My Climate Action Plan

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

Tax attractiveness

Tax competition is good and bad. It is good because it forces governments to run lean operations and minimize distortions, but it is also bad because small governments can undercut larger ones and increase their own revenue while reducing aggregate well-being. Some firms and individuals are quite responsive as to where they should set up shop, so it could be useful for them to figure out where the best tax conditions are offered.

The latest attempt at figuring this out comes from Sara Keller and Deborah Schanz. They build a composite index from 16 indicators relevant for company taxation. While one can quibble about the weights but on each indicator, their normalization, and some of the redundancy, there is still useful information in the results. While it should be no surprise that the Caribbean is the most attractive area for business taxes, it is more surprising to see that Europe is significantly more attractive than North America. In fact, the United States are among the least attractive of the 100 countries Keller and Schanz considered (only Argentina, Indonesia, Peru, the Philippines, South Korea and Venezuela are worse, and Zimbabwe is in the sample...). I wonder, though, how much this would change by considering South Dakota and Delaware separately.

A Class Act

A profile of Stanley Fischer.

Good News from the Marketplace

It is the beginning of a new academic year, and I am pleased to report that my favorite textbooks are still selling well.

UK Ditches US on Syria: Bye Special Relationship!

In 2010 I wrote about the UK Parliament publishing documents about how it should have a foreign policy more independent from that of the US, special relationship be damned. This, of course, came a few years after Tony Blair was portrayed in British media as Bush's poodle. At the time, few believed that the UK was striking out more on its own and thought the publication did not mean much of anything. These folks included my then-boss Michael Cox who is considered one of the most prominent British experts on US foreign policy.

However, the first big litmus test for UK foreign policy independence--hastily convening Parliament during the summer break to decide on British participation in planned US air strikes against Syria for its alleged use of chemical weapons--went against America. It was not quite a thumping defeat at 285-272, but it was a defeat nonetheless. This time Labour had no intention of Blairing things up, while enough renegade Tories sunk their own leader's please to tag along with Sammy on yet another (foolhardy) caper.

So, what are the implications now that the Americans cannot get their erstwhile sidekicks to play along?

1. The United States has lost the support of its staunchest ally even for what promises to be a very limited intervention. Unlike what several warmongers and pacifists believe, the US action will likely involve a bombing campaign and no "boots on the ground." Still, war fatigue looks to have set in with the British public as their lawmakers turned down this vote. To paraphrase the Yanks, what kind of persuasion does the Lone Ranger--and it increasingly looks like one--if it can't get Tonto to tag along?
2. The United States helped Saddam gas the Iranians and is now poised to bomb the Syrians over using similar weapons. The easiest thing in the world to do is demonstrate American hypocrisy since it is so easy. Recently, Foreign Policy published a feature which strongly suggests the US guided then-ally Saddam as to where its Iranian foes would be. Knowing full well that Iraq used chemical weapons, it provided this information that resulted in Iraq again deploying said weapons. When it comes to chemical weapons, then, the US is highly vulnerable to accusations that it discriminates against Shi'ite regimes. Not only did it effectively coordinate Saddam's chemical attacks against Iranians, but it is now contemplating conventional attacks against the Shi-ite-led regime still nominally heading Syria. 

In its own way, Syria is a problem with no easy solutions. After all, there are good reasons why actions is only being contemplated now. However, that the world's so-called superpower must go it alone does show its declining influence even on those who were stalwart allies in years gone by.

The special relationship is well and truly dead, my friend. Goodbye and good riddance to all that. The United States' misadventures and wild goose chases it can keep for itself.

More financial education could lead to more market instability

At least part of the blame for the last crisis was put on the lack of financial literacy of some borrowers who accepted mortgages they could not reasonably pay back. More generally, the lack of financial literacy is blamed for the widespread less than optimal funding for retirement and for excessive fluctuations in asset prices, a prime example being gold.

Mario Padula and Yuri Pettinicchi use some theory to understand how financial literacy can have an impact of markets, in particular market fluctuations and instability. In their model, one suffers some dis-utility cost from becoming more financially literate, but this lowers the cost of buying a more precise signal. The policy variable is the effectiveness of becoming financially literate. Beyond the utility/signal trade-off, the model highlights important general equilibrium effects. Indeed, once it becomes too easy to be literate, people stop buying signals because the market advantage of the signal has vanished: too many people share the information, and the benefit from asymmetric information is too small. The proportion of well-informed people is U-shaped as financial literacy is more easily accessible, as so is market volatility. Cheap information may not be worth acquiring.

PS: it looks like the paper has been removed from IDEAS. It is, however, still available here (pdf)

Death $: Tracking US Military Aid to Egypt

I was watching Al Jazeera, designated the "real news" by Hillary Clinton, when I came across an interesting feature about how US military sales to Egypt were publicly disclosed by law. A little sleuthing brought me to the Department of Defense website. A Bing search (talk about irregularities in government procurement) brings us recent American "foreign military sales" to Egypt:

Aircraft parts, anyone? 

General Electric Co., Cincinnati, Ohio, (FA8604-13-D-7953) is being awarded a $9,148,074 requirements contract for contractor engineering and technical services support for the F-110-GE-100, J-85-21B engines and F-16 C/D aircraft.  The locations of the performance are Dannelly Field, Ala.; Atlantic City, N.J.; Springfield, Ill.; Sioux Falls, S.D.; Duluth, Minn.; Dover, Del.; Travis, Calif.; and Tinker, Okla.  Work is expected to be completed by Dec. 31, 2014.  The contracting activity is AFLCMC/PZIEB, Wright-Patterson Air Force Base, Ohio. Contract involves Foreign Military Sales to Bahrain, Egypt and Israel. 

How about anti-aircraft system supplies?

Lockheed Martin Maritime Systems & Sensors, Morristown N.J., is being awarded a $49,481,279 indefinite-delivery/indefinite-quantity contract for engineering, technical services and materials required for the resolution of obsolescence, reliability/maintainability issues, production/rework, testing, evaluation, installation and life cycle support functions for the Mk 92 Fire Control System.  This contract will support foreign military sales (FMS) to Taiwan (40 percent), Egypt (24 percent), Poland (16 percent), Saudi Arabia (4 percent), Australia (0.4 percent), Turkey (0.2 percent), Spain (0.1 percent), Pakistan (0.1 percent) and Bahrain (0.1 percent). 

Other sources have tallied military aid to Egypt over the years alike CNN and NPR. The honest truth is that it is very hard for the United States to wash its hands off Egyptian military and police forces killing and maiming its own people. This life--I mean deathline has been extended for years and years. Why does the US take little action to punish Egypt aside from delaying more arms shipments or calling off joint exercises? Those are empty gestures. Aren't the Syrians doing exactly the same sort of thing, allegedly with other sorts of weapons? Either way they die--it's just that one country is using weapons proudly "Made in the USA" to do the deed.

As for US SecDef Chuck Hagel, part of allowing Egypt to sort out its own troubles is not supplying billions of dollars' worth of weaponry to one side (for a start).

Repression in China

A professor in China brings this story to my attention:

A renowned professor has confirmed online rumours that his peers will decide whether he will be expelled from China's most eminent university after he made a series of remarks in favour of free speech and constitutional governance. 

Economics professor Xia Yeliang of Peking University was told by his department that his fate would be decided by a faculty vote, he told the South China Morning Post on Monday. 

"They told me it's because of all the things I have said and written," Xia said. "They have threatened me before, but this is the first time they will vote on my expulsion."

My correspondent says that the vote will likely take place in September. He also reports that this is not an isolated incidence.  He writes, "Though you may not be aware, there is a quiet crack down currently under way in China with other professors being removed for similar offenses....I can tell you from my personal experience here, most Chinese faculty at PKU and other elite Chinese institutions having been educated at top schools in the US are appalled but are quite fearful to speak out."

Here are some questions to think about: If a professor at the prominent Peking University is fired for exercising free speech, how should professors in the United States respond?  For example, should American scholars refuse to attend conferences and give talks there?  Is there more we can do?

An Interview with Emily Oster

Are there biases from monetary rewards in experimental economics?

It has become very fashionable to run economic experiments in the laboratory. Typically, undergraduate students are lured into the lab with some monetary rewards. A longstanding question has been whether this leads to a selection bias that renders the experiment results impossible to generalize. One paper I previously discussed (here) finds no bias within students, a second (here) worries that students in developed economies are not representative at all.

Johannes Abeler and Daniele Nosenzo add another bit of evidence. They invited students to an experiment, either by offering money or not, and either by appealing to the usefulness of research or not. First, the authors observe that appealing to money is much more successful than appealing to research, it triples the number of respondents. Thus, given that participants care more about money, we may think that they would have different characteristics compared to the others. That turns out not to be the case. Thus, no bias from monetary rewards, at least within the student population.

Five universal laws for economics

Physicists believe that social sciences can only be described as true sciences if on can figure out some laws that always apply, without exceptions, and if there some invariant constants that would be good, too. Social scientists do not believe this is the right approach, foremost as one has to deal with individuals and societies that make choices.

James Wayne realizes that Physics lacks one ingredient that is essential in social sciences: choice. Fundamentally, I am not convinced that we actually choose, but that it only looks like it at the level of abstraction that we can master at this point and for the foreseeable future. Indeed, our decisions are the results of complex chemical reactions in our brains under the influence of complex environments and likely some randomness. But we have found a simpler abstraction with the framework of choices under constraints, and that is certainly missing in Physics.

Now Wayne adds the concept of choice to Physics, and then determines five new Physics laws: 1) the outcome of any future event is indeterministic; 2) there is a joint probability of future events that helps predicting them; 3) actions can be taken at any time to change this distribution; 4) we cannot retain complete information about past histories; 5) eventually, some equilibrium is reached. He can then use these new laws to re-understand natural and social sciences under a unified framework. All this in only 8 pages of text and not a single equation. True science at work.

Macroprudential Regulation

A wise column from John Cochrane.

United States' UN Hatred vs Seafarers' Rights

The [UN] Secretariat building in New York has 38 stories. If it lost ten stories, it wouldn't make a bit of difference - John Bolton, US Ambassador to the UN 2005-2006

How much has US thinking changed about prospects for international cooperation, multilateralism and all that good stuff about being a responsible member of the world community? To be honest, not all that much. The infamous Bush appointee John Bolton once said that blowing up the top ten stories of the UN wouldn't make a difference in world affairs. Conservative media certainly hasn't stopped its crusade against the UN. Although Obama and his foreign policy officials are nowhere near as brazen in speech, in practice nothing much has changed. The US remains the only developed country not to sign on to the convention against discrimination against women, has not joined the International Criminal Court, has not joined the land mines ban...the list goes on and on. From keeping Guantanamo Bay open to conducting drone strikes and extraordinary rendition--there is a UN treaty on enforced disappearance the US has deliberately chosen to ignore--America's roguish streak against international law is evident. As I've said, the UN should be anywhere but New York. 

Obama is actually more appalling than Bush in the sense that he pretends to be cosmopolitan and internationalist when, in reality, US foreign policy remains largely unchanged. In hindsight, we should probably appreciate Bush's candour about us being either with the US or against it. Practically speaking, Obama defines American national interest the same way Bush does, but is not as forthright in saying so. Such deception may fool committee members who gave Obama a Nobel Peace Prize for "not being Bush," but I would like to think that we are not so easily deceived.

Recently, the International Labour Organization's (ILO) Maritime Labour Convention [MLC] came into force on 20 August 2013. With 49 countries already signed on, it demonstrates that many states value the contributions of seafarers to making globalization possible. By shifting goods vast distances, they provide an essential service to the world economy. But does the United States value their contributions? To no one's surprise, one of the major holdouts in legislatively ratifying the MLC is the US of A:

Before the U.S. Senate can vote on the issue, however, the administration of President Barack Obama must formally sign the convention and then request the Senate to authorise its ratification. Currently, an inter-agency advisory panel is looking at the specifics.

“The U.S. government believes the MLC is an important addition to protect workers at sea, and we welcome its entry into force for 30 countries this week,” a U.S. State Department spokesperson told IPS. “The United States was actively involved in the negotiations, and we supported its adoption in 2006. At present we are reviewing the convention to determine whether to submit the convention to the Senate for its advice and consent.”

That review is being coordinated by the U.S. Coast Guard. While the Coast Guard did not respond to IPS requests for comment, analysts have suggested that the agency does support ratification, as the MLC offers a potent tool to crack down on ships in U.S. waters that are failing to adhere to international standards. “It will be very important for the U.S. to ratify this convention, as doing so will go a long way towards eliminating substandard vessels from international commerce more generally,” the Centre for Seafarers’ Rights’s Stevenson says. “Further, given the size of the U.S. economy, it is almost impossible to make money operating a major ship without going through the United States.”

It is fair to say that shipborne cargo makes the world go round since it carries 90% of world trade. So, why this self-proclaimed champion for human rights choose to ignore the rights of those who labour to bring so many goods to America? Last I checked, the United States remains by far the world's largest importing nation.

Like "Internet Freedom," I guess this is just another instance of American hypocrisy about so very many things. On binding international treaties, the US is a non-entity. How did that saying go...all hat, no cattle? When it comes to stepping up to the plate by signing on to treaties to observe various rights, America quite frankly doesn't give a damn.

LDC Currency Free-Fall: Party Like It's 1997?

I was dreaming when I wrote this; forgive me if it goes astray. But when I woke up this morning and watched the Bloomberg channel, I could have sworn it was judgment day. Having lived through the 1997 Asian financial crisis while working as a banker (of all things), I have a heightened sensitivity to currencies going berserk. Friends, I feel for the Indian artist above wanting to save the falling rupee. Aside from highly touted BRICs coming under pressure alike Brazil and India, anticipated normalization of interest rates in the United States is unleashing complications around the world. Indeed, there is a fear that we may be on the cusp of another rehash of 1997 given the prevailing uncertainty over the direction of American policy.

Or, are things really that bad?

Plunging emerging market currencies on the prospect of US stimulus tapering have stirred memories of the 1997 Asian financial crisis, but analysts doubt a similar catastrophe is in the making. "There are negative linkages (now) but I don't think that we are in a repetition of the 1990s crisis," said Jean Medecin, a member of the investment committee at the Carmignac Gestion asset manager.

While the Indian rupee has so far taken the worst beating, falling nearly 15 percent against the US dollar over the past three months, Indonesia's rupiah and the Brazilian real are down 10 percent, and the Turkish lira over 5 percent in a trend that is frightfully reminiscent of the crisis that began in Thailand in mid-1997.

Things have changed in some ways. Most especially, LDCs have far accumulated healthier foreign exchange reserves in anticipation of days like these:

Back then, investors reacted by panicking, withdrawing funds en masse, resulting in the Thai bath eventually collapsing. The phenomenon then spread like a wildfire throughout Asia, and even to Russia, with foreign capital vanishing almost with the blink of an eye.

Short of capital, emerging countries suffered acute shortages of credit, plunging them even deeper into the crisis. Fifteen years on, India's Prime Minister Manmohan Singh last week said emerging countries are now much better equipped. In 1991, India had only 15 days worth of foreign exchange reserves, he said. "Now we have reserves of six to seven months. So there is no comparison. And no question of going back to the 1991 crisis," he said.

Moreover, does intervention really work? The historical record is patchy, but that doesn't seem to stop LDCs from trying anyway:

Simon Derrick, chief currency strategist at BNY Mellon said that "letting the currency take the strain might be the smartest move for some emerging market nations". He noted that in 2008, when emerging markets last tried to stop the outflow of funds, they failed despite spending up to 20 percent of their foreign currency reserves [...]

Still, several countries have moved to defend their currencies. Brazil, which had led emerging market complaints that Western stimulus measures had resulted in the appreciation of their currencies and eroded its competitiveness, turned around, saying it would make $55 billion available to prop up the real. Turkey pledged to inject a minimum of $100 million per day, while India announced it would put $1.26 billion into the banking system by buying back long-term government bonds, although it said the move was aimed at making more credit available to boost economic growth rather than defending the rupee.

The bottom line is that LDCs are better prepared this around to weather currency shocks. Still, there may be some validity to assertions that blaming economic woes on American economic machinations hide a number of structural faults at home alike gaping current account deficits. (Not that the US is free of those, mind you.)

Free Bikes and Girls' Education - Update

Last year, I posted a video about some new research on how giving bicycles to girls in a India increased their educational attainment.  Here is an update. (And here is the paper.)

Ethnic ghettos and unemployment

Both in Europe and the United States, minorities face significantly higher unemployment rates. In addition, they live in places that are farther from work than others, or at least their commuting options make it more difficult to get to work. Are the two linked? Obviously, if you do not live where the jobs are, unemployment gets more prevalent. But one could also move, and this may be more difficult for minorities, for various reasons. But before going there, one needs to determine how much of the unemployment rate is due to this spatial mismatch.

Laurent Gobillon, Peter Rupert and Etienne Wasmer pick up on a previous paper of the latter two, which I discussed here. In this spatial search-and-matching model, commuting time acts as a friction, but can only explain a fraction of the unemployment rate gap between "majorities" and "minorities". So other factors are clearly at play. The fact that minorities are de facto confined to particular areas certainly plays a role here.

U R in Trouble: Brazilian Forex Intervention

 Here's another victim of the so-called "taper" of Federal Reserve purchases of US Treasuries worth $85 billion a month or so. To make a long story short, rising interest rates Stateside in expectation of less American bond market intervention from the Fed are causing those who've invested abroad in search of higher yields to reassess their strategies. For several years there was a Brazil "carry trade": borrow in dollars, convert to Brazilian real, then lend in real while pocketing the interest rate spread (after charges and fees, of course). 

The end of Fed Treasury purchases has whiplashed many developing countries like Brazil. Not only are their economies slowing down as China does and demand for raw materials dwindles accordingly, but the carry trade becoming less profitable also has negative repercussions for their currencies. Brazil, already encountering an economic slowdown--remember those protests and riots a few weeks back--is simultaneously trying to combat higher inflation. The latter cause will not fare especially well as the real continues its slide.

So, faced with few alternatives, it's back to the time-tested solution: currency intervention...

Brazil's central bank announced a currency-intervention program on Thursday that will provide $60 billion worth of cash and insurance to the foreign-exchange market by year-end, a move aimed at bolstering the country's currency, the real, as it slips to near five-year lows against the dollar.

The bank said in a statement it will sell, on Mondays through Thursdays, $500 million worth of currency swaps, derivative contracts designed to provide investors with insurance against a weaker real. On Fridays, it will offer $1 billion on the spot market through repurchase agreements. Both are designed to prevent companies and individuals with dollar obligations from scrambling to the market at the same time, afraid that waiting will force them to pay more to buy dollars. When that happens, the real tends to weaken further and faster.

What Brazil is essentially trying to do is ensure that not everyone heads for the (Brazilian real) exit at the same time. Still, you have to wonder if this kind of "demand management" is enough to stop the real's slide. At any rate, the irony is not lost here: As the United States winds down its market intervention (Fed Treasury buying),  other countries like Brazil must step up their market intervention (through FX intervention and the like).

A look at faculty workload

A common complaint about teachers is that they have too much vacation time. Such complaints are even louder for university faculty, as the academic calendar specifies even shorter teaching times, and on top of this the weekly class room hours are ridiculously low. These complaints emerge because teaching is the only face time university faculty have with the paying public. We do a lot of other things that the tax payer does not see and in particular does not realize how much time it takes. But how much do university faculty actually work?

Manuel Crespo and Denis Bertrand have analyzed surveys distributed to faculty of a "Quebec research-intensive university." Using results from 130 tenured faculty who agreed to spend significant time thinking about there use of time, the average workweek is 57 hours. That takes into account that there are parts of the year where workload is lighter (summers) and other times where there more to do. Only about a third of the time is dedicated to research, which I find surprising as this is supposed to be a research university. 44% of the time, or 25 hours, are dedicated to teaching, a surprisingly low 3 hours a week to administration and 9 hours a week to "public service" (would my blogging count?). The report goes through more details, some of which I want to highlight: only 10% of time related to teaching is actually in the classroom. The rest is mostly preparing for classes, face time with individual students, and grading. Time spend on teaching has increased over a decade, attributed foremost to increasing class size (I do not think there is much value to this result, as faculty also got older and in some cases tenured). And there are very few gender differences in time allocation.

Why is the agricultural sector still protected in the US?

While most industrialized economies are strong advocates for free trade, they somehow manage to make an exception for the agricultural sector. I cannot think of one country that would not subsidize its farms in some major way and this despite the facts that we are far from witnessing a food shortage and that the agricultural sector by now constitutes a voting block that can safely be called small. So why do elected official keep pandering to farmers?

Marc Bellemare and Nicholas Carnes look at this question in the case of the United States. Using roll call votes from the US Congress and congress member ratings by the Farm Bureau, they find that electoral incentives in fact still do matter, while personal preferences and lobbying are less important. Could it be that the median voter is a farmer? I do not think this is what the paper is saying. Indeed, the variable "electoral incentive" is based on the proportion of the electorate that works in the agricultural sector. But it is above half, or approaching this, in few districts. In fact, Bellemare and Carnes restrict the variable to farm owners and managers, who are the ones really benefiting from the subsidies, and they comprise a tiny portion of the electorate in every district. (Of course, this measure is correlated with the total farm population.) For this influence of such a minority to still carry the vote, it must be that there is still lobbying going on, and of the sort that is not captured by the agricultural political actions committees that the authors use to control for lobbying. Maybe individual donations? Somehow, it always boils down to lobbying in the United States.

Obstacles to the Global Mobile Banking Era

In many parts of the developing world, mobile banking or "m-banking" has largely supplanted conventional banking as the primary interface of customers with the financial system. For starters, many of the poor cannot meet minimums to open bank accounts. And, even if they did, bank branches are often sparse outside of urban centres. (Some m-banking heavy countries have generations of customers who've never even really used bank branches.) Just as cell phones have become far more plentiful than land lines in LDCs, though, people have needs for financial services as well as communications. Hence the ongoing popularity of using cell phones as "mobile wallets" to make purchases, pay off loans, receive salaries and so forth. As such, they can be quite handy in countries where financial services are sparsely available.

Truth be told, though, the diffusion of m-banking services has not been so swift outside of innovative countries in this space alike the Philippines in Southeast Asia, India in South Asia and Kenya in Africa. Just in time, a batch of three new articles from Global Briefing, the online publication from Commonwealth nations, tell us not only about their prospects but also why their diffusion has been slow.

First, there are competitive pressures from traditional banking institutions. Especially in the developed world, traditional bricks-and-mortar banks are afraid about what virtualization of money may do to their income. That is, what would m-banking do to their addiction to fees, fees, fees in a world where consumer choice is more unfettered in sending and receiving money across borders? There may even be broad systemic implications for the international monetary system should virtual currencies gain acceptance and replace national ones. Virtual money supplanting the dollar? I'm all in favour of it! Still, American authorities may not be so keen given the implications of such a shift...

So M-payments are a small part of the financial universe, but they are growing. In terms of the number of transactions, they are mushrooming fastest in emerging economies, although, inevitably, there is more growth in the value of transactions in developed economies. But it is not the mere expansion of transactions that is getting banks and governments hot under the collar about M-payments. What is driving the debate is the potential that mobile money has for changing the way that money works. Consider this: mobile communications are an alternative infrastructure, controlled not by private financial companies, or central banks, or governments, but to a large extent by the people who use them [...] The financial impact may only just be gathering momentum. Could it be that mobile communications will become the medium for new forms of unregulated money, beyond the reach of conventional banking and conventional financial regulation?

If that were to happen, the way the world uses and thinks about money would change beyond recognition. Bank regulation, instead of being a topic of urgent debate, would become an irrelevance. Economic management through monetary policy – the control of interest rates and the issuance of money – would be a relic of the past. Capital controls would disappear entirely. There would be no more offshore banking havens, because everything financial would effectively be offshore. Both risk and profit would be in the hands of individuals, along with whichever companies manage to grab a piece of the new commercial action. Far fetched? In fact, there are many who would welcome such a zero-regulation financial world, in which there are no safety nets and no taxpayer-funded bank bail-outs.

Second, aside from prospects for revolutionizing how the international monetary system works, less drastic regulatory concerns abound. In particular big, bad America's insistence on stringent anti-money laundering and counter-terrorist finance (AML/CTF, not AML/CFT as the article mentions, actually) is saddling consumers worldwide with additional costs:

Given modern technologies, it is hard to believe that sending money costs nine per cent on average and, in some south-south corridors, 15-20 per cent of the principal amount remitted. The fee structure is also highly regressive – the smaller the remittance, the higher the fee. International regulations, especially anti-money laundering and countering the financing of terror (AML/CFT) regulations, are increasing the cost of using mobile phone technology and internet to send money across international borders. These regulations are also preventing global banks from operating bank accounts of money transfer companies, thus contributing to higher costs. Exclusive partnership agreements between national post offices and major money transfer companies are increasing the market power of the latter and stifling competition from new players. Capital controls are preventing outward remittances from many developing countries. And exchange controls, together with dual exchange rates, are discouraging remittances in many countries.

Third, then, is the rather slow uptake of virtual currencies. At present, none can yet fulfil the traditional functions of money: store of value--no one is sure if any of these currencies are going to be around in a few years' time; medium of exchange--even fewer still are accepted by an appreciable user base; and unit of account--valuations of these virtual currencies remains...irregular. So, we still need a trustworthy virtual currency that many will be willing to use and hold:

The next step in the mobile money revolution is the emergence of virtual currencies. At present, mobile wallets use established currencies but parallel digital currencies are now being introduced that can be traded across any digital platform on a peer-to-peer basis. The first – and best known – was Bitcoin, which, unlike alternatives, is not restricted to a single website, nor used solely in gaming. The currency is created by ‘Bitcoin mining’, where rival servers compete to solve maths tests, the complexity of which regulates the supply. The winner gains the virtual money created and it can enter the market, in much the same way that currency created by a central bank is distributed.

Bitcoin has attracted criticism, not least because its founders are unknown, its market value volatile and it has proved attractive to drug dealers. Each Bitcoin was valued at $15 at the start of this year but quickly rose to more than $100 on investor interest. In six hours in April, the exchange rate plummeted from $266 to $76 then rebounded to $160. Other convertible virtual currencies have followed, including Ripple. Developer OpenCoin has created a fixed number of 100 billion Ripples, most of which it will give away for free. It hopes limiting the supply will increase the currency value over time, thus making the Ripples it retains worth a fortune.

The more I read about it, the more I believe that the emergence of m-banking is a necessary step in moving further into a better, post-American world. Escaping from the shackles of their junky national currency which causes American busybodies to stifle innovation over "security" concerns post-9/11 involves the development of a better alternative. In many parts of the developing world, it is already emerging with m-banking. The obstacles are not insurmountable if innovation progresses at the rate it has in the developing world, leaving America far, far, behind in the sophistication of such services.

As always, necessity is the mother of invention.

Height and labor market outcomes among twins

Yesterday, I mentioned some research on the link between height and labor market outcomes. Let me continue on the theme. It is not entirely clearly why height would matter. There are many confounding variables that could come into play. One way to sort some of them out is to use twins. Unlike many other twin studies, in this case you want to use twins who have not been separated, thus they have the same genetic material and life environment. They may thus only differ by height, social skills and cognitive abilities.

Petri Böckerman and Jari Vainiomäki use such data from Finland and find that there is no significant height premium for employment. However, looking at total income over a 15-year period, they find a premium for women, but not men. For the latter, it must thus be social or cognitive skills only that differentiates them. For women, the authors conclude that it must be discrimination that leads to the height premium, as health variable do not seems to explain it. I wonder whether this has to do with the fact that taller women are better negotiators, but somehow this does not seem to work for men.

I am Ray Fair

Or at least we agree on most things, according to this website, which identifies which economist on the IGM Forum your opinions are most similar to.

Surnames, height and labor market outcomes

It is well-known that taller people do better on the job market, and people get taller thanks to better circumstances in early childhood. But the causation link is not necessarily that simple, as fortunate circumstances in childhood can affect other variables that themselves influence job market outcomes. But this is difficult to establish without the proper data.

Wolter Hassink and Bas van Leeuwen got interesting data from Indonesia. The dataset contains information about army pensioners, including their height, place of birth, ethnicity, religion, education and occupation. What the authors want to emphasize here is that social networks matter in the analysis and they use the surnames to determine which network, and thus social class, people belong to. How well one does both in childhood and on the labor market is determined by networks, they hypothesize. And indeed their empirical analysis shows that while height and labor market outcomes are linked, childhood circumstances and labor market outcomes are not. The story is thus not as simple as previously thought.

Subsidies or Thailand's Descent Into Egyptification

One of the biggest (fiscal) drags on the Egyptian economy is its continued use of massive subsidies for food and energy. At a touch less than a third of the national budget, it eats up a lot of money arguably better spent elsewhere. Moreover, you can hardly say that these subsidies have bought the country peace as the natives have been restless for years and years now and seemingly enjoy killing each other for the heck of it. Having (temporarily) exhausted Detroitifaction as a metaphor for industrialized countries descending into Hades, let us now talk of something happening in the developing countries. You guessed it--Egyptification.

Unfortunately, there is something of the sort going on right here in Southeast Asia. A few weeks ago I discussed the mounds and mounds of rice being hoarded by the Thai government. Not only is the national purse being hurt by this open-ended commitment to buy these crops at well over market prices, but so much food is simply spoiling away since this massive stockpile cannot be sold without significantly denting prices commanded by rice. Thai PM Yingluck Shinawatra tried to roll back the price at which rice was purchased, but quickly chickened out once rice farmers complained. Since her electoral base lies not among city slickers in Bangkok but rather farmers in rural areas, she knew better than to commit political suicide. No matter how economically ruinous, there is little turning back from rice subsidies.

Almost unbelievably, instead of backing down, Yingluck and Co. are now extending subsidies to include rubber. As one of it not the world's largest producers of natural rubber, Thailand is also buffeted by global price fluctuations of this commodity.

Thailand has offered 30 billion baht ($959 million) in aid to rubber farmers to help offset a plunge in the price of the commodity, the latest in a string of costly populist policies the government has aimed at rural communities. Farmers are welcoming the promised funding, though marches are still planned across the country for Monday aimed at keeping up pressure on Bangkok and to ensure the policy is enacted. 

This effort comes on top of (unsuccessful) initiatives to buoy rubber prices by withdrawing supply alongside other major Asian exporters Indonesia and Malaysia given slack global demand. Having caved in to key constituencies alike rice and rubber farmers, the fear is that the Yingluck government will now be obligated to entertain every other agricultural interest group:

The government is walking a tightrope—providing subsidies and other benefits to farmers as soft commodity prices fall while trying to keep a lid on expenditures, which are nevertheless booming. This week's subsidy offer comes in the wake of an aborted government effort to pull back on its rice subsidization program, which has led to massive stockpiles of the staple grain.

The worry, though, is that withholding money from farmers may risk fueling social unrest in a country prone to political violence. "Now that rice farmers and rubber farmers get subsidies from the government, farmers of other crops will want to have their share," said Aat Pisanwanich, director of the Center for International Trade Studies at Thai Chamber of Commerce University. "The government has to come up with longer-term measures because this subsidy isn't sustainable."

These subsidies tend to be self-perpetuating: once granted, they are hard to rescind--especially in light of the current trend towards softening commodity prices. You wish the Thais well, but I do not see a smooth transition out of these subsidies. Already, Thailand has slipped into recession, and you can only imagine calls for these market-distorting measures to increase from agricultural interests whom the Shinawatras have become exceedingly obsequious towards lest they lose this key constituency.

UPDATE: Not that the rubber farmers are content already as they are out in force to, well, ensure the government buys rubber at uncompetitive prices. 

So, Why are China, Japan, ROW Dumping Treasuries?

There is a debate going on here in the rest of the world concerning the United States. It isn't really whether American officials are trustworthy, but whether they are more of BS artists or ripoff artists. When it comes to foreign holdings of US Treasuries, it's arguably both: The United States likes to con others with "strong dollar" rhetoric as it runs unfathomable deficits and the dollar falls to some godforsaken level. There is a lie, and a large financial consequence to believing in such nonsense.

Or, is there a limit to global gullibility? Will the rest of the world continue to be held hostage to this "financial balance of terror"? As it turns out, the top two suckers--China and Japan--have actually been selling loads of dollar detritus in recent months. What's more, the rest of the world are following suit, intensifying movement away from greenback garbage:

China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries. The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June [there is a two-month lag with this data series], a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.

China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.

Bernanke spooking the markets by suggesting that the Fed will soon stop accumulating nearly unlimited Treasuries to lower borrowing costs is resulting in others' pre-emptive action to avoid near-term losses:

"The sell-off in Treasuries and Bernanke's tapering remarks are related," said Michael Woolfolk, global market strategist at BNY Mellon in New York. "Lightning doesn't strike in the same place twice, but Bernanke repeated his comments in June and that roiled the market."

He said the net Treasury outflow was the highest since at least 1977 when the government started compiling the data. June was the fifth straight month that foreign investors sold long-term U.S. securities, but the specific selling of long-term government bonds was the big turnaround as foreigners had bought $11.3 billion of Treasuries in May.

Are we reaching the outer limits to global gullibility in buying Treasuries? Given the aforementioned time lag in reporting the data, it will be interesting to note from forthcoming reports whether rising interest rates Stateside are driven more by Bernanke signalling the end of "money for nothing" policies or by central banks worldwide dumping Treasuries en masse.

Heaven knows, this world would be a much better place if the latter trend continues. Central bankers of the world, don't be afraid to dump those treasuries and teach America a lesson; in the end, only you will be responsible for your people suffering losses from hanging on to such worthless pieces of paper in their name.  

UPDATE: To be fair, the FT expects some bottom-fishing to buoy capital inflows into America in the next report.

An Economist Gets Pregnant

Emily Oster looks at the evidence.

The impact of bullying

If you do not manage to be part of the clique of "popular" people in school, or even worse are bullied, the conventional wisdom reassures you telling you that it is going to be all downhill from here on for the popular people, and that the bullied ones are going to be significantly more successful after school. I think the reason is that after high school, people split into the circles they really belong to, do not have to suffer other people they have nothing in common with and can really deploy their talents. The bulliers and popular people have lost their only edge, particular social interactions, once they get into the labor force and cannot progress.

Nick Drydakis tries to bring some empirical analysis to all this by using the Greek Behavioral Study dataset, which includes information about recollection about bullying, including frequency and intensity. It shows that at least part of the conventional wisdom (or at least how I perceived it) is wrong. Being bullied is associated with lower labor market outcomes, and it is hypothesized this is due to lower self-esteem which has also translated in lower academic achievement while in school (before age 18) and is perpetuated once in the labor force. Thus those whose mental health has been affected by bullying suffer significantly, and they seem to be more common than those who manage to brush it off and go on with life. However, the bullied ones achieve more human capital as measured by computer or English skills and higher degrees, but it looks like they do not managed to turn this into more employment or higher wages. The Greek labor market may be in part responsible for this. For example, the impact of bullying is particularly strong for homosexuals, and all those may not have a fair shot in the Greek labor market either. One should not read too much into a causality from bullying to outcomes here, as the author is careful to highlight. The study has nothing to say, however, about the bulliers and the popular people.

Top Economics graduate programs are not as good as you think

Along with business schools, Economics is where pedigree matters most in the placement of PhD students to academic positions. Students from top ranked (or considered such) programs have a job almost guaranteed in research universities, and students from lower ranked universities find it very hard to break into such universities no matter what their performance is. In part, this is due to the fact that we tend to hire faculty fresh out of graduate school, while other fields go first through post-docs, and that publication delays imply that graduating students have typically no publication. Thus one has to rely on reputations only (or actually read their papers, but then are you going to read the papers of all students from lower ranked programs?).

John Conley and Ali Sina Onder find that while there is indeed a steep gradient across program rankings, there is an even steeper gradient within programs. They use student rankings within programs and cohorts and their publication output after six years, that is, when they are up for tenure. Looking at AER equivalents, they find that the top Toronto student is equivalent to the number three from Berkeley, for example. And to illustrate how steep the gradient is, the median Harvard student has after six years only 0.04 AER equivalent publications, despite coming from the #2 program. This means that more than half of Harvard students are not tenurable in any research-oriented institution.

I see two major conclusions from this: 1) Stop worrying so much about where PhD students are graduating from. It is OK to hire students from lower ranked programs as long as they excelled in those programs. 2) Even the top places should acknowledge that not all students should take research positions and need to prepare them for other ones, like industry, government or purely teaching jobs. These students are screwed twice: they are sent to tenure-track positions that they will never get tenure in, and they are woefully unprepared for the jobs they should take.

Strategic self-ignorance

There are times were we kind of feel we have done something stupid and do not want to know the result. For example, the grade of a test or how a recently bought stock is faring. Such situations are linked to regret aversion, where you consciously try to block available information after a decision has been taken. What about blocking readily available information before you take a decision?

Linda Thunström, Jonas Nordström, Jason F. Shogren, Mariah Ehmke and Klaas van 't Veld relate to the case of temptation, where you consciously block out information about the consequences of your action. Specifically, think about a delicious but calorie-laden meal. You kind of know it is bad for your health, but you decide not to look at the calorie count, although it is available. And that is what they had people do in a experiment where they invited people for lunch with two option: a low and an high calorie meal. It was, however, not obvious which one was high calorie, and participants could look it up. 58% chose not to and ate significantly more calories. How do the self-ignorant differ from the control group? It should not surprise anyone that they smoke more, have lower incomes, know less about nutrition and are more impatient. More interesting is that they are over-represented among males, educated and older people. Having a higher body-mass index leads to less self-ignorance. I wonder whether some of those results are endogenous to the setup of the experiment, where all those questions about nutrition are asked, which may lead people to become more conscious about their weight, especially less educated ones.

PS: too bad the equations in the paper are unreadable. Never use the Word equation editor...

Why Venezuela Has Egypt-Like Forex Reserves

Unlike many (left-leaning) colleagues, I remain profoundly unimpressed by the "post-capitalist" stylings of countries alike Argentina and Venezuela. When it comes to the geopolitics of the world economy, I am generally unconcerned about whether countries style themselves as "pro-American" or "anti-American" since it's largely beside the point. The point being, of course, that perceived friendliness to the world's largest economy has little to do with sound economic management.

Today we have an excellent case in point: How the heck can Latin America's second largest oil exporter after Brazil have Egypt-like foreign exchange reserves? With sustained high oil prices for years and years, it's hard to imagine but it's true in the case of [surprise!] Venezuela. Nor did it help that Hugo Chavez stashed a lot of foreign exchange in state-owned enterprises, which are now likely to be recalled to help repay the debts of this financial basket case:

Venezuela can more than double its reported reserves, which fell to a nine-year low of $22.9 billion on Aug. 5, if it chooses to take control of all the dollars held by state enterprises as of March 31. Increasing its foreign-currency holdings would bolster Venezuela’s ability to repay $40.5 billion in obligations at a time when its borrowing costs, at 11.59 percent [!!!-such confidence in this socialist paradise], are almost double the developing-nation average, according to Bank of America Corp. in New York. 

Alike many gold bugs, Venezuela (wrongly) bet on ever-rising prices of gold, in which it has kept much of its forex reserves. So, when gold prices headed south, you know what happened to its reserves:

Venezuela’s liquid cash reserves fell 31 percent in the first half of the year to $3.1 billion, the central bank said yesterday. The bank had 11.8 million troy ounces of gold as of June 30, which it valued at $18 billion, down from $20 billion as of Dec. 31...

The 23 percent decline in reserves this year is mostly due to a 43 percent plunge in the price of gold, which accounts for 72 percent of holdings [my emphasis], Rodriguez said. Because the central bank values its gold holdings using a six-month moving average, reported reserves may fall by $1.1 billion more if gold remains at current prices, Rodriguez said in an Aug. 8 report.

“The fact that Maduro has given control of these funds to the central bank is definitely a credit positive move,” Bianca Taylor, senior sovereign analyst at Loomis Sayles & Co. in Boston, said yesterday in an e-mailed response to questions. “However, it is not a panacea. Venezuela’s problems are deeply structural.”

In other words, Venezuela has precious little cold, hard cash. ($3.1 billion? What's that, 1.25 seconds'  worth of US deficits?) Moreover, there is some doubt as to whether much dollars--currency of el diablo--are actually stashed away in SOEs. At any rate, I am still gobsmacked at the level of financial mismanagement here. You must be radically incompetent to turn Latin America's second largest oil exporter into a holder of Egypt-like forex reserves. Hoarding gold? Puhleeze.  

What's up with the labor income share?

The labor income share in national income has been generally decreasing across industrialized countries for about three decades now. The consequences of this can be large, as this means a major reallocation of economic surpluses towards capital income (and the fact that Cobb-Douglas production functions become less appropriate). This trend has been exacerbated with the last recession, much to the dismay of many who see the rich capitalists screwing the labor force.

According to Loukas Karabarbounis and Brent Neiman that is at least not the entire story. Rather they emphasize that this drop in the labor income share is due to an increase in capital accumulation as a consequence of the decline in the price of investment goods. The drop cannot be attributed to changes in industrial composition, as it is also happening within industries. Note that this decline in investment good prices is often taken a symptom of technological progress, which means that for the first time since the industrial revolution, technological progress is leading to a decrease in the share of the production surplus that workers can capture. It just so happens that technology nowadays is labor-decreasing, or at least less labor-augmenting that it is capital-augmenting, and I do not think there is much that we should do about it at the technology level. At the fiscal level, that may be another question, though.

Only in Hong Kong: Designer Handbags as Collateral

It's been such a long time since we've had a luxury goods feature, so here's one: Anyone who has been known to Asia knows the social pecking order here among cosmopolitan (small-c, that is) women has something to do with carrying designer handbags. Mainland China is becoming a large and lucrative market and Japan remains a steady customer for big-ticket items, but Hong Kong is still a prime destination--especially in designer-handbags-per-capita terms since the city is Asia's second largest market overall for these products. It does help that you can buy these items duty-free there. Some markets are built to retain their advantage for the long haul.

Therefore, it was only perhaps a matter of time that this global financial centre began offering to accept these designer handbags as collateral. Sure the mainland Chinese buy lots of those too, but those hordes of noveau riche do not have longstanding experience valuing such goods. Moreover, the kinds of financial services they offer are nowhere near as sophisticated as those of Hong Kong which are obviously on the cutting edge. So,without further ado, welcome the pawnbrokers accepting designer handbags:

Say hello to the handbag-backed loan, a unique Hong Kong phenomenon. While money lenders typically ask for cars and homes as collateral, Hong Kong's Yes Lady Finance Co. seeks its customers' beloved handbags. The four-year-old company accepts handbags on the spot, assesses them for their condition and authenticity and then procures loans within half an hour, as long as the bags are Gucci, Chanel, Hermès or Louis Vuitton. Occasionally, they'll consider a Prada.

Prada? It's so very gauche, dahling [I adopt a haughty pose and turn up my nose at its mere mention]. Questionable workmanship and excessive marketing hype aside for the latter brand, many residents actually prefer this kind of fast finance to avoid the red tape incurred while dealing with conventional consumer loans. Hence, many customers are not really hard up as you would assume in other settings, but whose cost-benefit analysis regard handbags-as-collateral favourably:

In a city driven by consumers' voracious appetite for the newest and latest luxury products, handbag-driven loans are a lucrative business. Yes Lady takes a purse and lends clients 80% of the bag's value. Customers get the bag back by repaying the same loan with 4% monthly interest, within four months. Classic purses and special-edition handbags often retain much of their retail price.

The company recently gave out a roughly US$20,600 loan in exchange for a Hermès Birkin. But Yes Lady's purse-backed loans come in all sizes and start at about US$190 with no upper ceiling. Yes Lady is carving out a niche for itself in a city with 200 licensed pawnbrokers and over 900 moneylenders. The pawn industry, one of the city's most traditional forms of lending, targets primarily poorer residents and foreign domestic helpers. Pawnbrokers typically only accept watches, jewelry and electronics as collateral.

But unlike pawnbrokers, Yes Lady, whose Cantonese name translates to "Rich Woman," has a different customer in mind: wealthy locals whose money is tied up—sometimes literally—in a luxury accessory [...] Angel Yam, a white-collar office worker, says she doesn't really care if she gets back the Chanel purse she recently traded in for a total of roughly US$1,550. "I have too many idle handbags at home," she said. "I don't feel any loss when I take some of them as collateral for loans."

So there is a shallow, materialistic culture at work here among status-seeking handbag collectors and the cottage industry dedicated to serving them, but I'm rather more impressed by the financial innovation it has spawned in one of the world's most cutthroat of capitalist societies.

The One Percent

The JEP Symposium on The Top One Percent is now available online.

When to borrow from friends

When should I borrow from friends or from banks? With friends, I would typically get a lower interest rate, but I could risk losing a dear friendship. With banks, I pay more in interest and have to bring collateral, but I can walk away with relatively little damage. There are some situations where one should be preferred to the other.

Alexander Karaivanov and Anke Kessler study this question in the context of a world where borrowers can default strategically and there is limited enforcement of loan contracts. First they show that the optimal informal loan (from friends or relatives) features zero interest rate and zero collateral. This is because friendship is an efficient enforcement mechanism. That would typically happen with smaller, less risky loans. Then Karaivanov and Kessler show that if there is sufficient risk in the loan, one should go for a formal loan. The reason is that the collateral is divisible. In an informal loan, you either keep or lose the friendship. With a formal loan, you may still keep part of the collateral if things go bad. Using household data from Thailand, they find that their model lines up nicely with the data.

House Demolitions or the Detroitification of Spain

A chair is still a chair
Even when there's no one sittin' there
But a chair is not a house
And a house is not a home
When there's no one there to hold you tight
And no one there you can kiss goodnight...

As the late Luther Vandross explained, a house is not a home. Unoccupied houses--whether deserted or incompletely finished--blight the developed world. In the benighted American wasteland of Detroit, they have been bulldozing more and more unoccupied homes, and this phenomenon now stretches to parts of Japan. Meanwhile, we have a related occurrence in Spain. Alike the US, Spain experienced a housing boom in mid- to late-2000s, fuelled by expectations of ever-rising prices and easy credit (especially from German banks plunking their euros in these "investments"). Years and years of stagnation have left Spain with--you guessed it--thousands ofnd thousands of unoccupied houses.

How do you correct this oversupply of partially built, unoccupied houses that will probably never be completed that are dragging down market prices? It's the same solution the world over, whether in Detroit or Daisen. Namely, demolish those houses: 

Sareb, the unit holding soured real estate assets from Spain’s nationalized banks, orders work to stop on about 160 of the 650 partially-completed building projects on its books and decides which ones are worth completing. A small number of them may be demolished, said two people with knowledge of the matter, who asked not to be identified by name because it isn’t public.

“We expect the bad bank will start to seek bids for some demolition projects starting this summer,” said Anka, chairman of Madrid-based Anka Demoliciones and vice-chairman of the Spanish Association of Demolition Businesses.

Spain is counting the cost of the collapse of a decade-long property boom that’s sent home prices falling about 30 percent since the start of 2008, driven unemployment to 26 percent and burdened banks with mounting bad loans that have made them wary of extending new credit. A decision by Sareb to raze unfinished properties would demonstrate it makes more sense to knock down homes than try to sell them as an economic slump drags into a sixth year, said Fernando Rodriguez de Acuna, a project manager at Madrid-based real estate consultant RR de Acuna & Asociados.

It's going to be game over in a short while, too. They're just houses, not homes.

Wisdom from Raghu Rajan

"For economists who actively engage the public, it is hard to influence hearts and minds by qualifying one’s analysis and hedging one’s prescriptions. Better to assert one’s knowledge unequivocally, especially if past academic honors certify one’s claims of expertise. This is not an entirely bad approach if it results in sharper public debate.

"The dark side of such certitude, however, is the way it influences how these economists engage contrary opinions. How do you convince your passionate followers if other, equally credentialed, economists take the opposite view? All too often, the path to easy influence is to impugn the other side’s motives and methods, rather than recognizing and challenging an opposing argument’s points. Instead of fostering public dialogue and educating the public, the public is often left in the dark. And it discourages younger, less credentialed economists from entering the public discourse."

Read more at http://www.project-syndicate.org/commentary/the-declining-quality-of-public-economic-debate-by-raghuram-rajan#Xlo2wzGUe2FcbYDZ.99

A Debate over Obamacare

Casey Mulligan versus David Cutler

Textbooks do not matter

I have complained before, and I am far from being the only one, that textbooks are too expensive. But we still use them because we think they are useful, or because we are too lazy to come up with class material ourselves. Beyond the benefit for the lazy teacher, do textbooks actually bring something to the classroom?

Maria Kuecken and Marie-Anne Valfort looks at a case where textbooks are sometimes simply not available, classrooms in 11 Sub-Saharian countries. And it turns out the availability of textbooks does not matter, whether owned by each pupil or shared. It is only in one case, the richer kids, where there is a noticeable improvement in school achievement for shared textbooks. So it looks like teachers manage to adapt well to the absence of textbooks. And I think there is virtue in working without them: students have to listen to the teacher, learn to take notes or absorb material on the spot, and they are more active in the classroom. I wish I could go without textbooks, but unfortunately rules are rules. And publishers also need to make a living, right?

The option of suicide

Suicide is a trigger strategy and when to pull the trigger is a decision that involves forming expectations over future outcomes. It is a difficult decision, as future outcomes are very uncertain, if not difficult to quantify.

Shin Ikeda models the suicide decision as the decision to exercise an American option on future wages. Seen this way, the suicide option is straightforward to quantify once you have wage profiles of suicide candidates (to determine timing) and non-candidates (to determine future wage profiles, their distribution and how they may differ form suicide candidates). From anecdotal evidence, anxiety seems to be an important factor, thus modeling at least risk aversion right is very important, as well as bankruptcy. Unfortunately, this is not at all how the paper proceeds. Individuals are risk neutral, but returns are adjusted for market risk. Individuals hold no assets or debt, except their human capital. The wage process is identical for everybody. It is then no surprise that the results are not realistic, indicating that the strike price corresponds to 90% of the average initial wage in perpetuity, meaning that a majority of workers is at suicide risk at some point during their life. Any study in the value of life literature gives numbers much higher than this value, and this is because people value more than just wages. Instead of only looking at money flows, one needs to consider concepts like utility and preferences...

The Latest from Merle Hazard

Babysitting and labor market outcomes

It is well established that what happens early in life matters a lot for adult outcomes. But some adult life choices may rather be influenced by event later in childhood, like what to study in college or which profession to take on, controlling for all the cognitive skills that seem to be largely set by then.

Zeynep Erdogan, Joyce Jacobsen and Peter Kooreman look at the impact of having worked as a teenager, and in particular as a babysitter, on fertility and labor market outcomes. Results are a mess, and I suspect that endogeneity and selection bias have a lot to do with it. The authors, though, find one rather strong result: Working during 10th grade has a positive impact on labor market outcomes and delays fertility. It is rather strange that having babysat (at a specific age) would encourage a woman to have children later. But babysitting in general leads to having more children, according to their results. That all looks like spurious correlations to me, especially as instrumental variable results looks very different from OLS ones.

Depopulation or the Detroitification of Japan

There is a spectre haunting the developed world--the spectre of Detroitification. (Take that, Marx and Engels!) It involves depopulation and industrial hollowing out destroying the tax base of locales barely able to provide basic public services. Aside from the highly questionable logic of Japan incurring more debt to "cure" problems arguably caused by an oversized debt overhang, I have a more fundamental doubt about its economy moving forward. Simply, demographics dictate that an ever-shrinking population places nearly-insurmountable pressure on enfeebling the economy. Too many seniors drawing on too many benefits compared to too few working-age persons--it's a bad situation only set to get worse:

The estimate shows that Japan’s population in 2040 will stand at 107.276 million, a decline of about 20 million from 2010′s 128.057 million. A January 2012 estimate by the same [National Institute of Population and Social Security Research] institute had shown that in 2060, Japan’s population will number 86.737 million, about 30 percent less from the 2010 level.

Japan has been experiencing a natural population decrease since 2007, with annual deaths topping births. In 2011, the total fertility rate — the average number of babies a woman gives birth to during her life — was 1.39. A total fertility rate of 2.07 is required to maintain population levels. Although the public sector has been taking steps to make it easier for women to have more children, it will be extremely difficult to improve the situation.

While industrial stagnation is perhaps less evident in Japan at the moment, the fiscal implications of these hollowed-out societies remain the same. There are already signs of Detroit-esque lapses in the provision of public services emerging:

The progress in the graying of the nation means that the need for social services for residents such as medical and nursing care services will increase. The population decrease means that the nation’s total tax revenues will decline. As a result, grants from the central government to local governments will diminish. Both the central and local governments must find ways to overcome the imbalance between revenues and outlays. It will become all the more important for both the public and private sectors to increase chances for women to fully utilize their abilities in the workforce.

The effects of a population decrease are already being felt. Cases in which road bridges have been closed to traffic because of a lack of funds for maintenance and a drop in the number of users are increasing. Forests exist whose owners are now unknown. The number of vacant houses are increasing. Some municipalities have passed by-laws under which they will demolish vacant houses that have become dangerously dilapidated [my emphasis].

The spectre of Detroitification is hard to beat, and its footprints are unmistakeable.With current leader Shinzo Abe unwilling to consider meaningful migration reform as a solution thus far, it's the Motor City writ large and not Godzilla that's looming ominously in Japan's skyline.

A New Job for Raghu Rajan

He's becoming a central banker.

Human capital and corruption

It is commonplace to assume that corruption is bad, although the evidence is far from clear about this. Empirical investigations are typically at the macro level and have very little to say about the micro channels of corruption. In fact there is very little structural modelling or estimation in this area.

Spyridon Boikos concentrates on the impact of corruption on the accumulation of human capital using an endogenous growth model. Two channels are investigated: the first is about public resources being misdirected being education and production sectors, and the second is complementarity between human and physical capitals. Putting this to the data, it is found that corruption does not have that much impact in the education sector, and it is conjectured that corruption does not have the same bite in the education sector as in the rest of the economy. I cannot help thinking that the model misses the big elephant in the room in terms of human capital and corruption: a very common form of corruption in this regard is bribing for entry into schools, passing exams and even getting diplomas. This means that the signalling effect of diplomas is getting lost, and hence the incentive to get an education vanishes, in particular for the talented ones. And for those who attend a school, there is little incentive to learn.

If I Were On Drugs, I'd Do Ratings Like Moodys

So, just how "moody" is Moodys? For reasons I'll explain, it makes me want to take large amounts of hallucinogens to acquire their "expertise." The global financial crisis revealed that, if anything, major credit rating agencies are not trustworthy. Conflicts of interest and plain negligence abounded. When push comes to shove, it's ultimately up to us to perform due diligence on prospective investments and not have some self-proclaimed rating agency do the job (poorly) for us.

This introduction brings me to the Philippines seeking to complete all major credit rating agencies giving it an "investment grade" designation. On March 27 of this year, Fitch granted the country such a rating after waiting for it for quite some time. On May 2, Standard and Poors followed suit in doing so. All this leaves just Moodys to grant the Philippines such a designation.

During the past week, Moodys people were in Manila assessing what rating to give the Philippines. These discussions were somewhat ridiculous given how low yields are on Philippine sovereign debt. If we take international capital markets as our gauge of investor perceptions of trustworthiness, the Philippines' performance is laudable: In case you're wondering, 10-year Philippine bonds are yielding lower than solidly investment grade nations that have been considered as such for a long time including Israel, Australia, Poland, New Zealand, Chile and Mexico. (And no, the government isn't faking low yields by buying its own papers alike certain governments.) The real question to me isn't whether the Philippines is investment grade but rather why its credit rating isn't higher.

And here's the kicker: The Moodys folks are questioning the government's "failure" to spend all of its budget within the fiscal year. Last I checked, it was called "coming in under budget." Correct me if I'm wrong, but in this era of trillion-dollar American deficits, isn't this a rather desirable outcome?

The government’s failure to spend its budget within schedule will be one of the main issues to be discussed in meetings between state economic managers and representatives from Moody’s Investor Service this week. Moody’s representatives are in Manila as part of the debt watcher’s process in reviewing the Philippines’ sovereign credit rating.

Moody’s still considers long-term peso and dollar bonds issued by the Philippine government as “junk” investments. The firm’s peers, Standard & Poor’s and Fitch Ratings, already rate the Philippines at investment grade. “Funding is not the issue. The issue is capacity to spend the money,” Moody’s senior analyst Christian de Guzman said Monday. 

You apparently don't need an understanding of finance to work for Moodys. Heck, if I took lots of drugs, I'd prolly work for Moodys, too. For them, true-to-life market evaluations don't matter--and underspending is "bad."

Obamacare versus the Faculty

I don't know how widespread this phenomenon is, but I thought I would share an email I received this morning:

I have been teaching multiple sections of economics for four years now at several Colleges and Universities in the State of Indiana. I have also been a frequent user of your texts in the classes that I teach.

With the implementation of the ACA (Affordable Care Act) these institutions are giving notification to their part-time faulty that their individual teaching schedules will now be limited to three sections. At the college this will likely result in the cancellation of 20-25% of the class sections in economics, and I would assume other areas will have a similar result. The students are not fully aware of the situation and many will be surprised that their desire to get a college education is now being impacted by the need to avoid the full implementation of the ACA.

Regardless if you are a Republican or a Democrat I would hope full-time faculty would voice their concern regarding the impact the implementation of the ACA could have on the attainment of higher education for the current student population and upon the lives of the dedicated part-time faculty that have been devoted to serving this student population.

My hope is that if faculty across the nation brought this to the public attention that we as a nation could have a more open and complete dialogue regarding the course we wish to set as a nation.

Update: Another example.

Ec 10 Bleg

As part of our "marketing" effort to get freshmen into ec 10, Harvard's introductory economics course, the ec 10 staff and I are trying to construct a list of famous alums of the course. Here is the list we have put together so far:

Steve Ballmer
Ben Bernanke
Lloyd Blankfein
Ryan Fitzpatrick
Jeremy Lin
Sheryl Sandberg
Eduardo Saverin
Chuck Schumer
Cameron Winklevoss
Tyler Winklevoss
Mark Zuckerberg

If you attended Harvard and have a famous classmate who you are sure took ec 10 (or its predecessor ec 1), please email me the information.

Which academic field contributes most to economic growth?

If you have sat on any inter-disciplinary academic committee, you must have witnessed frustrating discussions about how one field is more useful in some respect than another, especially when resources are involved. And irremediably people compare apples and oranges, as academic fields can be very different and their metrics impossible to compare.

Cristiano Antonelli and Claudio Fassio decided to open this Pandora box and concentrate on one impact: economic growth. They perform a cross-country study and take the number of graduates in each field as an indicator of academic output, and see where that leads us in terms of economic achievement. They make the distinction between engineering, hard, social, medical sciences, and humanities in a 11-year panel of 16 OECD countries. The horse race ends with two clear winners, engineering and social sciences, and two big losers, medical sciences and humanities, the latter having a significant negative contribution to growth.

That said, should we believe those results? Beyond the obvious issue with panel cross-country regressions, the problem is that we are still comparing apples to oranges. In some countries, medical studies are at the graduate level only, while it is undergraduate elsewhere. There are also stark difference for Economics as well. In the US, many students graduate in that field and have actually only two years of classes in this major, having to take general education classes first for two years. In Europe, Economics students spend their whole four years on the topic. And the same applies to other fields. Thus counting students, and especially if you want to make the claim they are specialized in a particular field, is rather heroic. I would not yet claim social sciences have won this battle.