will be hosted by edX, a nonprofit consortium founded by Harvard University and the Massachusetts Institute of Technology. So far, the platform has primarily been used to host massive open online courses, or MOOCs, from elite universities.

The learning arm of the IMF, by the way, is known as the IMF Institute for Capacity Development. Get this: the IMF is even looking to expand its 'student base' insofar as others may wish to learn more about public financial management including civil society actors, consultancies, and so forth. Its marketing is sharp, too, with course offerings being made in different languages in the near future:

The classes will be in English, but may carry subtitles in other languages. They will open first to government officials within the next few months. Coorey plans to open them to the broader public in 2014. "We hope it will enhance public awareness and elevate the debate about economic issues," she said. The financial arrangements have not been made public, but edX President Anant Agarwal said the IMF courses would bring in revenue for the consortium. If it's a success, Agarwal said he would seek similar deals with other institutions, as well as corporations and nonprofits.

Who'd think that the IMF of all institutions would be an innovator in delivering online education modules? You may not agree with IMF policies and prescriptions (I usually don't). You may not even believe that it performs its functions well as the world's lender of last resort (ditto). However, when it comes to keeping in tune with the times in delivering timely and cost-effective solutions in education, it is making noticeable strides. It's hard  to imagine, but yes, the IMF seems to understand the logic driving MOOCs more than any number of universities still wedded to increasingly outmoded learning models.

I can't believe I'm saying this, but perhaps it's time that we let the IMF show us the way in higher education.

In the meantime, repeat after me, class: Savings...good! Debt...bad!

UPDATE: Details for the distance learning modules, AKA MOOCs, are already listed online.

Focus on Bank Liabilities, Not Bank Assets

John Cochrane has a great column in today's Wall Street Journal on how to create a better banking system.  He says that we should focus on the nature of bank liabilities (demand deposits, in particular) rather than on the riskiness of bank assets.

Back in 1993, in my discussant's comments on an Akerlof-Romer article on the savings and loan crisis, I made a similar argument.  Here is an excerpt of what I then wrote:

Traditional banks are peculiar institutions. Traditional banks have depositors who want short-term, liquid, riskless assets. Yet these deposits are backed by long-term, illiquid, risky loans. This incongruity is fundamental. As we have seen, it cannot be easily fixed by a government policy such as deposit insurance.

There is, however, a simple, market-based solution: mutual funds. Individuals who want truly riskless assets can invest in mutual funds that hold only Treasury bills. Those who are willing to undertake greater risk can invest in mutual funds that hold privately issued CDs, bonds, or equities. Long-term, illiquid loans could be made by finance companies, which would raise funds by issuing equity and bonds. In the world I am describing, all household assets would be perfectly liquid. Preventing bank runs---he original motivation for deposit insurance--would be unnecessary, because changes in demand for various assets would be reflected in market prices.

In essence, the system we have now is one in which finance companies are themselves financed with demand deposits. Yet these finance companies hold assets--long-term bank loans--that are risky and illiquid, much in the same way that fixed capital is risky and liquid. Imagine that the auto industry financed itself with demand deposits. Undoubtedly, self-fulfilling "runs" on GM and Ford would be common, and the auto industry would be highly unstable. Indeed, the auto industry would probably be a major source of macroeconomic instability. The best solution, of course, would not be deposit insurance and regulation of the auto industry, but a change in the way the industry financed itself.

More on the One Percent

If you enjoyed reading my forthcoming JEP paper, you might also enjoy It’s the Market: The Broad-Based Rise in the Return to Top Talent by Steven N. Kaplan and Joshua Rauh, which emphasizes complementary themes. An excerpt:

We believe that the U.S. evidence on income and wealth shares for the top 1 percent is most consistent with a “superstar”-style explanation rooted in the importance of scale and skill-biased technological change. In particular, we interpret the fact that the top 1 percent is spread broadly across a variety of occupations as most consistent with an important role for skill-biased technological change and increased scale. These facts are less consistent with an argument that the gains to the top 1 percent are rooted in greater managerial power or changes in social norms about what managers should earn.

Will summer camp make my kids rich?

Paul Krugman, commenting on my recent article, thinks it is noteworthy that the rich have increased their spending on child enrichment programs.  To me, that is not a surprise.  The incomes of the rich have risen, and this category of spending, like many others, has a positive income elasticity.

I am a parent of three, and as far as I know, Paul does not have any children.  So I have probably spent a lot more on this category than he has.  And I can report that much of it is consumption, not investment.

A book I probably should have cited in my article is Judith Harris's The Nurture Assumption.  The main thesis of this great book is that, beyond genes, parents matter far less than most people think.  Raising three children has made me appreciate Harris's conclusion.  It is frustrating how little influence we parents have.

I have a friend whose job it is to advise families of extreme wealth.  She is often asked how to raise successful children who know they are going to inherit gobs of money.  It is all too common to see kids raised in this environment becoming ne'er do wells.  Her advice: Make sure they get a summer job.  Rather than spending money on enrichment activities, have them learn what it is like to earn a living.

Milk quota markets are not efficient

Many countries have some sort of rationing system in place for their dairy industry, because apparently farmers have a tendency to produce too much milk and depress its price, in the end getting less, I guess because the price elasticity of demand is high. This rationing is typically done through a quota system, and these quotas are sometimes tradable. This last point is important as it makes it possible for the allocation to be efficient: the most efficient producers should indeed acquire more quotas, which they buy from the least productive farmers.

Rebecca Elskamp and Getu Hailu tell us this is not at all what is happening in Ontario, Canada. Elskamp and Hailu identify quota net buyers and sellers and they try to match them with various characteristics. As the milk sale price is uniform, it must have to do with production and costs. The latter do not seem to matter at all. Scale does, though. Thus, if you are a farmer who happens to have an empty barn, you buy quotas whether your costs are high or not. But if you are a very inefficient farmer with high costs, you do not think of selling your entire quota and live from it. Strange.

The Left on Just Deserts

I just got an email from the left-leaning Economic Policy Institute regarding their work on inequality.  I was struck by this passage:

Since the 1970s, the United States has become increasingly unequal in terms of income, wages, wealth and opportunity. Today, 1 percent of Americans are taking home nearly 20 percent of the country's total income and own nearly 35 percent of the country's wealth. This means that you (yes, you!) are probably making less money than you deserve to.*

Notice the emphasis on what "you deserve."  They aren't following the logic of the conventional Mirrlees model: they aren't saying we should redistribute more because the marginal utility of the rich is so much less than the marginal utility of the poor and middle class.  Rather, they are talking about what people deserve.

If economists want their models to connect with the political debate, they have to spend less time emphasizing diminishing marginal utility and more time thinking about just deserts.

That does not mean the EPI's conclusion is correct.  But I think they are right about the framing of the issue.
_____

*By the way, this was a mass email, not to me personally.  I don't think EPI really thinks I am making less money than I deserve to.

2013=1997? Volatile Asian Markets + SE Asia Haze

There is something about Asia that seemingly brings on the confluence of cataclysmic financial and environmental events . In 1997, the Asian financial crisis devastated wide swathes of the region in a credit crunch of epic proportions. To further the doomsday mood, the Indonesia-Malaysia-Singapore area was blanketed with suffocating smog emanating from Indonesia's recurrent forest fires. So, not only did market plunges in the values of stocks and bonds take your breath away, but so did inhaling the thick smog.

More recently, some family friends working in Singapore were scheduled to leave for Manila but ran into delays when one of their young'uns had to see a doctor due to the heavy haze blanketing the Indonesia-Malaysia-Singapore area once more. You would have hoped that Southeast Asian nations had dealt with transboundary haze in a satisfactory manner sixteen years later, but no: Forest fires still occur that devastate large areas of the Indonesian rainforest, supposedly started by slash-and-burn tactics of subsistence farmers. For, the easiest way to clear forest cover remains to set in on fire; pity if that fire goes of control.

As it so happens, the Indonesia-Malaysia-Singapore "tri-smog area" is also experiencing financial turmoil as markets here in Asia are being rocked hard. As you probably know, there is much whiplash in bond, currency and equity markets here due to uncertainty over whether the US Federal Reserve will stop buying Treasuries by the tens of billions each month via quantitative easing. There is also uncertainty over the extent of Japan's own version of quantitative easing--for how long and how much? We're sure they would like to continue, but at what cost to Japan's purse? With interest rate expectations being adjusted upwards, it becomes more difficult to borrow money to speculate in stocks. In turn, the dollar is strengthening somewhat as some international investors reconsider their portfolio investments in Asia and head home.

[Cough...cough] Meanwhile, the blame game over smog is leading to a heated war of words between Singaporean and Malaysian officials [ahem...hem]. Amid the suffocating smog, Singapore's environment minister says Indonesia has "no right" to harm the health of his countrymen as the city-state's air quality has become the worst it's ever been, 1997 notwithstanding [choke...gasp!]:

"No country or corporation has the right to pollute the air at the expense of Singaporeans' health and well-being," Singapore's Environment and Water Resources Minister Vivian Balakrishnan said on his Facebook page.

Balakrishnan said Singapore had sent officials to an emergency haze meeting in the Indonesian capital, Jakarta. At 1:00 pm local time on Thursday, the city-state's pollution standards index (PSI) soared to a new high of 371, indicating air quality had deteriorated to "hazardous" levels, and exceeding the previous record set on Wednesday night.

A PSI reading above 300 indicates "hazardous" air, while a reading between 201 and 300 means "very unhealthy". The top PSI readings in Singapore over the past two days have exceeded the peak of 226 reached in 1997 when smog from Indonesian fires disrupted shipping and air travel across Southeast Asia.

OTOH, Indonesian officials think the (pampered?) Singaporeans to be a bunch of whingers--and worse.

Earlier on Thursday, Agung Laksono, the minister who is coordinating Indonesia's response to the haze crisis, accused Singapore of "behaving like a child" by complaining about severe haze from raging forest fires on Sumatra island that has cloaked the city-state. "Singapore should not be behaving like a child and making all this noise," he told reporters in Jakarta. Laksono was responding to Singapore's demands earlier on Thursday for "definitive" action by Indonesia to quell forest fires raging in Sumatra...

Agung Laksono said "It's not what Indonesians want, it's nature."

This being the IPE Zone, what's particularly interesting are Indonesian accusations that Singaporean firms in search of palm oil plantations may be responsible for these fires. What's more, even Singaporean authorities cannot discount this possibility altogether. Indonesian officials have thus tried to deflect blame by suggesting companies based in Singapore may be partly to blame for the fires. To which the Singaporean authorities say, (surprise!) prove it:

"It can easily last for several weeks and quite possibly longer until the dry season ends in Sumatra,"  [Singaporean PM] Lee Hsien Loong said on Thursday, warning of action if Singapore-linked companies were behind the burning. "On the scale of it, it's unlikely to be just small stakeholders slashing and burning."

Singapore has said it wants Indonesia to provide maps of land concessions so it can act against firms that allow slash-and-burn land clearing. The illegal burning of forest on Indonesia's Sumatra island, to the west of Singapore and Malaysia, to clear land for palm oil plantations is a chronic problem, particularly during the June to September dry season...

Indonesian officials have tried to deflect blame by suggesting companies based in Singapore may be partly to blame for the fires. Singapore has said it wants Indonesia to provide maps of land concessions so it can act against firms that allow slash-and-burn land clearing. The illegal burning of forest on Indonesia's Sumatra island, to the west of Singapore and Malaysia, to clear land for palm oil plantations is a chronic problem, particularly during the June to September dry season.

Let's just say this matter is not, ah, clearing up soon. So, on top of financial disturbances we have logistic ones as shipping, transportation and travel are adversely affected on a region-wide basis. Having rather bad memories of 1997, I honestly hope they can sort this issue once and for all to prevent future recurrences. Moreover, the simultaneous occurrence of financial and environmental volatility honestly disturbs me a lot given how much buck passing is happening:

"The slash-and-burn technique being used is the cheapest land-clearing method and it is not only used by local farmers, but also employees of palm oil investors including Singaporean and Malaysian companies,'' Hadi Daryanto, a senior official at Indonesia's Forestry Ministry, told Indonesian media. "We hope the governments of Malaysia and Singapore will tell their investors to adopt proper measures so we can solve this problem together.''

A few years back, LSE IDEAS hosted an event in Southeast Asia asking whether the region was up to the challenge of dealing with environmental issues. My erstwhile boss Munir Majid concluded, in so many words, no. It was thus with no small amount of disappointment that I find his words to be correct no matter how bad the truth hurts as Southeast Asia is once again being blanketed in unbreathable smog. Have the root causes of these fires been identified? No. Have sanctions been put into place to place to deter those responsible? No, for again we still aren't quite sure who the violators really are. Have Southeast Asian authorities been working together to deal with transboundary haze? No, they are bickering instead and trading barbs. Alas, read on to hear more of this sad story: Despite ASEAN coming up with an agreement to deal with transboundary haze pollution in 2002, let's say it hasn't quite worked as intended. 

Uncertainty, slow government and optimal taxes

The optimal taxation literature has come up with incredibly complex and non-linear taxation schemes that have no way of making it into policy. The most complex tax code, the US one, is not complex because that would be socially optimal, it is complex because of special interests. Complex code does not make it past the politicians because they do not understand it, because it appears not to be transparent, or because its mathematical complexity scares everyone.

Marcus Berliant and Shota Fujishima claim rather that the lack of complexity on the tax code has to do with sluggishness. Governments can simply not adapt the tax code as fast as conditions change. Of course, they could also set up contingent rules, but I suppose that this is deemed opaque and subject to interpretation. Anyway, one consequence of this sluggishness is that optimal taxes start looking very different. A typical result of standard theory is that the top earner should have a zero marginal tax rate, so as to encourage this most productive person to work more. But when this person changes from period to period, or if this is the same person but he does not reach the maximum income every period, the result does not carry through. The top marginal tax rate needs to be positive to leave some headroom. But the marginal tax rate is still declining at the top. In a way, this is achieved in many countries by allowing for "loopholes" that makes it possible for the most productive people to pay less taxes.

In Defense of Me

My new paper on the One Percent has generated a fair amount of Internet commentary.  I won't respond to the critics. Time is scarce, and I am busy with other projects. For better or worse, I will leave the paper to speak for itself. (I should note that my paper is part of a forthcoming JEP symposium. I have not seen all the other papers, but from what I have seen, the symposium should offer a good, balanced group of perspectives.)

Regarding all that Internet commentary, I did enjoy this defense from Matt Nolan.  Nolan was apparently a reader of my favorite textbook early in his life.  His defense of me begins as follows:

When it comes to looking at policy, I started life fairly heavily left wing. When I started university at the age of 18, my first textbook was by Greg Mankiw. He was a Republican, while most of my economics reading at the time had been Marxist or a frustrated attempt at reading the General Theory by Keynes. I was immediately certain that I would hate the textbook, and that it had no value – at that point I was even more immature than I am now   

I was utterly and totally wrong – a situation I have become accustomed to. Mankiw’s first year textbook is clear, to the point, and is honest about what the economic method is and what it achieves. He “wears his assumptions on his sleeve” which I have learnt is the distinction of the best type of economist. His textbook, and his papers on macroeconomics and tax, have been insightful for me as a way of not just understanding economic ideas, but of understanding the economic method.

Thanks, Matt!

Why is living in poor countries so cheap?

Theory tells us the law of one price should hold: the same good should have the same price throughout the world after taking into account exchange rates (and transportation costs). Yet, there is plenty of empirical evidence that this is not true. And anecdotal evidence, too, think of how it is noticeably less expensive to live in developing countries. Why?

Daniel Murphy offers a new and simple explanation: complementarity between tradable and non-tradable goods. In a rich country, more non-tradable goods are available as complements, thus providers of tradable goods can charge higher prices if competition is not perfect. This conjecture is supported by empirical evidence showing that where more complements are used the prices of tradables are also higher. But given that the extend of complementarity seems to change from one country to the other, it seems to me that we are not really talking about the same good. We may measure it as the same good, but people seem to perceive it as a different good. It is just a measurement issue.

FATCA, Tax Havens & the New American Imperialism

Once upon a time there was an offshore, where we'd hide a multimillion dollar account or two...

The wheels of financial history are spinning once more. Whereas offshore financial centres were all the rage just a few years ago, the world's most powerful countries are now causing them much discomfort as they seek to recover "lost" tax revenues. Interestingly enough, it was not always like this. Consider:

1. Many G-8 nations were complicit in the creation of these offshore banking centres in the first place since they did not raise much of a fuss about their banks setting up shop in paradis fiscaux all those years ago;
2. However, those things were allowed to happen during happier times when rich countries did not run habitual budget deficits;
3. With there being no fiscal cushion to speak of in any number of wealthy countries, their mood towards tax cheats has unsurprisingly soured;
4. Especially after the global financial crisis wiped out their tax bases, the political mood in developed nations has soured, the now-common refrain being one of "tax justice": why should us proletariats pay out a higher percentage in taxes than these wealthy folks who can shift their tax burdens elsewhere alike, say, Mitt "Bain Capital" Romney?

Even more unsurprisingly, the charge to collect more revenue is led by that most bankrupt of nations, the United States. In 2010 the Foreign Account Tax Compliance Act (FATCA)[maybe it should be "FATCAT"] was passed which allows the US Treasury to go after any offshore centre financial services provider it suspects of harbouring American tax cheats. On one hand, the "tax justice" folks whose sites I link to on the blogroll were understandably elated. On the other hand, bankers and offshore domiciles cried foul, saying the global application of American law constituted the new American imperialism.

But, this issue appears to be approaching a non-debate. With the ever-so-subservient UK appearing to bow to American wishes on this issue, it appears the famous Caribbean offshores' days of milk and honey are numbered:

Given that UBS and other Swiss banks had their vaunted bank secrecy gutted by the IRS, anything seems possible. And FATCA has a global reach with what some are calling a new American Imperialism. All in all, the world is smaller and more transparent than ever before. And it may get smaller still.

In the current milieu, the UK may be feeling some parental misgivings. After all, it spawned some of the most notorious tax havens. Many of its self-governing regions turned out to be enablers. Perhaps Britain now feels a sense of obligation to make the largely island nations join the tax haven attack.

That’s one conclusion to draw from the UK Prime Minister David Cameron asking 10 territories and self-governing regions to join hands. Just execute the Multilateral Convention on Mutual Assistance in Tax Matters, Mr. Cameron urged. It’s a creature of the OECD, the Organization for Economic Cooperation and Development. The treaty has been signed by more than 50 countries.

One of its key features—you guessed it—is information sharing. That means these countries will all share information on individuals who hold bank accounts in their jurisdictions. The 10 include Bermuda, British Virgin Island, Cayman Islands, Gibraltar, Anguilla, Montserrat, Turks and Caicos, Jersey, Guernsey and the Isle of Man. Mr. Cameron’s announcement of the 10 crown dependencies and territories tied nicely with the G-8 Summit days later.

I remain conflicted over this issue: Small island nations have few development strategies available to them, and financial services have sustained many for years and years. At the same time, it's kind of dismaying for tax cheats to get away with fiscal tomfoolery on such a vast scale. All I can say is that it's going to become much more difficult to escape American fiscal dragnets in the near future.

Why should we debate the contributions of particular dead economists?

Pier Luigi Porta reports that there is currently a lively debate on the legacy of Piero Sraffa's research and its contribution to modern economics, all this in conjunction with the opening of Sraffa's archives twenty years ago. Sraffa's major work was published half a century ago, and it influence economic thinking back then. But Economics moved on, we found new techniques, models and evidence. What is the purpose of going back to outdated theories? I realize that sometimes you need to take a few steps back when you realize you got into a dead-end, but that does not mean one should worship old science and look for its traces everywhere.

There are, however, circumstances where the history of economic thought is useful. For example, there certainly are some fads in economic research and it would be useful to learn how they emerge. Fads are a waste of time and should be prevented. It can also be useful to understand how some people can lead economic thinking onto a particular path, especially when there are some self-interests attached (and the path turns out to be a dead-end). But this is more about group psychology than hero worship.

Maybe someone can help me understanding why we need this debate about the importance of Sraffa in current economic thinking. I do not see it.

Crackpot Conspiracies: Bilderberg Group Circa 2013

I think it's Hollywood's fault: In any number of action/spy/suspense/thriller movies, there is a good chance that they will depict some kind of shadowy secret organization that really runs the world--usually to fulfil nefarious ends. (You can't sell movies if they were a bunch of do-gooders, can you?) One version of this storyline is that little-known but powerful masterminds get together to plot the global future to suit their purposes. Another version is that well-known public figures in politics and business are ultimately networked to an organization that decides the fate of the world that put them in places of power.

During the years of Bush the Younger, the evil organization du jour was of course the Carlyle Group. With the ebbing of American military adventurism, however, it has receded from the public eye (for now). Bereft of that military-industrial complex, conspiracy theorists have been left with more traditional bogeymen to ponder when their minds naturally wander into evil machinations being hatched.

Given that we now have a Democratic presidency, it's about time the conspiracy theorists revived the Carter-era Trilateral Commission [TLC] whose American component of a North America-Europe-Asia triad was composed mostly of Democratic instead of GOP operatives. Given Obama's seeming penchant for mounting drone attacks, engineering computer viruses, and invading Internet privacy, it's about time someone asked on whose behalf be did all of those things. I was rather amused by the Straight Dope's take on the subject matter:

The TLC's first executive director was Zbigniew Brzezinski, and such well-known figures as Walter Mondale, Caspar Weinberger, and Paul Volcker have been members. Also on the rolls at one time, mainly because the commission needed some representation from the South, was the then-governor of Georgia, Jimmy Carter. The prospect of spending hours cooped up with the likes of Walter Mondale would probably send most of us screaming for the exits. But Carter was an impressionable sort who found both the commission's meetings and its members deeply fascinating. He got chummy with many of the latter and appointed more than a dozen to posts in his administration, including Cyrus Vance, Michael Blumenthal, and of course the redoubtable Brzezinski.

This short guided tour of shadowy organizations thus brings us to the eponymous Bilderberg Group. Just as the Carlyle Group is named after the hotel its members prefer to meet at, this one is named after the venue of their first gathering. In terms of membership, however, Bilderberg resembles an older Trilateral Commission. Whereas the TLC is an North American-European-Asian gathering, a more apt name for Bilderberg would be the "Bilateral Commission" since its was intended to be an American-European gathering. But hey, it bears mentioning that the Bilderberg Group was formed in 1954--the world's powers were rather more Western then.

No matter, though. Recently, the Bilderberg Group meeting in London became an occasion for the crackpot conspracists to have a jamboree. Yes, they were partying like it was 1954 as they pondered what sort of dark machinations were being plotted in sequestered grounds...

More than 100 of the world's most powerful people are at the former manor house near London for a secretive annual gathering that has attained legendary status in the eyes of anti-capitalist protesters and conspiracy theorists. The guest list for the Bilderberg meeting includes Google executive chairman Eric Schmidt, Amazon CEO Jeff Bezos, International Monetary Fund chief Christine Lagarde and former U.S. Secretary of State Henry Kissinger. British Prime Minister David Cameron is due to drop by Friday.

 

The Bilderberg Group was set up in 1954 to support military and economic co-operation between Europe and North America during the Cold War. Named for the site of its first meeting — the Bilderberg Hotel in Oosterbeek, Holland — the forum for prominent politicians, thinkers and business leaders has been held annually at a series of secluded venues in Europe and North America.

I honestly doubt whether the Bilderberg Group is anything but a slightly less transparent World Economic Forum-style gathering where self-important VIPs are willing to spend top dollar to feel ever-so-important hobnobbing with other poo-bahs. While protesters at WEF events are of course ubiquitous, I believe that conspiracy theorists are less prone to ascribing dark, romantic connotations to what is ostensibly an "economic" meeting that videotapes most of its events. Let's just say that the reality of a bunch of guys talking about non-tariff barriers and other dry topics doesn't quite capture the fancy of the conspiracy set used to a steady diet of faceless characters known to viewers only by the plumes of smoke emanating from their tobacco pipes. Lemme put it this way: Do you think a runt like Paul Krugman could be cast in a Tom Clancy film adaptation? I didn't think so.

And so the "mystique" continues. Actually, the delusion is mutually reinforcing: On one hand, the erstwhile secret society members delude themselves into thinking they actually have a hand in shaping the global agenda while gathering with fellow Masters of the Universe. On the other hand, the conspiracy nutters actually buy into the idea that that's what really happens at these gatherings.

In the end, that's probably all the truth out there to be found.

Why is financial education unpopular?

People make dumb financial choices often because they miss some of the most elementary notions of finance, and they even realize that. Yet, it is extremely difficult to get them to sit down and learn something about elementary finance? Why? Is it because their is a stigma? Because it is horribly boring? Because they have better things to do? Because they do not see the point of it?

Miriam Bruhn, Gabriel Lara Ibarra and David McKenzie tried to coax people into a financial education class in Mexico and found it very difficult. They tried with substantial monetary incentives and still achieved little. Even more disheartening, those they managed to get through the door retained very little: they saved more, but only for a little time, and their borrowing effort was unaffected. Sad.

I wonder whether there is comparable data for developed economies that were recently rattled by the financial crisis. People must have realized that financial education matters. Did they improve their financial literacy? Give me some hope.

Defending the One Percent

Click here to read my new essay "Defending the One Percent," which is forthcoming in the Journal of Economic Perspectives.

How much do firms want to stay informal?

In developing economies, a substantial fraction of the economy stays informal, that is, unregulated, untaxed and unprotected. Why so? One could argue that they want to avoid red tape and corruption. Or they may find the the benefits of formality, like better access to credit or payment systems, courts and insurance, do not outweigh the costs being visible to the state, like workplace regulation, taxes and competition with untaxed businesses.

Suresh de Mel, David McKenzie and Christopher Woodruff perform an experiment in Sri Lanka wherein firms are offered various incentives to formalize, from simple administrative help to lump-sum payments corresponding to two months of profits. Helping with the red tape does not change much, however payments got up to half of the firms to formalize. The threshold to formalization seems rather low in monetary terms, and may also include some path-dependence. From post-experiment interviews with participating firms, the authors learned that the formal firms not change their profits much, but owners felt more legitimacy and they report more confidence in the state. Thus, they are unlikely to return to informality. And if this were to happen at a greater scale, I surmise this would have importance scale effects in formalization, as formal businesses would fear less informal competition. Formalizing an economy may thus be relatively cheap to achieve.

Did US Ask Philippines to Kill KAT.ph?

News site Torrent Freak, "[t]he place where breaking news, BitTorrent and copyright collide" believes so, at least. Coming from the Philippines, I've always wondered whether to be proud or ashamed that the world's top torrent sites have had .ph top-level domains [TLDs] at one time or another. I recall the now-defunct private tracker site Demonoid being "located" in the Philippines. Sometime later, the world's second largest torrent site, Kick Ass Torrents also "moved" to the Philippines [KAT.ph].

As someone with--ahem--professional interest in the operation of torrent sites as working examples of the underground economy, the recent disappearance of KAT.ph intrigued me. Despite the Philippine passage of the Data Privacy Act in the middle of last year, it was curious to me how KAT.ph continued to operate with impunity after adopting its Philippine domain in April of 2011. But lo and behold, Philippine music industry figures supposedly argued that they were being hurt by KAT.ph's nefarious activities and the government was compelled to shut down the URL only yesterday...

Yesterday the torrent site ran into trouble with its KAT.ph domain, and there were signs suggesting the domain was no longer in control of the original owners. Over the past few hours more details have emerged, and the Government of the Philippines has now confirmed that the domain name has been seized on copyright grounds.

The seizure is the result of a complaint filed by the Philippine Association of the Recording Industry and several individual music labels. The complaint stated that KickassTorrents was causing “irreparable damages” to the music industry, and a local court agreed to suspend the site’s domain. “The complaint alleges that the registrant of KAT.ph is violating intellectual property rights by making copyrighted music available for download to its users,” the dotPH registry informed TorrentFreak. 

To be clear, the Philippine industry complaint was filed in December 2011, but Philippine authorities were only able to act after a court order was issued to do so...

Early this week the Philippine Intellectual Property Office issued a temporary restraining Order directing the dotPH registry to suspend the KAT.ph domain for 72 hours. The order, signed by the IPO Bureau of Legal Affairs, will become final if the domain owners don’t appeal. According to dotPH, the company that maintains the database of PH domain names, the music industry first complained about KickassTorrents in 2011.

However, the company said at the time that it would only take action following a court order. “dotPH was initially contacted by the complainants’ lawyers in December of 2011 with a demand to take down the domain, and dotPH agreed to cooperate if provided with an order from a court or appropriate authority,” TorrentFreak was informed. “dotPH received the restraining order earlier this week and subsequently suspended kat.ph in compliance with IPO’s directive,” the registry adds. 

As with most of these things where "Internet," "intellectual property" and "enforcement" are mentioned, there is natural suspicion that the United States is involved in pressuring the Philippines via inclusion in the US Trade Representative's watch list. To be clear, the Philippines has long been on this list, but more for the piracy of fake DVDs as opposed to "hosting" a rogue site (KAT.ph). There were earlier hopes that the Philippines would be struck off the 2013 edition after cracking down on physical distribution of pirated media, but officials were disappointed when it was not. See here:

The government expressed surprise and disappointment over the decision of the United States Trade Representative (USTR) to retain the Philippines on its watch list of countries that violate intellectual-property rights (IPR) due to concerns over Internet piracy.

[Intellectual Property Office of the Philippines (IPOPHIL) Director General] Blancaflor noted the “changing requirements” of the USTR for removal from the watch list of IPR violators. “The USTR has no intention of removing the Philippines from the watch list. Every year the requirements change and vary. How can we be removed if the requirements keep changing?” he asked. “Two years ago it was massive counterfeits. We addressed that with record-breaking volume of seizures. We were not removed then. Last year the US complained that we did not pass the Internet treaty law. We passed it on March 22,” Blancaflor said.

Anyway, back to TorrentFreak on US pressure for Philippine action against KAT.ph:

While the case is presented as a local action aimed at preventing piracy of original Filipino music, it wouldn’t be much of a surprise if U.S. forces have also been applying pressure. In its latest Special 301 Report the U.S. Government listed the Philippines on its copyright “watch list,” demanding further action against so-called rogue sites.

“The United States looks to the Philippines to take important steps to address piracy over the Internet, in particular with respect to notorious online markets,” the Office of the United States Trade Representative wrote in its report.

I suspect the Philippine authorities are still keen on having the country removed from the watch list given the efforts it has undertaken in passing the aforementioned law and continually raiding vendors of pirated DVDs. With legal backing through a court ruling to seize KAT.ph, its fate was pretty much sealed given the changing nature of American IP requests..

In the broader scheme of things, however, does it really matter? KAT is now operating with another TLD, business as usual. So, the US may have successfully bullied Philippine authorities, but the piracy goes on unabated as most users will eventually find the new site. And if that's taken down eventually, well, the game just moves on and on across even more TLDs. Montenegro, perhaps?

Will France's "Culture" Concerns Delay US-EU FTA?

I have already dubbed the proposed " Transatlantic Trade and Investment Partnership" AKA the US-EU FTA a non-event on the grounds that (a) the counterparties are slow-growing economies (b) which already have few barriers on each other's products [around 2% tariff rates on average]. Also, (c) they face several obstacles to further liberalization on products with tariff peaks that will at best result in a watered-down agreement --especially in agriculture. While this FTA bores me already, I have nonetheless found France's intransigence somewhat intriguing given the run-ins they've had with the United States over various issues. Remember those "freedom fries"? I surely do.

A few weeks ago I discussed how the French were likely to raise a stink about "cultural imperialism" insofar as their "superior" culture was to be overwhelmed by Hollywood's brand of lowbrow tinselled trash. Call it the cultural special safeguard mechanism. While agreeing that much US video entertainment is garbage, it is not my place or that of anyone else's to question the questionable taste of French consumers. That is, if they prefer Hollywood fare to France's own productions, well, tough. Obstinate French officials are pressing this point, though. They will surely ask for exceptions in agriculture--just you wait since they will come just as night follows day--but possibly delaying the start of FTA negotiations over exceptions to entertainment is exceptional:

France is "extremely determined" to keep movies and digital media out of free trade talks between the EU and the United States, a government minister said on Wednesday, a stance that could block the start of negotiations. Two days before EU countries are supposed to give the go-ahead for negotiations, the EU is struggling to find a compromise that satisfies France's "cultural" concerns without exempting the audiovisual sector from the wide-reaching talks.

"France defends and will defend the cultural exception to the end - that's a red line," French Culture Minister Aurelie Filippetti told Reuters TV, referring to current EU rules that allow governments to preserve "cultural diversity" by setting subsidies and quotas that might otherwise be considered contrary to free trade. Asked if Paris would go as far as blocking the opening of talks on what would be the world's largest free-trade agreement, she replied: "France is extremely determined."

The first round of talks has been tentatively scheduled for July, but both sides must first agree the scope of the negotiations, something EU trade ministers should finalize at talks on Friday.

Later today the eurocrats will discuss the coverage of FTA negotiations. Expect more drama from the French. Mas oui!

UPDATE 1: The French will not block the start of the negotiations after winning an exemption on media products after hours and hours of negotiations (albeit with some qualifiers):

Paris had refused to join the 26 other EU governments unless television, movies and developing online media were left out.

The final mandate given to EU trade chief Karel De Gucht, who will lead negotiations, does not include the audiovisual sector. However, it does give the Commission the right to ask member states for a broader mandate at a later stage. "I can live with this," De Gucht told a news conference.

French Trade Minister Nicole Bricq said it was "written clearly in black and white" that culture was excluded.

UPDATE 2: A number of top European directors are elated about "victory" in a culture trade war.  

An All-Harvard CEA

With the news that Betsey Stevenson is joining the CEA, the three-member board will now have two Harvard PhDs and a Harvard professor. Just saying....

Update: A friend points out, "Actually, we have had an all-Harvard CEA for some time since Betsey is replacing Katharine Abraham (a Harvard Ph.D.) and Jason is replacing Alan Krueger (a Harvard Ph.D.)."

Euro zone: the common cycle is strong

The general thinking is that if you want to create a monetary union, a strong prerequisite is that the business cycles in the involved economies should be well synchronized, among other criteria. The reason is obvious: it allows consensus regarding monetary policy. This synchronization may arise after the merger, though, facilitated by the currency area.

Periklis Gogas looks at the Euro-zone and comes to the conclusion that synchronization has increased, especially with the last global recession. While the paper has plenty of robustness exercises, I fail to be convinced, though. Indeed, this supposed trend is based on two, maximum three, business cycles. And the last recession was of a different kind, being global, so it is difficult to avoid having it more synchronized than any other in the sample. You may argue that there are 86 quarterly observations and this is sufficient for statistical significance. But when you look at such questions, it is turning points that matter, and you only have a handful, and they do not look like a random sample of the population.

Where did the gender unemployment gap go?

There was a time where females had little attachment to the labor force, and employers also considered them to be the easiest to dispense with in the case of a downturn. These lead to a gender unemployment gap, with females proportionally more unemployed. Times have changed. Females are now in many households the main breadwinners and thus more attached to the labor market than men, even during recessions. This has manifested itself in full force during the last one, which has been dubbed a "mancession" by some because the unemployment rate rose more for men than for women. That was new, and needs an explanation.

Stefania Albanesi and Ayşegül Şahin use a three-state labor search model to understand the data in various OECD countries. They confirm that the change in relative labor attachment explains the disappearance of the long-run gender unemployment gap. At business cycle frequencies, and in particular during recessions, the key is in the sectoral distribution of the female and male workforce. And as this distribution evolves, females benefit from more employment stability than men. Is this last recession a breakpoint for the labor market? There are so many things that are different from before, like super-low employment rates, hysteresis, and declining labor income shares. This all points to structural changes, and we should forget getting back to pre-recession labor markets.

Come to Where the Energy Is: Myanmar Country

With apologies to the Philip Morris Co.'s iconic figure, let's draw some analogies here: Both Marlboro and Myanmar are not exactly the most politically correct of figures, one representing the hazards of cigarette smoking and the other decades of political oppression. That said, both are irresistible draws in certain, undeniable respects. Marlboro is instantly recognizable worldwide for its cowboy, go-it-alone romantic imagery of the "American West." Myanmar, meanwhile, epitomizes the exoticism of the "Far East" to many Westerners. Despite their less-than-perfect reputations, they remain top-drawer economic attractions. Marlboro remains a Top 20 global brand, while Mynamar's considerable natural resources will always have its takers. [Photo c/o Process Design Engineering blog.]

So it is with the recent normalization of Myanmar's relations with the rest of the world (best illustrated by it hosting a World Economic Forum event) that it's sought energy sector investment from MNCs whose countries previously barred them from doing business with the military junta. It's like a land grab out there as its "frozen in time" oil and gas fields are going to be up for auction soon. And, unlike the oil and gas fields of Southeast Asian neighbours the Philippines and Vietnam, China is not disputing ownership over them. (Call it an accident of geography since China has this habit of claiming everything within, alas, striking distance.) Indeed, prior to the recent wave of liberalization, China was next to the only foreign investor of note in Myanmar after India. But anyway, back to the story...

[Australia's] Roc, [France's] Total SA (FP), [Italy's] Eni SpA (ENI) and [India's] Oil & Natural Gas Corp. are among 59 companies that qualified earlier this year to bid for onshore fields in Myanmar, according to the nation’s energy ministry. Myanmar is also offering 30 offshore blocks. Myanmar’s potential gas resources are estimated at as much as 45 trillion cubic feet, Roc said in February, citing a U.S. Geological Survey report. Myanmar has 7.8 trillion cubic feet of proven gas reserves, according to BP Plc data.“That’s quite a significant prize, and clearly the industry feels that as well given the appetite,” Eliet said. 

Due to having fewer geopolitical tussles with China alone, Myanmar's prospects for energy recovery may be said to be better than those of the Philippines and Vietnam irrespective of their reserves. It's certainly indicative of the lure of the "resource curse" that a country such as Myanmar stands to fill its coffers so much just by practicing rudimentary improvements in governance, but I guess that shows you how fierce competition is worldwide for fossil fuels even at this time when energy costs have receded somewhat.

Mortgage refinancing is not that hard

We continuously take economic decisions. Most of the time, they are trivial. Sometimes they are important, and any sensible person thinks hard before settling on an option. Purchasing a home is complex, for example. Can one afford it? Is it the right price? How will it evolve? How is the financing? Comparatively, refinancing a mortgage is relatively easy: what is the interest saving? What are the fix costs? How long does one expect to hold this mortgage?

Yet, it appears a substantial fraction of those refinancing their home mortgage make lightheaded mistakes, according to Sumit Agarwal, Richard J. Rosen and Vincent Yao. Using a dataset that covers homeowners who only refinance to reduce mortgage payments, they find that 52% pick the wrong interest rate (off by at least 50 basis points) and 17% wait at least six months too long, likely because they do not monitor rates. That could be excused by inattention, but when you consider the amounts involved, they would need to have some very lucrative alternative uses of their time. That is quite disappointing for those who model optimizing agents.

Biased taxable income elasticities

Anytime you apply a distortionary tax, it bring well-being losses from the distortion (although the revenue can be used for well-being enhancing public goods). In addition, there are social losses that arise from the fact that people try to evade the tax by shift to other goods, go informal, or in the case of income shift compensation to non-taxable benefits or other amenities like more flexible work hours. Traditionally, the literature has evaluated the deadweight loss from taxation by looking at the income elasticity of the tax. That may be too simple a statistic in this case.

Brendan Epstein and Ryan Nunn show that ignoring the endogeneity of the non-taxed benefits and amenities leads to serious biases in the income elasticity and thus deadweight loss, to the point that it provide not good guidance on how to set tax rates. They basically do this by providing examples: build simple models, calibrate them, generate data from them and show that the usual empirical method provide crassly wrong estimates. An econometrician could in principle do better by taking all this in account, unfortunately data will be very hard to come by for this.

The Jason Furman Fan Club

AEI Chapter.

Update: Here the President's announcement of Jason's appointment.

World Economic Forum in Myanmar: Isolated No More

In the retail space, there are certain token signs of global integration: McDonalds, KFC and Starbucks. In the realm of economic summitry, there too are certain "franchises" one can have: Think of hosting IMF/World Bank meetings...or, in this case, a World Economic Forum event. What brought Myanmar to mind is the country hosting that most neoliberal of talk shops, the World Economic Forum, from 5-7 June. If you had told me as late as 2010 that this nation would soon be hosting Klaus Schwab's schmooze-a-thon of global movers and shakers, I'd have probably chuckled heartily in dismissing it. Klaus Schwab and Thein Sein sharing the same stage; what an idea!

Well, dismiss it no more since it's actually happened. More remarkable yet, the WEF East Asia event was held in Nay Pyi Daw--the capital created by the generals from virtually scratch starting in 2002. To escape scrutiny of their less-than-proletarian lifestyles, it was thought that Southeast Asian equivalents of McMansions were better shielded out in the boondocks. Again, who would have thought that the hermit-generals would open up to the world once more, or that a marquee WEF event would be held in Nay Pyi Daw of all places.

At any rate, the presence of Tony Fernandes (head of AirAsia--the region's largest budget carrier) and Indra Nooyi (global head of PepsiCo) and other movers and shakers in the worlds of business and politics guaranteed attention. Indeed, that few remarked on how exceptional it was that such an event was held there indicates how far Myanmar has gone towards mainstreaming itself into global affairs. Given how marginalized Myanmar has been in ASEAN in the past few years largely through its own actions, the rapid transformation of the country augurs well for the group moving forward:

John Riady, director of [multinational conglomerate] Lippo Group, said: "I think the opening up of Myanmar over the last 12-18 months is nothing short of amazing. And we should all seize this opportunity as a moment to come together and try to work out our differences and achieve a breakthrough for the integration of the region." Now that Myanmar is facing fewer sanctions and easing controls on its governing style, it'll be able to contribute as a more active member within ASEAN.

The message has been served, then: Myanmar may not remain the "weakest link" in Southeast Asia for long. Besides, with more cooperation and less fear in store for ASEAN, who's complaining?