Industrial Revolution in Britain: it was thanks to human capital

Despite the fact that it happened about 200 years ago, we are still puzzling why the Industrial Revolution happened, why it started in Britain and it happened at that moment. A sample of previous work relevant to this has been discussed on this blog: 1, 2, 3, 4. While all this is old history, it is still kind of relevant, as we are also trying to understand how to get the least developed economies to get through a similar revolution. The circumstances are different, but lessons from two centuries ago may be useful.

Morgan Kelly, Cormac Ó Gráda and Joel Mokyr add another piece to the puzzle. British men were significantly better fed and taller than their continental counterparts. They likely had better cognitive skills, too, as we know today that they correlate positively with physical health. And, the distribution of these positive traits was such that a significant share of the population had the right characteristics to participate in the Industrial Revolution. That was not the case elsewhere. Thus, good human capital and a good distribution of it are necessary for the Industrial Revolution, but likely not sufficient.

Will Somali Pirates Return if EU Stops Patrolling Soon?

Ahoy mateys, it's back to the Gulf of Aden for us in this post. The collapse of a functioning government in Somalia led to a period when many turned to piracy as a lucrative livelihood in the absence of other viable sources of income. Americans--people who top the global list of ignoramuses about what's going on in the world--even focused some attention on the issue with the kidnap of Captain Richard Phillips of the MV Maersk Alabama. They even made a movie about it (just don't ask them where Maersk is headquartered since the average Yank probably can't find Denmark on the map, let alone Somalia.)

In any event, EU-led efforts to patrol these lawless seas eventually bore fruit, with piracy receding to far less alarming levels in the last year. With EU Navfor's mandate winding up in 2014, however, there is concern that the pirates will come back strong once the cats are away. Back in the UK, Labour's Shadow Foreign Secretary John Spellar has voiced this very concern. (For non-Brits, a "shadow" minister is someone from the opposition whose portfolio is similar to the "real" minister's except s/he is obviously not in power.) From the industry publication Lloyd's List:

A senior UK official has urged the shipping industry to lobby to extend the mandate of EU Navfor’s Operation Atalanta beyond its 2014 mandate deadline.

The shadow foreign and commonwealth office minister John Spellar warned that “EU Navfor’s Operation Atalanta will be renegotiated in 2014 and it is not clear whether it will be maintained”.

Addressing the Security in Complex Environments conference in London, Mr Spellar revealed that politicians had complained that multiple forces patrolling the high-risk area duplicate each others’ efforts rather than complement each other. “There are voices in the back benches that question why we need UK co-operation when there is [North Atlantic Treaty Organisation] involvement,” he said.

Unsurprisingly, most shipping industry interests are lobbying for EU Navfor to stick around:

Mr Speller warned that some government departments are slow to react to changing circumstances and urged the shipping industry to lobby the government as soon as possible to extend Operation Atalanta. “It is important to get [government] engaged at the earliest possible stage,” he said.

A representative from Mitsui OSK Lines based in London said operators needed EU Navfor forces to stay in place. “If we lose that capability the pirates will come back. It’s as simple as that,” he said.

I think the chances are good that EU Navfor will gain an extended mandate in 2014. While the reduction in piracy is also due to a host of other factors alike more commercial vessels having armed guards and designating traffic zones where pirates are less likely to be successful, European patrolling is clearly valued by industry players. Moreover, I am not convinced that playing Britney Spears music [?!] will drive the evildoers away. 

Ops, I hope they don't do it again.

Feldstein on Obamacare

Marty worries about a great unraveling.

Procrastination is a strong predictor of academic performance

I believe that perseverance and timeliness are the secret to success, and foremost so in school. And I believe these are the qualities that brought me to where I am now, and I hope these qualities have also transpired on this blog. But ,y belief may not be general wisdom or even scientifically established. Thus, I am happy to report on a study that confirms at least part of my credo.

Marco Novarese and Viviana Di Giovinazzo use data on how promptly astudents have enrolled for university to forecast their future academic performance, and the forecast is quite good. Of course, promptness likely correlates with plenty of other positive student characteristics the authors cannot measure. And of course, the result is not too surprising. But I feel comforted in my belief and my bias in selecting studies that confirm my prejudices is thus reinforced.

Give girls a bicycle

It is well known that girls from developing countries face hurdles in their schooling experience. This goes from subtle issues during their periods, curricula geared towards boys, and household work to plain denial of access to schools. While some of this has to do with cultural issues that are difficult to overcome with (economic) policy, some help could be surprisingly easy. It happened before in public health, my favorite example being telling kids to wear shoes eradicated hookworm from many parts of the world.

Karthik Muralidharan and Nishith Prakash have a recommendation, and that is to give girls a bicycle. They base this on an experiment they ran in India, where girls were offered a bicycle if they continued into secondary education. This helped overcome traditions that would not let girls out of the village and increased enrollments by 30% and closed the boy-girl gap by 40%. The authors also claim this is more cost-effective that the traditional cash transfers because bicycles have positive externalities, such as the safety of girls during commutes and more generally empowering them. As with any such experiment, one can question whether the result can be generalized, but it is interesting nonetheless.

PS: As several readers noted by email (but could have commented), this is not a randomized experiment. Rather, the authors used an initiative conducted by the government of Bihar. I apologize for the confusion.

Who knew what when?

President Obama is getting heat over his often repeated claim that, under his healthcare reform, "If you like your plan, you can keep it."  It is clear now that for millions of Americans, particularly those who participated in the individual insurance market, that is simply not true.  You can argue that the plan they will get under the Affordable Care Act is better, but it seems undeniable that the President's sales pitch was factually incorrect.

As someone who has previously worked for a President, I am fascinated by how the White House staff let President Obama so consistently and so publicly make a false statement.  Presidential speeches undergo a painstakingly thorough review process. It seems that there are only three possibilities:

1. The White House staff did not know the statement was false.  That is, they did not understand the law the administration was promoting.

2. The White House staff knew the statement was false, but they decided to keep this fact from the President.  That is, they let the President unwittingly lie to the American people.

3. The White House staff knew the statement was false and told the President so, but the President decided to keep saying it anyway.  That is, the President consciously decided to lie to the American people.

These are the only three possibilities I can envision.  None of them reflects particularly well on what has been going on in the White House.

Colonial Mentality: Chinese Shun Their Own Brands

Given the truckload of goods China makes for the rest of the world, it may seem odd that the Chinese are concerned with their inability to develop homegrown brands: Why should you develop your own brands when Apple/General Electric/Samsung and whoever else have you have done the heavy lifting of brand-building for you as a contract manufacturer? It's certainly not easy, either--none of the world's top 100 brands are mainland Chinese. The answer is as simple as it is clear: actually making consumer goods constitutes an ever-decreasing share of the profits--if any. The higher value-added activities come from branding, marketing and goodwill which emanate from (surprise!) building up a brand name. In other words, the Chinese get the grunt work and the industrial pollution, while Western companies get the cushy high-salaried jobs and clean air.

Just in time, the FT has an article discussing how the Chinese perpetuate this lamentable situation themselves by preferring imported to local brands. In sociology, it would be classified under "colonial mentality" or believing that former colonizers--be they the Japanese or the Europeans--are superior. After all, they managed to colonize you, right?

Chinese consumers want foreign goods. Whether sports shoes or cars, televisions or mobile phones, cosmetics or nappies [diapers to non-Brits], surveys show that foreign brands predominate. Shaun Rein of China Market Research Group says people trust foreign brands not to cut corners and associate them with more of an established heritage than their domestic labels.

This spells trouble for China as its people become more middle-class and spend more on non-essential items. The more that they buy foreign goods, the more that the proceeds of China’s progress will accumulate to shareholders elsewhere. It will also mean fewer profits for Chinese companies to reinvest in innovation and expertise at home in electronics, for example.

Moreover, there is the matter of "sham" trade surpluses (the image above comes from the ADB Institute): trade figures aside, once you adjust for the actual value-added of Chinese exports, the results look rather less impressive:

Its lack of popular brands is already visible to some degree in its trade balances with other countries. China may run a large nominal surplus but when economists adjust those numbers for the value that it adds or gives away in making goods that are consumed at home or abroad, the numbers tell a very different story.

For example, its total trade surplus with the US drops from $189bn to $127bn on a value-added basis, according to calculations by economists at BBVA, the Spanish bank. Most of this reduction is due to value given away in electrical and optical equipment, textiles and clothing.

Consider it as a warning sign. Sometime ago, I wrote a journal article together with a marketing scholar about the pressing need for the likes of China to develop brands of its own. Suffice to say that message has gone unheeded, and things may get worse in terms of prospects for Chinese development going forward if this matter is not addressed:

If China can follow its neighbours and develop its own powerful brands like Samsung of South Korea, or Toyota of Japan, it can sell not only to its own 1.35bn people but to billions of others all over the world.

If it does not build or buy such brands there is a risk that its consistent trade surpluses will become deficits in the decades ahead. That is not what the push to rebalance China’s economy towards consumerism is supposed to do.

Consider these folks warned. After all, if you don't buy your own brands, what confidence will others have in them?

Why Keynes dominates Hayek

I generally find debates about schools of economic thought annoying, especially when it is all about adoration of some dead economist while ignoring all the progress we have made since his contributions. Unfortunately, these dead economists keep coming up in the public debate, I think because these are the people non-economists are familiar with, from basic economics classes and popular readings.

Kristina Spanting studies the back-and-forth in popularity between Keynes and Hayek in light of the past 80 years or so of economic history. Keynes was all about shorter term solutions to crises, while Hayek had a longer term vision of things, and would not bulge from it no matter what the circumstances. Accordingly, their popularity in policy circles has oscillated depending on the need to react to a crisis. Keynes is an easy sell to politicians in such times. The electorate is asking them to do something, and Keynes provides the justification for that. And all the work economists have done since Keynes (and Hayek) is brushed aside just when you should draw the most on it. Sad.

Post-Crisis, What are the World's Safest Banks?

Your initial reaction will likely be the same as mine: Who are these guys?  After years dabbling in own-account speculation, derivatives and other get-rich-quick schemes, the stalwarts from days gone by are no longer on this list. Deutsche Bank? You must be joking. American money center banks? Get outta here! Instead, we have an interesting combination of European banks with government ownership and Singaporean banks with conservative practices. From the press blurb:

The safest 10 banks in the world are all European, just as they were last year and the year before that. However, in all but one case, that safety arises largely as a result of ownership by a European government or sponsorship by government-related entities. Of the 10 banks that lead this year’s rankings of the World’s Safest Banks, only one, Rabobank, is privately owned.

As in recent years, Germany’s KfW heads the rankings, though four other institutions also have AAA ratings from Fitch, Moody’s and Standard & Poor’s (S&P): Bank Nederlandse Gemeenten, Zürcher Kantonalbank, Landwirtschaftliche Rentenbank and L-Bank.

No privately owned bank holds a Triple-A rating from any of the three agencies, although four have an Aa1 from Moody’s: TD Bank Group and the three leading Singaporean banks, DBS Bank, Oversea-Chinese Banking Corporation and United Overseas Bank. Neither Fitch nor Standard & Poor’s assigns AA+ ratings to any private bank.

Global Finance's rankings are based on ratings of the three major agencies, by the way. My intuition is not so much that government ownership guarantees the safety of the aforementioned European banks (sorry, WSJ Deal Journal), but by charter or mandate they are required to maintain conservative banking practices. In other words, they tend to stick to the low risk spectrum with its accompanying implications for reward (at least in a short-term sense). Hence, I am puzzled as to why the privately-owned Rabobank cracks the top 10, not least because it's been implicated in the LIBOR-fixing in a big way. Go figure.

Fact-checking The Economist

Here is a question for students who are learning about compounding.  What is wrong with the following passage from The Economist magazine?

Investors who bought Treasury bonds in 1946, when yields were around current levels, did not suffer a formal default. But over the following 35 years they lost money in real terms at a rate of 2% a year. The cumulative real loss was 91%. By that standard, Greek creditors, who recently suffered a 50% loss via default, were lucky.

Answer: The second number is inconsistent with the first.  Note that .98^35=.49, so we get only a 51 percent cumulative loss.

In fact, the price level from 1946 to 1981 rose by a factor of about 5, so holding currency with a zero nominal return led to a real loss of only about 80 percent.

The Suits/Geeks Divide

Arnold Kling diagnoses what went wrong with the new healthcare exchange website.

The brain drain from financial liberalization

The financial sector is not riding high in popularity polls lately. First, compensation is deemed excessive. Second, the general public often does not perceive the benefits of a financial industry. The most common error there is the idea that finance plays a zero-sum game: anything it gains is necessarily taken away from others. Finance allows a better reallocation of resources and funds to the most productive businesses, and this raises overall productivity. But as it is well rewarded for this, it seems to be attracting perhaps an excessive number of top talents who could, at the margin, be more productive in other sectors. This brings us to a third issue: the financial sector is hiring away the best people from other sectors.

Christiane Kneer studies this inter-sectoral brain drain by looking at the consequences of financial deregulation on sectoral productivity. The assumption here is that financial deregulation attracts top talent to the financial industry because it allows the design and management of new and complex financial instruments. She finds that industries that rely the most on human capital are hurt: after an episode of financial liberalization, they have lower labor productivity, lower value added growth and lower total factor productivity. This is what happens when, for example, a software engineer moves to finance to exploit arbitrage in trade by gaining micro-second advantages over competitors. The social benefit of this arbitrage is close to zero, and some industry lost a great software engineer.

China's 'Maritime Silk Road' as a Hegemonic Project

 The wrangling over both the US government shutdown and the debt ceiling caused Barack Obama to cancel his attendance at the annual Asia-Pacific Economic Cooperation (APEC) shindig being held this year in Bali, Indonesia. So he stayed at home to deal with a localized insurrection led by an angry, mostly whitebread crowd, "Tea Party" members, they call themselves. Just desserts, I say. His absence triggered yet another round of commentary about the existence of American hegemony in general and its alleged "pivot to Asia" in particular. Some say the absence does not matter; others think it's a culmination of US decline.

At any rate, this notable omission only served to highlight China's latest plan (gimmick?) to curry favor with other nations in the Asia-Pacific. After having its Noughties-era outreach efforts to ink economic agreements alike free trade deals undermined by its strident assertions to territorial disputes in the South China Sea and East China Sea, the PRC seems to attempting to return to a more diplomatic approach. The Silk Road was named after the commercial routes plied by China when it was an empire. At APEC, keynote speaker Xi Jingping's main talking point concerned the "Maritime Silk Road" which once again promises improved relations with neighbors through commercial ties.

On Oct. 3 during his trip in Indonesia, Xi [Jingping] said in a speech that China and the ASEAN will promote maritime cooperation and build a 21st-century maritime Silk Road. This was also brought up by Li [Keqiang] in his seven-point proposal on China-ASEAN cooperation in Brunei on Wednesday. [B]uilding a maritime Silk Road will involve a new consensus, including discussing the signing of a treaty on good neighborliness, friendship and cooperation, strengthening security exchanges, setting up an Asian infrastructure investment bank and prioritizing maritime connectivity development...

In the seven-point proposal, Li [Keqiang] said "the two sides should launch negotiations on upgrading their free trade area and strive to bring bilateral trade to one trillion U.S. dollars by 2020 so as to allow ASEAN countries to benefit more from regional integration and China's economic growth." Zhang Jiuhuan, former Chinese ambassador to Thailand, Singapore and Nepal, said, "Upgrading the free trade area is another significant step for the Chinese government to beef up China-ASEAN cooperation." 

President Xi and Premier Li have been flogging this idea for many months in ASEAN countries, although they have not yet taken it to the Philippines and Vietnam with which it has the most pronounced maritime disputes in Southeast Asia. Still, they allude to the success of the China-ASEAN FTA which they wish to use expand and use as a focal point in strengthening ties:

Starting operation in 2010, the China-ASEAN free trade area is the largest one among developing countries. China is the largest trading partner for ASEAN, and the association is the third largest trading partner for China. According to Zhang, bilateral trade volume between China and the ASEAN grew from 78.2 billion U.S. dollars in 2003 to 400.1 billion U.S. dollars in 2012. Volume reached 210.56 billion U.S. dollars in the first half of this year, up 12.2 percent year on year.

Zhang said "upgrading the free trade area" is needed for both sides. He said the area will help improve the trade of commodities and services and investment cooperation in order to provide convenience and freedom. "All-dimensional cooperation will create more favorable conditions for the maritime Silk Road," said Zhang. "China's economic growth will also bring about more opportunities." 

The idea remains the same in a liberal sense: improved economic ties will smoothen relations--including frayed ones over territorial disputes. However, reception of the Maritime Silk Road idea is mixed among Southeast Asian countries as you would expect: Malaysians are more sanguine, but then again their territorial conflicts with China are not particularly heated. How successful can the Maritime Silk Road project be in calming neighbors? I personally believe that building more economic ties is welcome, but they will be accompanied by more guarded opinions of China's broader intentions. That is, for how long can it afford to give security matters lesser priority while the "security dilemma" the PRC has created makes others feel insecure?

President Xi Jinping and Premier Li have toured ASEAN extensively; it reflects their strategic outlook of developing relationships with neighbouring countries. The new leadership is trying to diffuse tension in the SCS by using various techniques, of which MSR is one. However, a revival of the MSR looks bleak. Also, earlier the route was used for the import of precious stone, wood and spices but today it will used for oil and gas, which is directly connected to the energy security of not one but many countries. There is an emerging security architecture in the region which has led to an increased arms build-up, and the assertiveness of new regional powers has further complicated the regional military balance, which makes the MSR an unlikely prospect.

Moreover, isn't this the same China that disinvited the Philippine president from participating in a trade mission due to the South China Sea imbroglio? More commerce is welcome, but I believe that economic and security matters are becoming less positively correlated in terms of Sino-ASEAN dynamics. That is, stronger economic ties do not necessarily imply improved security ties. Remember, trade has been increasing against a backdrop of worsening conflicts over the South China Sea with the Philippines and Vietnam especially.

Lastly, wasn't the Silk Road at its height when China effectively enforced a tributary system on others in the region? Perhaps the metaphor China has chosen is not a good one since its original iteration had others accepting their subordinate position relative to the Middle Kingdom. The PRC always says it does not seek hegemony (alike white people do), but it has given the rest of us reason to doubt.

Marginal tax rates in Sweden

Whenever high marginal tax rates are discussed, the example of Sweden is brought forward. And typically the episode where they where close to 100% on labor income. But this has not always been so high, and it is certainly not the case now. What is the history of tax rates in Sweden?

Gunnar Du Rietz, Dan Johansson and Mikael Stenkula look back at 150 years and reconstruct marginal tax wedges for top and average earners. Tax wedges are different from tax rates in that they also incorporate other contributions, such as for social security and payroll taxes. I learned from this study that Sweden was in fact a very low tax country at the start of the 20th century, but this all changed with WWII, a succession of crises and the push for the welfare state that culminated in the 1960s. This change of attitude towards taxation and redistribution was relatively quick, and may have lead to excesses that have been built down since the 1990's. The paper also has a very detailed description of the tax system in Sweden over this period.

The median voter changes his mind

click on graphic to enlarge

The Government Shutdown

The CEA analyzes its economic impact.

There should be more female mayors

It is well known, and I have documented it before, that women behave differently from men in politics, in particular when it comes to policy priorities. While the various examples I have discussed before are interesting, it is difficult to ascertain that they generalize. Indeed, politics is fraught with social and local norms. We need more studies.

Fernanda Brollo and Ugo Troiano look at municipal elections in Brazil and concentrate on those where the mayoral seat was hotly contested between a male and a female candidate. One can thus consider that the electorate was essentially similar whether the female or the male won. The outcomes are damning for men. Whenever a woman became the mayor, health outcomes are better, corruption is lower, and the municipality gets more federal funding. To illustrate how men are politicizing relatively more, Brollo and Troiano find that male mayors up for reelection will hire many more temporary workers, a clear sign of electoral patronage.

New Research on UI

The abstract of a recent NBER working paper (emphasis added):

We exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed -- the micro effect -- we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively.

Hong Kong, World's Freest Economy 42 Years Running

I guess some things in life are inevitable: Canada's Fraser Institute, watchdog of economic freedom the world over, has designated the special administrative region (formerly a crown colony) of Hong Kong the world's freest economy for a 42nd consecutive year.  This matter is of special interest given how HK's most famous businessman is warning that too much clamor for political freedom may dent this vaunted reputation for economic freedom. Think of the political free-for-all Stateside--a moronic version of political expression from all sides--and you catch his drift.

Speaking of which, the United States is zooming down the index at a rapid clip. Talk about American decline:

Hong Kong again topped the rankings of 151 countries and territories, followed by Singapore, New Zealand, and Switzerland in the Fraser Institute’s annual Economic Freedom of the World report. The United States, once considered a bastion of eco nomic freedom, now ranks 17th in the world. “Unfortunately for the United States, we’ve seen overspending, weakening rule of law, and regulatory overkill on the part of the U.S . government, causing its economic freedom score to plummet in recent years.

This is a stark contrast from 2000, when the U.S. was considered one of the most economically free nations and ranked second globally,” said Fred McMahon, Dr. Michael A. Walker Research Chair in Economic Freedom with the Fraser Institute. 

Despite how bad things are in the godawful US of A, there is always worse. Venezuela ranks dead last. Fortunately for it, the likes of Cuba and North Korea were not surveyed for lack of data:

Venezuela has the lowest level of economic freedom worldwide, with Myanmar, Republic of Congo, Zimbabwe, and Chad rounding out the bottom five countries. Some nations, like North Korea and Cuba, could not be ranked because of a lack of data.

The Fraser Institute gives me a new tagline for the United States: America, where you can have as much TP as you want! So it's not quite the commercial success story that's Hong Kong, but things could be rather worse...

Why invest in cows if their return is negative?

In some developing economies, cattle are used as store of value. This is because there is no other good asset available as financial markets are not developed. Cattle has its drawbacks though, as it can die from disease or hunger, usually at the worst moment, can walk away or be stolen, and thus needs constant guard. This implies that their return could actually be negative.

Santosh Anagol, Alvin Etang and Dean Karlan find that cows and buffaloes in rural India have a negative return of a whooping 64% respectively 39%. If you take the extreme assumption that labor has no return, then their returns are minus 6% respectively plus 13%. How is that possible? The authors offer several potential explanations: measurement error, preference for home-made milk, the lack of other saving vehicles, in particular those that allow commitment to keeping those savings, improvement in social and religious standing, and preference for lotteries (small probability of striking it rich with female cattle). The one I like the most is that marginal return of labor is actually zero. Indeed, farms do not operate like firms. As they are typically family-operated, everyone "works" even if that means being idle most of the day. This idle person may have a productivity close to zero, and may thus be used to guard cattle.

Yes, Economics is a Science

Says my Harvard colleague Raj Chetty.

An interesting article, which raises the following questions in my mind: Is the younger generation of economists like Raj skipping some of the big questions of economics because some smaller questions are easier to answer?  If so, is that optimal from the standpoint of society as a whole?

Contrarian Thoughts: Depopulation's Benefits

The essence of dramatic tragedy is not unhappiness. It resides in the solemnity of the remorseless working of things - Alfred North Whitehead as quoted by Garrett Hardin in The Tragedy of the Commons

While doing research on an environmentally-related issue, it occurred to me to re-read the famous article concerning the tragedy of the commons by Garrett Hardin. Unbeknownst to many, he was not only concerned with collective environmental abuse but also overpopulation--on which he voiced many politically incorrect opinions. However, questions of demography remain foremost as the world's population has zoomed past 7 billion and the consequences of anthropogenic activity on the environment capture the world's attention.

In many recent posts, I have treated "Detroitification" as shorthand for demise. Fewer and fewer people implies lower and lower economic growth. But, what if we recognize the finitude of economic growth as a consequence of finite resources? It would follow that fewer people may be more desirable. What's more, overpopulating a country, town or what else have you may be a strategy of maximizing one's welfare while reducing that of the broader (world) community--precisely, a tragedy of the commons:

Work calories are used not only for what we call work in common speech; they are also required for all forms of enjoyment, from swimming and automobile racing to playing music and writing poetry. If our goal is to maximize population it is obvious what we must do: We must make the work calories per person approach as close to zero as possible. No gourmet meals, no vacations, no sports, no music, no literature, no art. ... I think that everyone will grant, without argument or proof, that maximizing population does not maximize goods.

Hardin's potential insight is that the more people = more economic growth equation does not hold at a global level given the proverbial limits to growth. Consider, also, the world situation circa 1968 when the article was written:

Has any cultural group solved this practical problem at the present time, even on an intuitive level? One simple fact proves that none has: there is no prosperous population in the world today that has, and has had for some time, a growth rate of zero. Any people that has intuitively identified its optimum point will soon reach it, after which its growth rate becomes and remains zero. 

Of course, a positive growth rate might be taken as evidence that a population is below its optimum. However, by any reasonable standards, the most rapidly growing populations on earth today are (in general) the most miserable. This association (which need not be invariable) casts doubt on the optimistic assumption that the positive growth rate of a population is evidence that it has yet to reach its optimum.

In 2013 we have reached the point where there are any number of "prosperous" populations which have growth rates approaching zero in Western Europe as well as the East Asian tigers--Hong Kong, Singapore, South Korea and Taiwan. And then there's Japan which is already depopulating at a fairly rapid clip but remains the world's third largest economy.

Instead of feeling sorry for them or bemoaning their lack of growth, perhaps the environmentally and morally appropriate response would be to welcome their contribution to sustainability. In effect, they sacrifice national well-being by old metrics alike GDP growth for the sake of not lessening the world's carrying capacity.

Just a thought for you from a reading on Hardin.

Videos in 7e

The seventh edition of my favorite textbook will be coming out in January. One of the new features available to users of the electronic version of the book is a group of video introductions to many chapters, featuring the book's all-too-geeky author. You can see the first one below.

Why are the World's Best Central Bankers All Asian?

Ben Bernanke is the world's leading practitioner of what I call "Jive-A** Central Banking." It involves creating vast negative externalities for others. Easy money policies Stateside have not only led others to justifiably accuse the Fed of beggar-thy-neighbor policies via competitive devaluation (which he denies), but also cause further turmoil in the Hamlet-style drama of whether to end them or not. Suffice to say that these unconventional measures have done little to put the United States on a firm economic footing, let alone a sustainable path for growth.

Recently, Global Finance released this year's list of the world's best central bankers, a sort of Pro Bowl for central banking. In a sign that the "Asian Century" has come to central banking at least, all of the featured top vote-getters were from Asia. (Perennial selection Mark Carney famously moved to the UK from Canada so the jury is still out on him.) Again, I believe this points out that since the Asian financial crisis, these states have learned their lessons about prudent monetary policy in the face of unusual situations: avoidance of extremely negative real interest rates, balance sheet abuse, market-misleading pronouncements and so on. Prudent central banking is not exactly a mystery; why so many violate sound practices is quite frankly galling.

Obviously none of these holds insofar as Ben Bernanke is concerned. Faced with its own crisis, the United States has embarked on Wild West experiments in central banking that, quite frankly, have not produced much of anything.

Anyway, to the press blurb:

Global Finance magazine has named the heads of the central banks of Malaysia, the Philippines and Taiwan as the World’s Best Central Bankers over the past year, in recognition of their achievement of an “A” rating on Global Finance’s Central Banker Report Cards. In addition, the central bankers of Chile and the European Union earned “A-” ratings.

The Central Banker Report Cards, published annually by Global Finance since 1994, grades central bank governors of more than 50 key countries (and the European Union) on an “A” to “F” scale for success in areas such as inflation control, economic growth goals, currency stability and interest rate management. (“A” represents an excellent performance down through “F” for outright failure.) Subjective criteria also apply.

It is almost surreal to me, but the Philippines' own Amando Tetangco is the "veteran" here, having won the award five times in 2006, 2007, 2011, 2012 and now 2013. He is becoming the Michael Schumacher of central banking for those keeping score. This representing a country that was among the hardest-hit during the Asian financial crisis continues to amaze. As I said before, some people learned from their crisis. Others didn't.

BTW: Mario Draghi getting an A- demonstrates that being a Western crisis-hit entity is no excuse. Good riddance, Bernanke. You will not be missed by your own people or the rest of the world.

Saudi Arabia, Probably the UN's Worst Crybaby

This must take the cake for the worst tantrum in international relations for the year: Saudi Arabia's movers and shakers have, in recent years, been lobbying hard to become one of the ten rotating members of the UN Security Council. Then, having secured this berth just recently, the country pulls out:

A decision of such magnitude would have to have been taken by King Abdullah or Crown Prince Salman, said a Saudi analyst who asked not to be named. "Saudi Arabia has been working on (getting onto the Security Council) for the last three years. They trained diplomats, male and female, the cream of the Foreign Ministry, our best talented youths. Then somebody made the decision suddenly to pull out," he said.

Until the Saudis winning selection as a temporary security council member for 2014-2016, no country has ever turned down such a selection. Having done the oozing and schmoozing, Saudi Arabia is acting out over three pet issues not going its way: tougher sanctions on Syria to support Sunni rebel groups it funds; tougher sanctions on its would-be hegemonic rival in the Middle East (Shi'ite) Iran's alleged nuclear weapons program; and the continuing stalemate in Israel-Palestine negotiations:

The failure "to find a solution to the Palestinian cause for 65 years" had led to "numerous wars that have threatened world peace," the foreign ministry said. It also criticised the UN's "failure" to rid the Middle East region of weapons of mass destruction, including nuclear weapons [take that, Iran...and Israel too!]. And it accused the UN of allowing the Syrian government "to kill its own people with chemical weapons... without confronting it or imposing any deterrent sanctions".

Saudi Arabia likely believes it is locked in a contest for its very survival. Not only is the Islamic-Jewish invoked here but also the Sunni-Shi'ite schism. That the US is not willing to "act tough" is the cause of Saudi calls for UN reform, whereas before the Yanks were presumably viewed as being more accommodating of Saudi wishes:

Unlike in the past, when Riyadh's frustration was mostly directed at Russia and China, it is now also aimed at Washington, its oldest international ally, which has pursued policies since the Arab Spring that Saudi rulers have bitterly opposed [...]

Saudi concerns that the U.S. decision to avoid [Syria] strikes demonstrated weakness were underscored by signs of a tentative reconciliation between Washington and Tehran, something Riyadh fears may lead to a "grand bargain" on Iran's nuclear programme that leaves Gulf Arab states at a disadvantage. In an earlier sign of mounting Saudi anger, Foreign Minister Prince Saud al-Faisal two weeks ago cancelled his speech at the U.N. General Assembly in what a diplomatic source said was a response to international inaction on Middle East issues.

It has been sharply critical of U.S. policy in the Middle East since the Arab Spring, not only on Syria but also in Egypt, where Washington cut off aid to the military after it ousted a Muslim Brotherhood government that Riyadh saw as a threat. In an interview with pan-Arab daily al-Hayat on Tuesday, Saudi Arabia's ambassador to the U.N. Abdullah al-Muallami described U.S. policy on Egypt as "arm-twisting".

This whiny behavior has more to do with geopolitics than with the unfairness of the UN Security Council setup. I do agree that it's unfair that we continue to accede to the wishes of victors of a conflict that ended almost seventy years ago. However, the Saudis acting in such an immature manner is hardly the sort of thing to get the ball rolling in terms of UN reform.

After all, it's hardly acting in the interests of all members but in its (rather petulant) self-interest. Had its former American buddies given Saudi Arabia its way, I hardly think it would be acting so very immaturely. In any event, the IPE Zone's "Best Dramatic Performance About the Unfairness of the World" award for 2013 goes to Saudi Arabia. No one even comes close.

WAAAAAAAAAAAAAAAAAAAAH!!!

Identifying monetary policy "shocks"

I have always found the empirical monetary policy literature rather frustrating. It is entirely based on the premise that one can identify monetary policy shocks. First, I am not sure what is really meant by a shock. Is it any change in a policy variable? Not changing it may be a surprise, as we recently witnessed by with the recent FOMC decision not to throttle quantitative easing. And how much a change is anticipated matters as well. The recent emphasis on forward guidance makes the interpretation of an interest change very different from the surprise actions from a few years ago. Second, the empirical identification of those shocks seems doubtful at best. Either you take a VAR and interpret residuals as shocks (never mind those will be significantly different across specifications), or you try to quantify some narrative of policy decisions, sorting out rather subjectively what was a surprise and what was expected. Third, a monetary policy shock should be measured differently under different policy regimes. There is no point on focusing on the Federal funds rates (or a Taylor rule) when the policy focuses on the money supply, for example.

The reason for this rant is that I came across a paper by Martin Kliem and Alexander Kriwoluzky who try to reconcile the VAR and narrative approaches, which of course is impossible. What they highlight though is that both are fraught with error. They find this by plugging the narrative measure into a VAR and they conclude that there is measurement error in the narrative measure and misspecification error in the VAR. That should surprise no one, but needs to be pointed up, with so many people relying blindly on these instruments.

A Trip to Korea

I have spent the past few days at the World Knowledge Forum in Seoul, Korea. While there, I gave a lecture on some of the challenges facing fiscal policy, joined Tyler Cowen in a public discussion of economic inequality, and participated in a panel on the global economic outlook (from which the photo below is taken).

The price of producing in a sinful sector

Many people avoid investing in certain types of firms they associate with unethical or sinful behavior. That would include tobacco companies, high polluters, alcohol, fire arms and defense industry, etc. That should lower the stock market return of these firms, but there is of course some arbitrage that negates these return differentials. Yet, is there some way in which being in a sinful sector is detrimental?

Stergios Leventis, Iftekhar Hasan and Emmanouil Dedoulis found one, and that is the cost of auditing. Auditing firms are extremely sensitive to their own reputations, and who they do business with is part of their reputation. The authors also argues that auditing firms perceive that sin firms bear higher business risk, perhaps because they deviate from social norms and require more scrutiny (risk of litigation, need for higher cash reserves). In the US, such companies end up paying a whooping 20% more in auditing and consultancy fees. I wonder where else they face higher costs (it is known they have higher capital costs). This means that their stock price should still be affected despite arbitrage.

Japan to Privatize Its Forex Reserve Management?

Here's an experiment in foreign exchange reserve management that looks interesting. We've heard of sovereign wealth funds (SWFs) that invest in non-traditional reserve assets, i.e. those other than sovereign debt of major currency-issuing countries or precious metals alike gold. These SWFs may place funds in equities and so forth. However, the innovation insofar as SWFs are concerned is on the portfolio side: they are diversifying placements of reserve assets in search of greater yield. In other words, SWFs are state-owned in their charter.

Hence Japan purporting to allow non-governmental entities to allocate part of its $1.27 trillion stash looks unique insofar as the management side rather than the placement involves the private sector:

Japan is looking to allow private sector funds and trust banks to manage a part of its $1.27-trillion pool of foreign exchange reserves in a drive to manage them better, a government source told Reuters on Sunday. Until now the government has managed the foreign exchange reserves itself, but its ability to do so has been stretched as the reserve roughly doubled over the past decade, thanks to massive yen-selling interventions to weaken Japan's currency.

The government needs to clear legal hurdles on its use of foreign exchange assets if it wants to draft in the services of private financial institutions and will propose amending the law during a parliamentary session that begins on Tuesday. The government is now restricted to lending its foreign securities only to banks, but the new law will also permit brokerages to borrow securities, the source said, with the fees borrowers pay going to replenish government coffers. "

Although we do not think the Japanese government will outsource all of the foreign exchange reserve to the private sector, even just a 10 percent outsourcing will become a $120 billion business," Tohru Sasaki, head of Japan rates and FX research at JP Morgan Tokyo, told clients in a note. 

Interesting if risky stuff. If large losses are sustained though, who's to blame--the Japanese government, the fund manager or both? It's the governance issue that needs sorting out if this experiment in forex reserve management is to be conducted. There's also the qualification for would-be managers that Japan being America's stalwart ally in the Asia-Pacific, assets must be kept in dollar-denominated securities.

Entrepreneurship in Liberia

I have recently mentioned that entrepreneurship cannot be taught, which implies entrepreneurship classes have little value. What should these entrepreneurship professors then do? Do research on entrepreneurship? It turns out that is also of questionable value.

Case in point, the latest paper of Johan Venter. He wants to understand how entrepreneurship emergences in post-conflict economies and lead to new jobs. To this end, he travels to Liberia and surveys ... entrepreneurship professors who, of course, testify about strong interest in entrepreneurship classes. Never mind that taking such classes has no impact on entrepreneurship outcomes, Venter concludes that entrepreneurship should get more emphasis throughout the curriculum. That came out of nowhere, or rather out of a pitiful survey with 28 respondents.

Memorable goods

In macroeconomics, one distinguishes between non-durable and durable consumption goods. This distinction is important, as the cyclical nature of the two is very different. Durables are very volatile, as households like to postpone their acquisition in recessions. Non-durables are extremely smooth, however. The later is what most models have in mind when thinking about consumption, while the first are more like investment goods, but at the household level.

Rong Hai, Dirk Krueger and Andrew Postlewaite think we should add a third category: memorable goods. These are non-durable goods that may not last long physically, but we keep good memories about them and thus they continue to provide utility in the future. In essence they are also durable goods, but they are not counted as such in national accounting. Some examples the authors provide are Christmas gifts whose memories last through the year. The same applies to vacations, going out, clothes, and jewelry. Using the consumption expenditure survey, the authors find that memorable goods lie somewhere between durables and non-durables in terms of cyclical properties. As they account for about 14% of outlays, their presence matters quantitatively. In fact, they can fully explain some observed deviations from the permanent income hypothesis. A paper to remember and cherish for a long time.

Lame PRC Exports Can't Stop Ascendant Yuan

It is fairly common knowledge by now that Chinese economic growth is slowing down from the double-digit to high single-digit range of years gone by. Among other things, weakness in demand in overseas markets has dented its vaunted export machine. The most recent external figures indicate that this trend is still continuing:

The currency moves came hot on the heels of official data showing Chinese exports slid in September [2013] by 0.3 percent from a year earlier. The figures confounded expectations for a 6 percent rise and marked the worst performance in three month [...]

In addition, the unexpected weakness in September's exports raised fresh concerns that economic growth - which has fallen in nine of the last 10 quarters - could stumble once again just as it has shown signs of picking up.

With exports on the wane and economic growth slowing down, have PRC authorities let up on the pace of yuan appreciation? Actually, no. It appears China is really serious about rebalancing its economy this time by allowing its currency to appreciate to a semblance of a market-determined exchange rate. In so doing, the hope of course is to rebalance their economy towards a domestic consumption-led economy that is less vulnerable to external shocks despite the expected complaints from exporters:

A stronger yuan is a key goal for policymakers trying to wean the economy off a heavy emphasis on exports more towards consumption-led growth. But they face complaints from Chinese exporters that the yuan's enduring strength is putting their products at a disadvantage in overseas markets even as foreign demand remains tepid.

The intraday record high of 6.1073 per dollar leaves the yuan up 2 percent in 2013, in marked contrast to slides posted by other Asian currencies, and more than 35 percent higher since a revaluation in 2005. "Domestic businesses hope there won't be more rises for the yuan, because exports are still really weak. If the yuan keeps rising, the results could be really ugly," said a currency trader at a European bank in Shanghai [...] 

Some economists predicted the central bank would be forced to let the yuan slip back, at least symbolically. Instead, it held a firm line. The currency has also risen in trade-weighted terms every month since Sept 2012 until finally declining slightly in August, data from the Bank for International Settlements (BIS) shows. BIS data for September should be released later this week.

What's interesting is that, absent Westerners haranguing China to revalue its currency, PRC authorities will actually do so on their own. There's a moral to the story about letting people figure out what they should do by themselves somewhere in here. Also, the article mentions public pressure to stop accumulating dollar-denominated (demoninated?) reserves given America's non-existent federal government as well as potential reductions in energy import costs. The price action is also in keeping with making the yuan attractive as a reserve currency, but in my case they are already preaching to the converted.

As an erstwhile marketing student, I am especially curious about how China's domestic-oriented strategy may involve producing innovative, higher-quality goods instead of competing solely on price:

Despite exporters' complaints Beijing's reformers see a stronger yuan as key to moving China to an economic model focused on producing higher-quality goods for domestic consumption, instead of churning out low-grade exports competing only on price.

I am not sure if locals are more demanding quality-wise than foreign consumers, but one thing is certain: China's salad days relying solely on a strategy of pile 'em high and sell 'em cheap are numbered. So it's a "creaking export model," according to some, but it's probably by design. Alike the rest of us, the Chinese appear to have realized that it's time to move on.

Building a reputation as online seller

A good reputation is difficult to earn and easy to lose. And reputation matters, think of monetary policy, auditing, medical doctors, restaurants, and politicians. With the Internet, online reviews and reputation have become important as well. I certainly take them into account before buying online. From the point of view of a seller, how do you build a reputations?

Ying Fan, Jiandong Ju and Mo Xiao got access to data to the major Chinese e-commerce platform to study the evolution of seller reputation. In particular, they have been able to trace the strategies and histories on sellers. They show that a good reputation is a great benefit, but that new sellers have a very hard time establishing it. Imagine you start with no reputation whatsoever and are competing with established sellers. To gain an edge, you need to resort to sales and attract attention in various ways, such as cross-listing your product all over the place. This is a lot of effort, and the authors argue that there is too much of it.

This reminds me of the early days of this blog. Being anonymous, I obviously started with no reputation and had to build it from scratch. With barely any readers, I started adding links to unrelated, but interesting stuff to attract more. That did not work, although this has worked for others (restaurant reviews come to mind). It took several years for readership to really pick up, and I thought several times about abandoning during that time.

The Nobel

Congratulations to Eugene Fama, Lars Hansen, and Robert Shiller.  A very well-deserved prize. All three have long been among the most highly cited economists.

Will the Eurozone/Euro Benefit From a US Dollar Crisis?

With the US supposedly flirting with being the first Western country since 1933 Nazi Germany to default, attention needs to be paid on those other Westerners and their economic plight as a consequence.

As a holder of euros myself and other non-junky stores of value--not gold, not Treasuries or any of that riffraff--I of course wish that the United States' self-inflicted crisis wallops their godforsaken currency. No ifs, not buts. However, the opinion of ECB policymakers is decidedly more guarded. Sure, it may increase the prestige of euro currency at a time when the Eurozone is just exiting a very long recession if its share of global currency reserves increases further. Then again, the bifurcation of Northern and Southern states' economic performance is worrying. Sure the likes of Austria and Germany can survive with the single currency at, say, $1.40. But the hobbling "Club Med" countries declared no mas a long time ago.

So yes, (nominal) Austrian CB guv'nor Ewald Nowotny expresses concern with what happens Stateside:

The dollar's role as the world's leading reserve currency is at risk because of the political impasse in the United States, which has raised fears of a debt default, European Central Bank policymaker Ewald Nowotny said.

Then again, Nowotny wears two hats since he is also a member of the ECB's governing council and must therefore consider the plight of the Euro-laggards:

"This discrepancy is very dangerous and in my view will have a negative impact on the long-term role of the dollar.

Interviewed in Washington during meetings of the International Monetary Fund and World Bank, Nowotny said jitters over the U.S. budget standoff were already pushing the euro higher. This was not such a big problem for Austrian exporters but posed more of a threat to southern euro zone members, said Nowotny, who is also governor of the Austrian central bank.

What's that saying about the weakest link(s)? It's what holding the Eurozone from wishing the US and its currency a well-deserved oblivion. Sure the Eurozone has taken its lumps, but even the likes of Greece and Portugal didn't default outright.


 

IMF Returns; Will Pakistanis Hate US Even More?

I entitled an earlier post about Pakistan, the US and the IMF "When Cash & Hate Collide." To underline that assertion, here's Exhibit A: In a recent Pew Global Attitudes poll, the country which assigned the lowest favorable opinion rating to the United States was--wait for it--Pakistan at a ridiculously low 11% [click for a larger image]. It even outdoes places where Amerihatred is keenest based on current events alike Egypt and the Palestinian territories. As for the cash part, in case you haven't read about it, Pakistan recently inked another IMF bailout for $6.6 billion. That's its eighth--that it not a typo--since 1988. Talk about a state of perma-crisis.

Recently I assigned US-Pakistani ties as a term paper topic to my students. They are well aware of what binds these two reluctant "allies": the danger of a failed nuclear state, the constant Taliban menace, and the strategically advantageous location of this country. The truth is that no matter how badly Pakistan mismanages its economy, the US through the IMF will always come to its "rescue":

In 2008, Pakistan agreed to an $11.3bn loan from the IMF to avert a balance of payments crisis. It received $7.6bn but failed to get the remaining $3.7bn because of its slippages in meeting the performance criteria. That led to the suspension of the programme in May 2010. The programme was extended in December 2010 for nine months, but disbursements were not resumed because of the country’s failure to take fiscal measures as demanded by the IMF. Ironically, Pakistan has availed itself of the new $6.6bn loan to repay the old loan to the IMF of which about half – some $4bn – is outstanding [my emphasis].

From where I come from, borrowing to repay previous borrowing is called a "Ponzi scheme." Whether the IMF does more harm than good is an open question as the IMF readies fairly harsh conditionalities once more. That said, there is hardly reason to believe that Pakistan can work its way out of trouble on its own despite the constant IMF debt overhang. Misplaced subsidies, huge budget deficits, moribund investment, next to non-existent FDI, lack of basic law and order in most places...Pakistan has almost all the negatives humanly possible.

But, going back to the title of the post, can Pakistan be made to hate the US even more after unauthorized incursions via drone strikes, bin Laden strikes, perceptions of IMF neo-imperialism and so on? You can argue that America's 11% favorable rating has nowhere to go but up. I actually expect that it will in the near future as a "dead cat bounce" phenomenon.

As for IMF lending, I expect the same cycle to repeat itself as it has eight times over the last few decades: Pakistan will try to comply for a while with IMF conditionalities but eventually decide the political price of obsequiously bowing to this American hegemonic institution are too high. After all, if there's a better scapegoat for Pakistani perma-crisis than the IMF with its 11% approval rating by proxy, I don't know what is. Who's more masochistic here, Pakistan or the IMF? Beats me, pal.

On DC Discord

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

Flying in Europe and North America, puzzling differences

I have recently had the opportunity to fly extensively across both Europe and North America, and it has struck me how different the experience was. It is also puzzling me why this is so.

Let me first highlight the differences I observed. On almost all counts, flying in Europe seems superior. The aircraft are newer, they are equipped with entertainment systems or individual monitors, they serve meals, and flight staff is attentive. Airports are not overcrowded and well-connected to cities, usually by train or subway. Security is rather smooth and security personnel seems "normal".

Contrast this with North America, where the fleet is old and noisy, nothing but a magazine is offered as entertainment, everything but non-alcoholic drinks is nickel and dimed (and the airline's credit card is constantly peddled to you), and flight staff seems tired or disgruntled. Airports are full to the brim and impractical, in particular you have to rent a car or get an expensive taxi to get anywhere. Security is obnoxious and its personnel seems quite uneducated.

Even for transatlantic flights, there is a noticeable difference on similar counts between US and European airlines.

And with that, flying is less expensive in Europe, at least in my experience. Labor and fuel costs appear to be higher there, and I do not think European airlines are saving on their aircrafts as they are newer. Personnel, in particular, seems to have much better working conditions. A Delta stewardess, for example, told me she had to take a vacation day (one of 10 a year) to get a visa to fly overseas for Delta. And she is only paid when aircraft doors are closed. The dismal situation of US pilots is well known. I heard no similar complaints in Europe.

With all this, US airlines are doing very badly. They seem to have higher prices, lower costs and provide fewer services. How is this possible? Is it because there is more competition from rail and low-cost airlines in Europe? Is it because American airlines have some liabilities in their luggage, like large pensions or large overhead? The days of state subsidies for national airlines are long gone in Europe, so that cannot be an explanation either. I am left puzzled.

All the Way

Last night, I saw Bryan Cranston in All the Way, the new play about Lyndon Johnson and the passage of the Civil Rights Act. It is a powerful play, with terrific acting.  Cranston is as compelling as LBJ as he was as Walter White.

Niall Ferguson takes on Paul Krugman

1. Part 1
2. Part 2
3. Part 3

What are the arguments for hosting sports mega-events?

I have argued several times already that hosting sports mega-events does not have a lasting impact and that the current impact is limited to the sectors providing directly services to the event (exhibits 1, 2, 3). Yet, politicians continue to come up with rationales why such events should be hosted locally and why public funds should be devoted to them. Is it that we economists are missing something here, or that the politicians are fooling everyone?

Marcel van den Berg and Michiel de Nooij observe that the immediate financial or economic gain from hosting is negative, thus one needs to finds arguments for hosting elsewhere. They highlights a series of biases among politicians that makes them commit to events they cannot afford. First, politicians commit early, before realities about what it implies have sunk in. Politicians thereafter rarely change opinions. Second, they are swayed by arguments about positive externalities like revitalizing areas or building otherwise useful infrastructure. But you can do all this without a mega-event. Third, they see only success stories. Fourth, the bidding process for a mega-event leads to a winner's curse like in any auction. Fifth, media are obviously biased in favor of hosting. Reporting on such events is their livelihood. Sixth, such mega-events provide excellent opportunities for "redistribution" of public funds to lobbyists. Seventh, it is all about pride. What a costly way to provide that.

On weights and coding errors: odd coincidence or dress rehearsal?

Angus Deaton recounts an unpleasant episode in his career.  Followers of the Reinhart-Rogoff controversy, take note.

Central Banks and Gold: Buy High, Sell Low

Despite strides made by central banks worldwide in recent years to control inflation, they are hardly infallible. Take the case of gold: With developed country central banks printing money like there's no tomorrow in order to jump-start their moribund economies--especially after the global financial crisis--you would expect that gold would benefit as an inflation hedge. Indeed, gold prices have increased many time over in the new millennium.

However, central bankers have not really benefited from the rising and now falling of gold prices since they are, after all, public financial managers of a sort rather than speculators. Owning nearly a fifth of all bullion extant, they are major market players. Yet, when it comes to trading gold, their timing tends to be off in the sense that they collectively buy high and sell low. Based on central bank gold holdings, Bloomberg calculates that their combined losses amount to $545 billion since the metal hit its peak in 2011:

Policy makers, who are responsible for shielding their economies from inflation, often mistime gold investment decisions, buying high and selling low. They were reducing holdings when bullion reached a 20-year low in 1999 and as prices as much as quadrupled in the next nine years. Central bankers became net buyers just before the peak in 2011.

There's more detail from Bloomberg on the extent of mistiming the markets:

Holdings were little changed from the start of 2008 through early 2009. Then, policy makers increased gold reserves as prices doubled and they have purchased a net 884 tons since the 2011 peak, International Monetary Fund data show. Russia was the biggest buyer, adding about 171 tons. Kazakhstan bought 67.2 tons and South Korea purchased 65 tons. Turkey’s reserves swelled about 371 tons in the past two years as it accepted bullion in reserve requirements from commercial banks.

In addition to buying when prices rose, central banks sold into slumping markets, disposing of about 5,899 tons in the two decades from 1988, equal to about two years of current mine supply. The U.K. auctioned about 395 tons from July 1999, a month before prices reached a two-decade low, through March 2002. Gold averaged about $277 as the country was selling. The Bank of England’s hoard of ingots and coins, including a bar smelted in New York in 1916, now totals 310.3 tons, or 13 percent of the nation’s total reserves.

Gold bugs will of course argue that continued money printing and developing states' inability to transition away from easy money policies will result in massive price rises in the future. If this scenario comes to pass, then seemingly large losses trading gold now will disappear. Again, though, it's more conjecture than fact at the moment.

Bottom line: there are good reasons why central bankers are where they are instead of at commodity trading desks.

Obamacare's Finances

Not a pretty picture.

I talk to Bloomberg TV

Do child laborers learn less?

Child labor is frowned upon because going to school is deemed essential to the development of every child, especially in terms of giving her the essential tools to do well as an adult. It is generally recognized that parents do not want to keep their child away from school (excluding those who insist on home schooling), but that sometimes economic hardship forces them to have children help with current expenses to the detriment of their future earnings. But child labor is not a black and white outcome. It may happen that children work and go to school. To what extend does this have an impact of academic outcomes?

Patrick Emerson, Vladimir Ponczek and André Portela Souza got their hands on excellent data from the municipal schools in São Paulo, where they can track students across several years, know whether they work outside the home, what their study habits are as well as a few socio-economic characteristics of the family. They find that transitioning into child labor leads to a decline in test scores for mathematics and Portuguese in the order of 6% to 10% of a standard deviation. That may not look like much, but this adds up to a quarter to a full year of education by the time they are done with school. However, one may argue that they also learn some useful skills for the labor market while working, so one can wonder how it look like in terms of adult outcomes.

Puerto Rico...Uncle Sam's Next Bailout Victim?

They could use more tourists right about now

 I don't wanna be your lover...I just wanna be your victim - Elvis Costello's "The Beat"

The post title may strike you as unusual: How can someone be a "bailout victim" when a bailout is some sort of "rescue" from financial calamity? Well, read on. Recently I have been on a tear classifying episodes of economic stagnation combined with depopulation as "Detroitification." Unbeknownst to many, the American protectorate of Puerto Rico is in a major financial bind a la Detroit with increasingly unpayable debt and a declining population:

Puerto Rico, with 3.7 million residents, has about $87 billion of debt, counting pensions, or $23,000 for every man woman and child. That compares with about $18 billion of debt for Detroit, with a little more than 700,000 people, or about $25,000 for every person in the city. Detroit and Puerto Rico have been rapidly losing population, leaving a smaller, and poorer, group behind to shoulder the burden.

Since the start of the year, bond prices have fallen 18.1% in a selloff as investors (suckers?) took fright. Fine then, you say--let Puerto Rico declare bankruptcy alike Stockton, Detroit, or any other Brokebank Yank town. Unfortunately for Puerto Rico, it's not that easy. As a protectorate, its status is unlike that of a municipality but rather a nation-state. In other words, it cannot "work out" its issues with creditors since, well, there's no international bankruptcy court out there. Nor can it go to the IMF since it's not a member. So tough:

Detroit, at least, was able to seek relief in bankruptcy court, but Puerto Rico is in a legal twilight zone. Territories, like states, have no ability to declare bankruptcy. Another territory, the Northern Mariana Islands, tried in 2012, but its case was rejected.  

Now, to the part about being a "bailout victim." The United States has been roiling the world economy at an increased rate with its myriad dysfunctions and financial chicanery since 2007. When all the (premature) talk about tapering introduced panic into global capital markets midyear, it was the United States' collateral damage that dealt Puerto Rico the knockout blow. As bond investors chased yield in a low-to-no yield environment, Puerto Rico abused its peculiar attractiveness to engage in high-risk borrowing. The worst symptom, as you would expect, is borrowing to pay off previous borrowing:

Until a few months ago, Puerto Rico was the belle of the bond markets. As a territory, it can sell bonds that pay tax-exempt interest in all 50 states, a rare and desirable trait. Puerto Rico’s bonds also pay higher interest than many others because its credit rating is relatively low — but not low enough to scare off investors. Some of its bonds were insured against default; others have special legal structures that make them seem bulletproof. The territory’s constitution explicitly states that general bond obligations have first call on all available resources.

Because Puerto Rico’s bonds have these unusual advantages, investors snapped them up year after year, even as the territory’s overall debt load started to snowball. In each of the last six years, Puerto Rico sold hundreds of millions of dollars of new bonds just to meet payments on its older, outstanding bonds — a red flag. It also sold $2.5 billion worth of bonds to raise cash for its troubled pension system — a risky practice — and it sold still more long-term bonds to cover its yearly budget deficits.

So Puerto Rico was pyramid scheming its debt. Let it pay the price, you say. Once more, it's not that easy. Last I checked, the US (federal) government was closed and could not reach agreement on anything dealing with fiscal matters. With Puerto Rico's credit rating set to be downgraded to junk status, things could get even worse. Uncle Sam is aware of the impending catastrophe, but can he get the legislators on board to execute a rescue? It's certainly an open question:

As a result, officials at the White House, Treasury Department and Federal Reserve have been meeting to discuss the matter and to assess the potential consequences for the overall municipal-bond market, people familiar with the discussions said [...]

A Treasury spokeswoman said: "Given the potential for Puerto Rico's financial challenges to impact U.S. markets, including the municipal market, Treasury continues to closely monitor developments." The Federal Reserve Bank of New York and Fed officials in Washington declined to comment. The New York Fed has regulatory jurisdiction over Puerto Rico. The White House advisory group is coordinating with other federal agencies "to make sure that federal resources are fully utilized for maximum impact for the people of Puerto Rico," one senior Obama administration official said.

In a manner of speaking it's partly the American's fault by worrying capital markets for no good reason whatsoever with vapid taper talk. However, a larger part is due to Puerto Rican financial mismanagement plain and simple. Sammy may have delivered the coup de grace, but PR leaders had already done the bulk of the damage to set it teetering. From where I come from, $87 billion is still a lot of money. Nevertheless, just as jurisidiction over working out the debt issues of an insolvent protectorate is uncertain, so is the culpability of the US government.

At any rate, here's another headache for the Brokebank Yanks when it least needs another one. That, dear friends, is the beat.

Congratulations, Janet

Click on graphic to enlarge.

President Obama has made a great decision in choosing Janet Yellen to chair the Federal Reserve.

The image above, by the way, is one of the illustrations in the next edition of my favorite textbook (which is now in production). When supervising the artist, I had to guess who the next Fed chair would be.  As you can see, I guessed right.

Addendum: Someone asks whether the helicopter in the picture is a reference to the current chairman's somewhat pejorative nickname "Helicopter Ben."  The answer is no, not at all.  I used a helicopter in this interior illustration since the third edition, which predates Bernanke's becoming Fed chair.  Ben has used the helicopter metaphor for monetary policy, but the metaphor is not original to him (or to me).  I would guess it started with Milton Friedman, but I am not entirely sure.

The Top of My To-read Pile

I am a friend and fan of the University of Chicago's John List.  (I had the pleasure of working with John about a decade ago at the Council of Economic Advisers.)  So at the very top of my pile of books to read is John's new one, with Uri Gneezy, called The Why Axis.

Can we measure smoking behavior?

In any survey, we must consider the issue of imperfect recall or misrepresentation in self-reported assessments. People do not remember precisely how much they spent on this or that, and they they may not recall how long they have been unemployed. For some questions, social pressure may also be a factor. For example, one may not concede on using illegal drugs or one may misreport smoking behavior. The extend of such biases can be measured though, if one has access to administrative data or some other objective measure. The results are often disappointing (Examples discussed here: 1, 2).

Vidhura Tennekoon and Robert Rosenman criticize the fact that the measures against which surveys responses are compared are taken as perfect gold standards. Specifically they look at the biochemical assessment of smoking status, whose results the literature never doubts and which makes self-reported smoking status look really unreliable. Once you use statistical methods that concede that the biochemical assessment may also include some measurement error, they realize that it may be just as bad as the self-assessment. One can thus not exclude that the self-assessment may actually be a better indicator that an independently recorded measure.