The Pope's Rhetoric

I see that the pope has decided to weigh in on economic issues:

“Some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world,” Francis wrote in the papal statement. “This opinion, which has never been confirmed by the facts, expresses a crude and naive trust in the goodness of those wielding economic power and in the sacra­lized workings of the prevailing economic system.”

A few reactions:

First, throughout history, free-market capitalism has been a great driver of economic growth, and as my colleague Ben Friedman has written, economic growth has been a great driver of a more moral society.

Second, "trickle-down" is not a theory but a pejorative used by those on the left to describe a viewpoint they oppose.  It is equivalent to those on the right referring to the "soak-the-rich" theories of the left.  It is sad to see the pope using a pejorative, rather than encouraging an open-minded discussion of opposing perspectives.

Third, as far as I know, the pope did not address the tax-exempt status of the church.  I would be eager to hear his views on that issue. Maybe he thinks the tax benefits the church receives do some good when they trickle down.

Rent control and home ownership

A new and recent trend in the United States has been the decline in the homeownership rate. While I have mentioned before that homeownership (the "American Dream") is not necessarily a good thing, both privately and socially, it is heavily favored by government policies. And while obviously the recent housing debacle has reduced homeownership, the trend started before that. To understand why the trend is down, it may be of interest to understand how it went up.

Daniel Fetter looks at the period where the nationwide homeownership rate went up the fastest, World War II. Paradoxically, this was a period were home construction was actually severely restricted. Yet, the 10 percentage point increase (half the increase over the entire century) happened in the context of widespread rent control. Exploiting differences in rent reductions through control across cities, Fetter finds that a majority of the increase in the homeownership rate was indeed due to rent control. I suppose it was renters somehow coerced by their landlords to buy the home they lived in, with no alternatives available. Would this mean that imposing rent control now would reverse the decline in ownership? I doubt it, as the market has now segmented between owned homes and rented apartments, and they are not close substitutes for the most part. And you would not want rent control anyway.

The role of marginal non-participants in the labor force

While the unemployment situation in the US is gradually getting better, the numbers on the labor force participation continue to decline. This worries a lot of people because this can be a sign that some of the unemployed are getting discouraged and drop out entirely out of the labor force. But it may also simply be the continuation of a trend for a few decades already of a steady decline in the labor participation rate, in which case this would be much less worrisome.

Regis Barnichon and Andrew Figura add to this discussion that we should not only think about three categories (employed, unemployed, and not in the labor force), but four by adding the marginally not in the labor force. They are not in, but are close to getting in the labor force, an typical case being a discouraged formerly unemployed. These people tend to join by being unemployed first, while other nonparticipants join the the labor force by transitioning straight to employment, because they value not being in the labor force (students, retirees, mothers) and can only be attracted with a job. Barnichon and Figura document that the numbers of marginals has declined for quite some time, which can explain of decline of a half percentage point in the unemployment rate from 1976 to 2010. This cuts across all demographic groups, so a demographic shift can be ruled out as an explanation. The last recession may have unraveled all that, though, we will need a few more years of data and a full recovery to determine whether the trend continues.

Conflict Minerals: Which Game Console is Most Violent?

With the holiday season upon us and one semi-new (Nintendo) and two completely new (Microsoft and Sony) video game consoles on the market, consumer interest is . While you may be thinking of blasting away virtual opponents playing Call of Duty 107 or whatever version they have nowadays, pause for a moment and think of the more than 5 million persons estimated to have died in the Congo in various conflicts. For, many elements you find in consumer electronics--including video game consoles--are sourced from mineral-rich mines there: tantalum, tin and tungsten.

Instead of Call of Duty 107, Congo is home to true-to-life civil war, foreign invasions, warlords, child soldiers, sexual crimes and so on piled atop a humongous body count that is still increasing. To fund these endless wars, proceeds from minerals--"conflict minerals"--have picked up their share of the (bloody) tab. While there are monitoring mechanisms in place that allow consumer electronics firms to gauge their reliance on dodgy Congolese sources, compliance is oftentimes voluntary and thus subject to wide variation.

So, which then are the most peaceful and violent video game consoles in real life? Watchdog group Raise Hope for Congo ranks MNCs by the measures they use in ensuring their products do not contain conflict minerals. Note that scoring high or low does not necessarily mean that their products have a high or low proportion of Congo-sourced conflict minerals, but rather that its share cannot be accurately determined because they do not keep tabs.

Microsoft (X-Box One) is greenlighted with a score of 30, meaning it has "taken proactive steps to trace and audit their supply chains, pushed for some aspects of legislation, exercised leadership in industry-wide efforts, started to help Congo develop a clean trade." Sony (Playstation 4) scores a 27 having joined some global initiatives but has not yet traced its supply chain for links to Congolese conflict minerals. Worst of all, Nintendo (Wii U) score a big, fat 0. Despite the ostensibly more family-friendly nature of its games as opposed to the blood-and-gore soaked titles of the other consoles, it is the bottom of the barrel:

What would Bowser do? If you look at the list, American companies generally rank highest, South Korean ones are in the middle, and the Japanese fall towards the back of the pack. I would believe that it's a function of activism insofar as most of them operate in the United States. Why South Koreans are more receptive than the Japanese to such entreaties makes me wonder, though.

Still, you'd hope Nintendo did a better job on the CSR end given that they are not exactly setting the sales charts on fire.

Policy and academic macro

Academics are in their ivory tower and have little real world or policy impact. That is the view that is often conveyed by those who do not know what those academics are up to. It is also a common justification by policymakers for ignoring any advice coming from academia. I have lamented many times that politicians routinely disregard advice from scientists (including economists), particularly by focusing law-making on the means instead of on the goals. That said, I recently mentioned work that argued that Keynesian policies will always appeal more to policymakers than Hayekian ones, because it gives them a reason to do something in times of crisis.

Michel De Vroey compares rather Lucas to Keynes. Lucasian macroeconomics relies a lot on internal consistency. This disciplines the theory a lot, but this acts also a straitjacket that in unappealing to policy makers. Keynesian theory has a lot more hand-waving regarding consistency but seems to have an answer for everything because it can cut corners (even if answers may turn out to be wrong). The fact that it appears to be so flexible and know-it-all (like those "economists" that are willing to answer any question journalists may have, I would add) makes Keynesian theory a magnet for policymakers, especially in terms of crisis. And this is why, with the last recession, macroeconomics has been declared to be in crisis, because it listened to Lucas and not Keynes for three decades and did not always immediately have answers.

This is an argument written by someone in the ivory tower. Contrast this with someone involved in policymaking. The very recent interview of James Bullard seems to say the exact opposite. Policymakers, at least monetary policymakers, are very much looking at Lucasian theory for help. In his words, "there is still no substitute for heavy technical analysis to get to the bottom of these issues" (speaking of the financial crisis) and that is happening with structural, internally consistent modeling. Hand-waving does not cut it. And I agree.

Business as Usual: Thailand Back in Crisis Mode

There is an anarchic quality to Thai politics that has to be seen to be believed. At regular intervals, mass protests, military coups and other forms of upheaval toss out leaders whether they are democratically elected or otherwise. Since the turn of the century, media mogul Thaksin Shinawatra--sort of an Asian Silvio Berlusconi--has dominated the political scene, being PM from 2001 to 2006, when he was ousted in a military coup. Since 2006, he has lived largely outside the country to avoid criminal prosecution. However, his allies have held office most of the time, including his sister Yingluck Shinawatra who was elected in 2011:

Although Thaksin or his allies have won every election in the past decade, the judiciary often undercuts him, illustrating how the billionaire former telecommunications tycoon and populist hero remains one of the most polarising figures in modern Thai history.

Since the 2006 coup, court rulings have removed two prime ministers, disbanded four parties, jailed three election commissioners and banned 220 politicians. The military will be watched closely. A major force in politics since Thailand became a democracy in 1932, the military has staged 18 coups - some successful, some not - and made several discreet interventions in forming coalition governments, almost all with the tacit backing of the royalist establishment that now reviles Thaksin.

Now Yingluck Shinawatra finds herself in trouble. She recently tried to ramrod legislation that would grant Thaksin amnesty, but to no avail. Instead of bringing big brother home, she has raised the ire of the middle class Bangkok-based opposition. I've already called her Badluck Shinawatra for her terribly expensive and quite frankly unaffordable populist policies of supporting rice farmers in Thailand's north and northeast. Aside from trying to bring home their bete noire Thaksin home scot-free, Thailand's deteriorating economic situation is driving much unrest as ten of thousands have, well, Occupied Thailand's Government Offices:

Thousands of anti-government demonstrators kept up pressure on the Thai government Wednesday by surrounding more official buildings amid the highest tensions the country has seen since deadly unrest three years ago. The protesters in Bangkok continued to occupy the finance ministry building, which they stormed Monday and turned into their secondary command center.

They plan to send groups to a range of other ministries and government offices around the capital Wednesday, said Akanat Promphan, a spokesman for the protesters. Their objectives include the public health, labor, industry, social development and science ministries, as well as a government complex that houses multiple agencies, notably the Department of Special Investigation. The number of demonstrators, led by the opposition Democrat Party, has declined from the huge gathering of roughly 100,000 people that assembled in Bangkok on Sunday.

So those are the politics; now for the economy part. The Thai baht and the stock market are both plunging. Part of the pressure comes from Yingluck trying to auction bonds to pay the rice subsidies she vows will remain in place. Since October (harvest season), the government has failed to pay the farmers. These auctions have not succeeded either in selling the entire amount on offer, raising fears among Yingluck's allies. After all, if the farmers desert her due to non-payment of subsidies, the Thaksinite political base will be angry:

At least four sales of three-year debt in Thailand have failed to raise the targeted amounts in July and August. The notes yesterday were sold at a yield of 3.53 percent, 39 basis points higher than similar-maturity sovereign bonds, Chularat Suteethorn, head of the Public Debt Management Office, said. The securities were issued on behalf of Bank for Agriculture & Agricultural Cooperatives, which is helping to support farmers by purchasing rice at above-market prices. 

There is another large auction scheduled for Friday, November 29. If that too fails (and it looks like it will), you can bet more economic turmoil will hit Thailand and add fuel to the protester's ire at the government. Call this another example in how democracy does not always work. Sure these Southeast Asian equivalents of (Venezuelan) Chavistas are very good at winning elections, but their policies are largely unsustainable redistributive initiatives.

In the end, you got the government you deserve if you vote for this kind of nonsense.

Pioneers of the static interest rate

When an author describes his work in the abstract or the introduction, it is common to highlight what is "new," "novel," "unique," an "improvement," or "better." But you do not write that your paper is "pioneering" or "seminal," as this can only be established by others in hindsight.

That does not stop Sarbajit Chaudhuri and Manash Ranjan Gupta, who start their abstract with "This paper makes a pioneering attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model." OK. So we have a static model to determine the interest rate. That is pioneering. I always thought the interest rate was tied to the relative price of commodities in different periods. I guess the genius here is that with a static model, one needs not to worry about future shocks and even current shocks are instantaneously resolved so the model is also deterministic! This allows to simplify everything to a great extend, but apparently still provides a major improvement of Gupta (1997), that was, however, already pioneering the static determination of the interest rate. So the pioneership of this paper must lie elsewhere. I think the pioneering aspect is rather in the assumption that there is no flow across regional informal markets and moneylenders have a local monopoly. Imagine the pioneering strides we are now making towards a closed-form solution of the model!

Is the Affordable Care Act reducing healthcare costs?

1. The case for "yes."
2. The case for "no."

Update: Goodman on Krugman.

Paid maternity leaves are regressive

Quite a few countries guarantee paid leaves for new mothers that not only allow them to get back the same job they left, but also gives them the financial wiggle-room to well take care of their new offspring. This time at home without worries is good both for the mother and the child, although one can suspect that this time off work can have adverse implication on human capital and the future career path for the mother. Paid maternity leaves are also often promoted as a way to conduct social policy across all social strata, as they apply to everyone.

Not so fast, say Gordon Dahl, Katrin Løken, Magne Mogstad and Kari Vea Salvanes. They look at Norwegian data, where the paid leave was increased from 18 to 35 weeks between 1987 and 1992. As it did not crowd out unpaid leave and expanded the time spent at home for the mothers, we should see some positive effects on child development in the country. None of that seems to have happened, not even on parental earnings, labor market participation, fertility, marriage and divorce. So it seems to be a rather useless reform. Worse, this expansion redistributed resources the wrong way. Indeed, in the absence of crowding out unpaid leaves, the reform corresponds to a pure leisure transfer to upper and middle income families (lower income families tend to have fewer working mothers in Norway). The reform is thus regressive. And we have not mentioned that there are obvious costs to someone for paying mothers while they do not work.

Pound or Euro? Currency of an Independent Scotland

The next few years are literally going to be make-or-break for the United Kingdom. First of all, the ruling Tories have promised a referendum on its membership in the European Union that, if it is held and voters decide against it, will mean the UK leaving the EU. It's a scary thought we can explore in another post; I myself don't see how the EU will lose much given how it has been very aloof.

Next, we also have another referendum scheduled in Scotland voting on staying in the United Kingdom. While it seems just desserts to me that the UK with its breakaway tendencies from the EU would be subject to similar domestic pressures, the political economy of such a move are...complicated. Scottish independence will mean that it will have to reapply for EU membership if it wants to be part of it. Moreover, there is the question of what currency it will use--the British pound, the Euro, or its own currency unit. Obviously, using the Euro will be contingent on first joining the EU and then the EMU. Both will not happen overnight.

How about continuing to use the pound? It is here where the Conservatives are throwing their weight around by threatening to kick the Scots out of the "sterling zone" if they declare independence, leaving them with the sole option of being a small nation with its own currency circa 2014. As Iceland has so vividly demonstrated, this is not such an attractive option in the new millennium, but I digress. From the FT:

Scotland will be forced to quit the sterling currency union if it votes for independence next year, a cabinet minister has said, in the starkest warning yet for Scottish voters to remain in the UK. Speaking to the Financial Times days before the Scottish government releases its vision for an independent Scotland, Alistair Carmichael, the Scottish secretary, warned Holyrood not to assume it will be let back into the sterling area if the country becomes independent.

Such a declaration would complicate efforts of the Scottish National Party (SNP) to portray a "no" vote as a walk in the park:

The Scotland secretary’s words are part of a concerted campaign across the union to rebut suggestions that a separate Scotland could simply continue to use sterling. Carwyn Jones, the Welsh first minister, said in a speech on Wednesday that his Labour-led government should also be given a veto on the idea, which he described as “very messy”

The message comes as the SNP-led government prepares to unveil its blueprint for the make-up of an independent Scotland, designed to answer questions such as what currency the country would use, whether it would belong to the EU and what taxation system it would have...

SNP leaders insist that sterling is an “asset” part-owned by Scotland, and that in the event of a vote for independence, the remaining UK will want to share the currency, not least to minimise exchange rate fluctuations between the two countries. Alex Salmond, SNP first minister, tried to ward off the threat of exclusion from sterling last week by saying that if that happened, Scotland would not be obliged to take on its share of the UK national debt.

My take is that it's a lot of hot air on both sides since poll numbers suggest the Scottish public understands the consequences of independence and generally believes it's not worth the hassle. 

Not gonna happen, as the Yanks would say.

The Fed's Exit

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

Lack of transparency at the American Economic Association

I have complained several times on this blog about how the American Economic Association is run, particularly how its executive and committees are constituted almost exclusively of faculty from the very top universities, and mostly private universities, see the current slate of officers (Past posts: 1, 2, 3, 4). This lack of representation leads to apparent nepotism in the distribution of awards, and this can lead to suspicions of the same for acceptances to its annual meeting program (especially the printed, unrefereed proceedings) and to its journals. I have called in the past to write in at the elections a candidate that does not fit the profile of current AEA officers, but rather a common member of the association. But the AEA has only announced the winner of the election, with no vote tally. As this does not look very transparent, I enquired with the AEA Secretary-Treasurer, Peter Rousseau, whom I asked about full election results and how they are certified. Here is what he answered:

The long-standing policy of the AEA in reporting election results is to report only names of those elected. This policy was re-visited by the Executive Committee several years ago. The minutes of that meeting state:

"A member requested that the number of votes for each candidate in the annual election of officers be reported publicly. Current policy is for the Secretary-Treasurer and Administrative Director to certify the vote counts, which are tabulated electronically, and to report only the names of the successful candidates. After an interesting economic and psychological analysis of the advantages and disadvantages of reporting individual vote counts, it was decided to retain the Association's policy of reporting only the qualitative outcome of the annual election of officers."

The bylaws clearly state that the Secretary certifies the results. Please be assured that it is my fiduciary responsibility to the membership as its agent to report those qualitative results accurately.

Thank you for supporting the AEA and its mission of encouraging economic research worldwide.

So it is the very executive committee that is suspect of inbreeding that is at the origin of this policy of obfuscation of the election results. And it is a member of the executive committee, the unelected Secretary, that certifies election results and only releases part of them. This is how dictators run sham elections.

High Japanese debt will become a problem

Japan has been able to sustain unusually high debt levels for a long time, even when other countries were facing debt crises despite having lower debt to GDP ratios, and more sustained GDP growth. What makes Japan so different, and what does this imply for the sustainability of Japan's debt?

Charles Yuji Horioka, Takaaki Nomoto and Akiko Terada-Hagiwara analyze the recent evolution of Japanese debt and have a grim outlook. Up to a few years ago, the debt was largely financed by Japanese households saving towards retirement. But as Japan is continuing through its demographic transition toward an older population, this source of funding is going to quickly dry up, if not reverse itself as an older population requires more transfer payments. During the few last years, an increasing share of debt was bought from abroad by investors looking for safe alternatives during times of financial turmoil. This temporary funding allows to mask the underlying drying up of internal funding. This foreign debt also carries a shorter maturity, so we may expect soon some problems in Japan, especially if other investment opportunities start looking better. Unless the Japanese government gets its fiscal house quickly in order, we may see again a country struggling with its debt.

Trade Deals: Ukraine Jilts EU, Returns to Russian Fold

When we last talked about Ukraine, it had elected a pro-Russian leader in Viktor Yanukovych--the same Russia-aligned "bad guy" the so-called Orange Revolution supposedly got rid of. Hard economic times (brought on by the global financial crisis) soured the partnership of his opponents Yulia Tymoshenko and Viktor Yushchenko. in their place he offered, well, "change." Ukraine is a rather divided nation with its Eastern Russian-speaking portion favoring closer ties with Russia (and thus Yanukovych) and its Western portion which is warier of the giant neighbor's residual influence post-Soviet Union.

It was thus interesting to note that Yanukovych remained keen on concluding a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU that his ostensibly more Western-leaning predecessors had initiated negotiations on. In recent weeks, the EU had been pressing Ukraine to finally get this FTA done, but it wanted Yulia Tymoshenko released from prison. Jailed over corruption charges, many (especially Europeans) believe she is a political prisoner of the incumbent.

And so things came to a head at the Ukranian legislature. Yanukovych's allies would not let Tymoshenko go for medical treatment in Germany lest she mount a comeback in time for the elections in 2015. Unable to stomach her release, Ukraine has now gone a step further by not only ditching the FTA with the EU but signaling its intentions to revive economic links with Russia:

Ukraine abruptly abandoned a historic new alliance with its western neighbours on Thursday, halting plans for an imminent trade pact with the European Union and saying it would instead revive talks with Russia. EU officials, who had been preparing to sign the long-negotiated deal at the end of next week, said President Viktor Yanukovich cited fears of losing massive trade with Russia when he told an EU envoy this week that he could not agree terms.

Yanukovich's prime minister issued the dramatic order to suspend the process in the interests of "national security" and renew "active dialogue" with Moscow. EU officials, who had hoped the president's complaints in recent days were a last-minute bargaining tactic, saw little chance of saving the deal...

Ukraine's parliament, dominated by Yanukovich's allies, rejected a series of bills earlier on Thursday that would have satisfied the EU by letting opposition leader Yulia Tymoshenko out of prison to travel to Germany for medical treatment [for a back problem]. Shortly afterwards Prime Minister Mykola Azarov issued the order on suspending the EU process and reviving talks with Russia, other members of a Moscow-led customs union and the former Soviet Commonwealth of Independent States.

Is the power of their neighbors such that Ukraine would so feebly accede to Russian pressure? Perhaps it was just Yanukovych playing Russia off with the EU in seeing who would give it more economic concessions. In the end, however, the Russians seemingly offered a better deal--at least to Yanukovych who was always inclined towards Russia to begin with. It was a feint that EU officialdom perhaps bought too eagerly.

However, this story is not yet finished since another Ukranian leader less receptive to its eastern neighbors may yet ink the DCFTA since s/he will have little at stake with regard to releasing Tymoshenko.

Meanwhile, we can pass time figuring out how to get Tymoshenko's famous braided hairstyle...

UPDATE: Yulia Tymoshenko has now declared a hunger strike until her country signs the EU FTA.

After 12 Long Years, a WTO Deal in Bali?

For obvious reasons--nothing much happening in Geneva--I have devoted very little attention to the conclusion of the WTO Doha Round, having given it up for lost. For all intents and purposes, the Doha Development Agenda as it is officially referred to is still on the back burner. But, there was activity stirring a week ago causing its new Brazilian Director-General Roberto Azevedo to remark "We are too close to success to accept failure but it is all or nothing now." Latin brio aside, they have taken some more "salable" items on the negotiating table to hopefully use in demonstrating that WTO negotiations are not yet dead by concluding a smaller multilateral deal during end-of-year gatherings of its members in Bali (3-6 December). 

What exactly is inside this "Bali package," then? Supposedly there are three pillars: (1) trade facilitation to reduce red tape among international customs authorities; (2) development in better operationalizing what kinds of special and differential treatment [SDT] are afforded developing countries; and (3) agriculture permitting developing countries more leeway in doing things such as helping feed their destitute members:

WTO ambassadors resumed consultations on Section II of a draft agreement on trade facilitation. This section provides the basis for special and differential treatment and for technical assistance and capacity building needed for the implementation of the agreement.

In agriculture, members are focusing on proposals about reducing export subsidies and related policies known collectively as “export competition”, reducing the chances that the methods used to share out a particular type of quota among traders become trade barriers in their own right, on how to deal with developing countries’ food stockholding for food security when the purchases could distort trade, on adding a number of environmental and development services to the list of programmes considered not to distort trade and therefore allowed without limit, and on cotton produced by least-developed countries (LDCs).

On development, members have agreed proposals by LDCs on preferential rules of origin and on operationalization of the services waiver for them. Work continues on duty-free, quota free treatment for LDCs. Members are also consulting on a monitoring mechanism for special and differential treatment for developing countries under WTO agreements. 

From my perspective, it's a bunch of giveaways from industrialized for developing countries which do not require substantial concessions from the former that the latter find reasonably attractive. They do not move the game on a whole lot. Still, the hope is that this "Bali package" is useful for demonstration purposes in showing the world that the WTO still matters. Yes, it's akin to shooting fish in a barrel, but the prospects are at least better than Doha. Ladies and gentlemen, a deal is now imminent...

Roberto Azevêdo, the recently appointed head of the WTO, is expected to present a finished draft of the agreement to the body’s highest organ, the general council, in a meeting as soon as Sunday or Monday.

Barring any unforeseen problems – and negotiators gave warning on Thursday that they could still emerge – the agreement would be signed by trade ministers from the WTO’s 159 member countries in Bali next month. “They have crossed over the threshold,” said a senior trade official in Geneva. Sealed, the deal would be a victory for Mr Azevêdo, who warned that the WTO risked irrelevancy if it did not deliver something substantive in Bali when took over in September.

For a guy who just came into office in September, it's certainly an auspicious beginning. And all it took was for a D-G from a developing country to do it?! We could have had something much earlier if so, but I think there's also an air of desperation that crept in which is making this deal more palatable all around. Believe it or not, trade negotiators probably got tired of attending these shindigs just to twiddle their thumbs year in and year out.

Is France less distorted than we think?

When you think about market distortions through regulation and taxation in a developed economy, you think first about France. It is the prime example of how excessive government intervention can lead to disincentives for production and to major misallocations of resources across firms and sectors. This all accepted wisdom, except nobody actually measured the misallocation part.

Flora Bellone and Jérémy Mallen-Pisano do this using the Chang-Tai Hsieh and Peter Klenow methodology which consists of using a model of firms heterogeneous in their use of capital, labor and technology. Taking this to data, distortions in the use of factors at the firm or the sector level translate into lower aggregate total factor productivity. Hsieh and Klenow showed that there were massive distortions in China and India relative to the USA. Bellone and Mallen-Pisano show that for France, there are no more distortions that in the United States. Thus, there are no misallocations across firms or sectors, but it remains that there can still be a uniform misallocation across the entire economy, say, because of distortions on the labor market applying equally to all firms.

So, Just How Urbanized is Our World?

To be exact, it is 52.1% urbanized in terms of persons living in cities according to the latest 2011 figures from the UN Department of Economic and Social Affairs (UNDESA). Having turned the corner in 2007, the pace is accelerating for better or worse as more people choose to live in cities.

Also above is a map [click to enlarge] depicting global trends in urbanization according to each nation's percentage of city dwellers. It's interesting stuff, especially from an urban planning point of view.

On W

Students often ask me what George W. Bush is like as a person.  This story from Dana Perino gives a great sense of what I saw and experienced as well.

How the Internet is changing our daily lives

There is no doubt that the Internet has changed the lives for many of us, both at home and at work. Email, online retail, online news and plain googling around have transformed the way we communicate, inform ourselves, work and shop. How much this happened is an open question, and it must be very heterogeneous.

Scott Wallsten offers some important insights thanks to the American Time Use Survey. Comparing survey responses from 2003 to 2011, he figures out what time spent online must have crowded out. One third of it comes out of leisure, mostly TV viewing, another third of it working, one eighth less sleep, one tenth less traveling, and the rest from household chores and education time. Can we consider that this mix also represents what we do on the Internet (except for the sleeping part)? Not necessarily, as it must also have transformed the productivity at doing things. For example, news reading is now much more efficient, in my case working, too, but it is easy to wander off during surfing, and this must be increasing leisure time.

Note that the ATUS measures only "computer use for leisure" but I figure that a survey respondent working at home on the Internet must have be confused what to answer. Indeed this is the only way it would make sense that online time would have reduced work time. As far as I can see it, online time at work is not measured.

Avoiding the Lewis path

In the best of all worlds, improvements in agriculture productivity leads to surpluses that allow capital accumulation and the development of industry, which then provides better inputs for agriculture. This is a virtuous circles that eventually leads to agriculture using only a tiny fraction of the workforce and representing a minuscule portion of GDP. This so-called Lewis path to growth has happened in many western economies, but does not seem to take off in Africa, in particular.

Bruno Dorin, Jean-Charles Hourcade and Michel Benoit-Cattin show that the Lewis path is not the unique equilibrium path in a growth model. A particular concern is the so-called Lewis trap that would result from a lack of additional agricultural land, where agriculture keeps growing in the labor force for little gain in output. But why insist on farming where land is no good? We have a global economy now and can produce goods where the comparative advantage is highest. Many areas of Africa are simply no good for agriculture, so we should stop insisting that they should go through all the motions of the Lewis path. Go straight to manufacturing and import food (my previous rant on this). This would also imply that other areas would specialize in agriculture, which is good even though the authors complain that this would lead to urban poverty there. People will move where the jobs are, for example to charter cities.

The Difficulty of Improving One's "Soft Power"

The notion of soft power, defined by Joseph Nye as the ability of a nation to get its way through attraction rather than coercion, is an archetypally wooly concept. How do you measure it? What sort of indicators would you use in comparing different nations according to it? Yet, the lack of hard indicators of soft power or a blueprint for achieving it has not stopped nations from trying to improve their global reputations.

Recently, the lifestyle publication Monocle previewed its most recent edition of its annual soft power rankings showing Germany topping the global league tables after the UK and the US did the last two years. Aside from not speaking English, you would think Germany also suffers from not having immediately British institutions alike "Bond, the Bard (Shakespeare) and the Beatles." Still, there are modern compensations alike, er, Bayern Munich and Borussia Dortmund--arguably the finest soccer teams in the world.

Actually, Britain's diminished performance in the 2013 rankings was predicted to some extent by Dorian Lynksey in the Guardian op-ed pages a few months ago. Given the current Tory government's obsession with quantifiable returns on expenditure--culturally important spending included--recent cutbacks may have taken their toll. For instance, diminished funding for the BBC World Service--still a plank of British cultural influence after all this years--will likely have wider repercussions.

That said, things could be worse than they are in Blighty. You could be China, which comfortably outspends the UK on cultural promotion but doesn't seem to be moving up the global rankings with any alacrity. As the Beatles sang, perhaps you can't buy love--or soft power, either:

Soft power is an unpredictable commodity that can't be bought in a hurry. China imposes a quota of 34 foreign movies a year but last year those imports outgrossed China's 893 homegrown productions, to the government's evident annoyance. Overseas consumers can't be blinded to a nation's flaws. When one of your most famous cultural exports, Ai Weiwei, is a tireless critic of the government, it's hard to pretend you're an artistic paradise, however much you spend. [Or cheap out on helping poorer crisis-hit neighbors for that matter.]

Britain has long enjoyed the cultural reach that China craves, but it's taking its enviable position for granted. Perhaps when you're the land of Bond, the Bard and the Beatles, not to mention the English language, you're prone to assuming it will be ever thus, but it's not just austerity that threatens Britain's soft power. Many elements of Conservative dogma are antithetical to it: resistance to immigration and Europe; suspicion of the BBC and state funding in general; and contempt for any area of the arts on which you can't immediately slap a price tag.

In America's case, I'd say Mickey Mouse cannot whitewash drone strikes or something to that effect. Meanwhile, the argument rages on in the UK whether its extensive cultural promotion ought to continue. Obviously, the British Council does not want the axe to fall on it despite not having "tangible" metrics to show their Conservative political overlords. Then again, assessing reputation is arguably more of an art than a science:

The British Council report rightly argues for a "move from short-term transactional and instrumental thinking to long-term relationship building". And if we must play the price-tag game, economists point out that growing demand for popular culture from newly prosperous nations plays to Britain's strengths.

Measuring the worth of culture using purely utilitarian arithmetic is a tricky path. Art should be valued on its own merits as well as for its financial rewards. But the government need only look at the global success of the Olympics opening ceremony or The King's Speech, one of the last movies to receive UK Film Council funding, to appreciate what the right combination of long-term state investment and individual creativity can do for Britain's reputation abroad, for relatively piffling sums. That, surely, is a language that even the most fanatical budget hawks can understand.

I'd pay up myself, but it's obviously not my decision to make. Read also through the informative British Council soft power report if you have some time to spare.

The fundamental equation of economics

It is every physicist's dream to find a formula so powerful that it can explain everything (and carry the inventor's name). Such hopes are not as prevalent in Economics, first as we realize that we cannot find such a fundamental equation (we are just not smart enough), second because an economy is so complex that it defies any attempts to reduce it to one equation.

This does not stop James Wayne, who as a physicist is still pursuing his dream. And he claims to have found the Fundamental Equation Of Economics (FEOE), thereby finally proving that Economics is truly part of Physics. What a relief. And what is this equation that can, as the author forcefully argues, explain all observed economic phenomena and solve all economic problems, without exception? What is this formula that shows that equilibrium, the laws of supply and demand, DSGE and SL/ML (whatever that is) models are all deeply flawed? Here it is: The change in time of the joint probability distribution of future valuation of assets and liabilities is a function of its current distribution. We do not know yet what this function is, because it is currently too difficult to figure it out at the atomic level, but we know it exists. Now we can go revolutionize Economics and solve the world's problems.

Long live the Wayne Equation!

IMF Research Conference

I recently had the pleasure of attending the IMF Annual Research conference (where I was a discussant of a paper by Reifschneider, Wascher, and Wilcox in Session 3). You can watch the conference online here.

West Makes Afghanistan Safe...for Growing Opium

Say what you will about the original premise that the 2002 invasion of Afghanistan was to force Osama bin Laden out of hiding from his Taliban protectors, but the aftermath of all that has not been very positive. Afghanistan remains a very poor nation, and the persistence of the Taliban threat speaks volumes about the West's inability to provide a superior vision of the country's future. That is the political aspect of it.

Meanwhile, the economic aspect is not promising, either: despite untold millions spent on eradicating opium over more than a decade, 2013 will be a bumper crop:

Opium poppy cultivation in Afghanistan rose 36 per cent in 2013, a record high, according to the 2013 Afghanistan Opium Survey released today in Kabul by the Ministry of Counter Narcotics and UNODC. Meanwhile, opium production amounted to 5,500 tons, up by almost a half since 2012.

Calling the news "sobering", Yury Fedotov, Executive Director of UNODC, stressed that this situation poses a threat to health, stability and development in Afghanistan and beyond:  "What is needed is an integrated, comprehensive response to the drug problem. Counter-narcotics efforts must be an integral part of the security, development and institution-building agenda".

The area under cultivation rose to 209,000 ha from the previous year's total of 154,000 ha, higher than the peak of 193,000 hectares reached in 2007. Also, two provinces, Balkh and Faryab, lost their poppy-free status, leaving 15 provinces poppy-free this year compared with 17 last year.

While respect is due to the UN Office for Drugs and Crime (UNODC) for taking on drugs and crime in such a difficult situation, I honestly believe that the West has largely given up on Afghan security, let alone the country's development. After sinking billions into the place with little to show for, Western publics have signaled their armed forces to head for the exit. UNODC's diagnosis is sound, but how exactly do you reconcile so many rival warlords? Moreover, what livelihoods are possible other than this one at the current time?

The link between insecurity and opium cultivation observed in the country since 2007 was still evident in 2013; almost 90 per cent of opium poppy cultivation in 2013 remained confined to nine provinces in the southern and western regions, which include the most insurgency-ridden provinces in the country. Hilmand, Afghanistan's principal poppy-producer since 2004 and responsible for nearly half of all cultivation, expanded the area under cultivation by 34 per cent, followed by Kandahar, which saw a 16 per cent rise.

Across the country, governor-led eradication decreased by 24 per cent to some 7,300 hectares. Badakhshan, the only poppy-growing province in the north-east, witnessed a 25 per cent increase in cultivation despite the eradication of almost 2,800 ha. During the 2013 eradication campaigns, the number of casualties rose significantly, with 143 people killed this year compared with 102 fatalities in 2012.

It's a sad situation (full report here), but the time is at hand when Afghans themselves will need to deal with the insecurity, fragmentation, and lack of the development on their own. Perhaps only when they realize that no one will be left to blame for their situation can progress really be made. Then again, the Taliban would welcome retaking the reins of power.

Why do some bikers not wear helmets?

There are no laws mandating helmet use for motorcyclists in many developing countries and some US states. In the first case, such laws are likely unenforceable, in the second I suppose the American urge for "freedom" makes such laws inappropriate and the hope is that motorcyclists would have the common sense to use helmets. So what determines why some choose not to wear a helmet?

Michael Grimm and Carole Treibich went to Delhi and surveyed motorcyclists, focusing on helmet use and speeding. Some of the answers are not surprising: the bare-headed ones are less risk-averse, younger, less educated and less informed about accident and fatality rates. More interesting is that speeding and not using a helmet seem to be strong substitutes. Imposing helmets alone would thus not necessarily improve safety. One would have to impose helmets and enforce speed limits. That is likely too much to expect from India though, where just informing about the true risks may be more effective.

The Map and the Territory

Click here to read my review, coming out in Sunday's NY Times Book Review, of Alan Greenspan's new book.

Why severance pay?

In many countries, it is customary or even mandated that firms should pay employees they let go a severance package. While that may make sense as compensation for a labor contract that is getting broken, mandating it under all circumstances may make little sense on a first glance. It adds to firing costs and may lead firms to retain less productive workers too much. And from having witnessed that first hand, this can induce an employee to become a poison for everyone else to tease out severance pay after getting fired.

Donald Parsons goes through the rationale of mandating severance pay and compares it to a labor market where no such pay is mandated. It turns out there would be not much difference, as firms do voluntarily offer severance pay, as mentioned to break a contract, but also to avoid having an employee move to the competition. On a aggregate level, such pay does slow down worker movement a little bit, but it also has its advantages. For example, it can substitute for unemployment insurance for some time and it can insure against wage loss in reemployment. This is good, especially if moral hazard or administrative costs in these programs are high.

Self-delusion in Basel II

The Second Basel Accord was put in place to more effectively prevent bank failures. The first one imposed some rather rigid rules that where not taking into account the true risk exposure of the banks, which obviously varies according to the particular activities of the bank and overall economic conditions. Basel II is more flexible in that it allows banks to used their risk models and scenarios to determine how much capital they need to secure. The goal is to have sufficient capital in 99.9% of cases of unexpected losses, or a failure once every 1000 years. That is pretty safe.

Except it is not. The first exhibit is of course what happened during the last recession. The second is a paper by Ilkka Kiema and Esa Jokivuolle that shows that in fact only a fraction of the regulatory capital needs to be loss absorbing capital. Indeed, half can be subordinated debt and thus not available when needed. According to the authors, this means that the true risk of bank failure is every 20 to 100 years. Not very reassuring, and Basel III does not seem to really address this.

Philippines, PRC & Geopolitics of Disaster Relief

[I wish to express my appreciation to those who have gotten in touch to check whether I have been affected by the recent storm in the Philippines. Typhoon Haiyan did not really pass through the capital, Manila, where I am currently based. Nevertheless, any help you can extend to my compatriots is most welcome.] Typhoon Haiyan is one of the most powerful storms ever to hit land. While storms of its magnitude are frequent in the open ocean, it is relatively rate that one reaching over 300 kph hits populated areas. The devastation is enormous, and the UN estimates that $301 million is needed to rehabilitate affected regions over a preliminary six-month period:

The United Nations today appealed for nearly a third of a billion dollars to provide humanitarian assistance to typhoon hit regions of the Philippines where aid workers are labouring around the clock to get in urgently needed survival supplies, such as food, clean water, shelter and basic medicines. UN Emergency Relief Coordinator Valerie Amos launched the $301 million flash appeal from Manila, the capital, where she is surveying the damage by Typhoon Haiyan which ripped through nine regions in south-east Asia over the weekend. 

However, many are noticing the comparatively small amount China is pledging to give to its neighbor ($200,000 total):

China's government has promised $100,000 in aid to Manila, along with another $100,000 through the Chinese Red Cross - far less than pledged by other economic heavyweights. Japan has offered $10 million in aid and is sending in an emergency relief team, for instance, while Australia has donated $9.6 million...

"The Chinese leadership has missed an opportunity to show its magnanimity," said Joseph Cheng, a political science professor at the City University of Hong Kong who focuses on China's ties with Southeast Asia. "While still offering aid to the typhoon victims, it certainly reflects the unsatisfactory state of relations (with Manila)."

China's ties with the Philippines are already fragile as a decades-old territorial squabble over the South China Sea enters a more contentious chapter, with claimant nations spreading deeper into disputed waters in search of energy supplies, while building up their navies.

While the merely state-affiliated publication Global Times usually holds the more jingoistic views compared to the truly official Xinhua news agency or China Daily, this time it expresses concern about how the rest of the region will view the PRC's comparative stinginess. A feint, perhaps? It is still notable that such an opinion was made. Especially notable is the recognition of contributions Filipino-Chinese have made when the PRC has been affected by similar calamities:

China shouldn't be absent in the international relief efforts. Instead, it should offer help within the compass of its power, given China's international position and its location of facing the Philippines across the sea. It's a must to aid typhoon victims in the Philippines despite Haiyan having also battered China's coastal regions and bilateral tensions over the South China Sea disputes.

China, as a responsible power, should participate in relief operations to assist a disaster-stricken neighboring country, no matter whether it's friendly or not. China's international image is of vital importance to its interests. If it snubs Manila this time, China will suffer great losses...  

Aid to the typhoon victims is a kind of humanitarian aid, which is totally different from foreign aid in the past made out of geopolitical concerns. Overseas Chinese in the Philippines played an active part to mobilize relief efforts when the mainland was in disaster. It's legitimate that we provide assistance when they suffer.  

Still, China's pledge is indicative of certain things. Its leadership is not quite pleased with the Philippines, having disinvited the latter's president in recent months and now this. These expressions are also conditioned on playing to public opinion: having portrayed the Philippines as "the enemy" over the South China Sea spat to the Chinese public, it is hard to back down on the tough rhetoric against the Philippines by offering millions in disaster relief.

Asian politics are notable for the long memories of those concerned. If so, the Philippines may better remember those who helped it during its time of need. For instance, that Putin guy might not be so mean towards other developing nations...

UPDATE: China has since upped its commitment to $1.64 million, although many are questioning why it has not dispatched its state-of-the-art hospital ship Peace Ark designed for emergencies such as this to the Philippines. 

Spreading the Wealth Around

From a new CBO report. Click on graphic to enlarge.

The price of long-run risk

In dynamic stochastic models, standard utility function specifications imply that the curvature of this function determines directly both the risk aversion and the elasticity of intertemporal substitution. When calibrating this, modelers have a tendency to be waving hands a bit too much, as they focus more on one than the other. In addition, their calibration seems to be immune to changes in data frequency. Those who are careful about this use Epstein-Zin preferences which disentangle risk aversion and the elasticity of intertemporal substitution. They think they have done all they could to address a proper calibration.

Well, not quite. Larry Epstein, Emmanuel Farhi and Tomasz Strzalecki show there is a third dimension in play, the temporal resolution of long-run risk. Indeed, the interaction of risk aversion and elasticity determines whether economic agents prefer early or late resolution of risk. This matters. Indeed, long-run risk is priced by markets differently than short-term risk, typically higher. Indeed, people are willing to pay to know uncertain outcomes earlier. But we do not know how much so far. An opportunity for additional research.

The Overoptimism of Research Assistants

How long will it take to fix the health exchange website? I have no idea. But thinking about this issue reminded me of a time when I was a grad student, and Larry Summers was an assistant professor. 

Larry told me that his research assistants always vastly underestimated how long any task would take. His rule of thumb: Double the estimate the RA gives, and then move to the next higher time unit.

So, if the RA says the task will take an hour, it will take two days.  If the RA says it will take two days, it will take four weeks.

The Day Venezuela is Fully Nationalized Approaches

The economic implosion of Venezuela is interesting insofar as the voters have repeatedly chosen Hugo Chavez and his anointed successor Nicolas Maduro despite them consigning the country to economic oblivion. Populist policies may have won votes as redistribution continues, but we are fast approaching a point when there is nothing left to nationalize or place under state watch. What then?

Venezuelan President Nicolas Maduro says he plans to extend price controls to all consumer goods, if he is given powers to govern by decree. In a televised address, Mr Maduro said that he wanted to set legal limits on businesses' profit margins. His announcement followed the seizure on Saturday of shops accused of selling electronic goods at inflated prices.

The National Assembly is expected to vote this week on his request to govern temporarily by decree. The president demanded there be "zero tolerance with speculators" in his speech broadcast on Sunday. "This is beyond usury, this is theft," he added...[t]he president announced that he would next turn his attention to stores selling toys, cars, food items, textiles and shoes. 

When all production comes under government control--as things will be at this rate--there will be no one left to blame other than the government. It will be at that point when the full extent of the government's mismanagement--galloping inflation, pathetic reserves despite being one of Latin America's leading energy exporters, and the evisceration of a functional economy--becomes apparent even to Chavez/Maduro voters:

Opposition leader Henrique Capriles said the move proved that the president "is a failed puppet of the Cuban government". "Every time he opens his mouth, he scares away the investments that create employment, and he worsens the crisis," said Mr Capriles, who narrowly lost to Mr Maduro in April's presidential election.

Official figures suggest inflation is running at more than 50%. Price hikes have become an important issue in next month's local elections.

For now, Maduro's perverse strategy involves creating artificial shortages by persecuting all forms of private industry as "speculators." Faced with a steadily deteriorating business environment, the rational thing to do would be to cut production (or flee the country if you're a foreign investor). The resulting government-induced shortage is then blamed on your "hoarding" ways, and the government then claims to "act" by slapping price controls on everything to hopefully win elections.

It will likely take Venezuela taking a turn for even worse before the Bolivarian socialists are ejected. Oftentimes, it takes things to deteriorate before they get better to get the attention of those who have been deluded for quite some time.

China is doing is right with managing its exchange rate

China has been heavily criticized by western politicians and policy-makers for its exchange rate policy that favors its export industry. Some have tried to explain to Chinese authorities that it is not in their best interest to follow a quasi-fixed exchange rate with the US dollar. Indeed, we know from past experience that fixed-exchange rates can be very expensive to maintain, especially in the context of large external imbalances. But is China different? After all, it financial development is
clearly less advanced than Western economies, and the Chinese economy is growing much faster.

Philippe Bacchetta, Kenza Benhima and Yannick Kalantzis look at the optimal exchange-rate policy of a growing economy where domestic households do not have access to international markets, that is, China. They find that the optimal path for the exchange rate is first a real depreciation during a growth spurt, and then a real appreciation in the long-run. This is pretty much what China has been applying. In other words, China did everything right given its situation, and this is because the growth spurt generates a glut of savings that have nowhere to go. The real depreciation allows to take care of this current account imbalance having the central bank serve as intermediary and converting foreign assets to domestic ones for the desperate households. In some sense, we could even argue that the Bank of China has not done enough of that given the real estate bubble, which is also a consequence of this savings glut.

The Political Economy of Int'l Beauty Pageants

OK, some qualifiers about the post title here: First, I am not quite attracted to beauty pageant contestants since I generally find them too skinny. Second, I didn't actually watch the Miss Universe 2013 finals in Russia since I didn't bother to figure out what time it was showing. Third, I am probably biased since our country's bet didn't win despite making it to the last five contestants for yet another year without actually winning. (Then again, if you are looking for unbiased commentary from blogs, you are probably looking in the wrong place.) So, with those caveats in mind, here is what the most recent event has taught me about the international political economy of beauty pageants. Excerpts here from the Manila Bulletin:

(1) It often helps if you *can't* speak English, the language of the event:

Fans expressed disappointment when it was announced that [Philippine contestant Ariella] Arida finished third runner-up. They said she was the only candidate who did not use an interpreter in the field of Latina co-semifinalists [from Brazil, Ecuador, Spain, and Venezuela. In 2011, Filipino fans expressed the same sentiments when [Shamcey] Supsup won third runner-up in the beauty contest in which she was the only one in the Top 5 who did not use an interpreter.

The idea is that you are more "exotic" when you cannot speak English. (I'd like to confess that I've been using Google Translate for six years to write this blog, but few of you will believe me.) Some will say that's a nonsense argument since Miss USA won last year, but consider the rarity of straight English answers in the Q&A portions and that the event's promoter is some Yank with a weird hairdo who stands to benefit massively from a ratings jump in the States.

(2) It doesn't help to be smart. This is a beauty contest, not a brains contest.  Ask the Philippine contestant--a chemistry major--who finished fourth:

Born on Nov. 29, 1988, to public school teachers Alresito and Estella, Arida graduated from the University of the Philippines Los Banos [UPLB] in Laguna...

Arida began studying veterinary medicine at UPLB in 2005 but shifted to chemistry on her second year. Her undergraduate thesis entitled “Virtual Binding of Synthetic Nucleoside Analogues and Phyto-brassino steroids to NS5 Dengue Virus mRNA 2’-o-Methyltransferase Domain Using Dock Software” was presented in the 2010 Philippine Chemistry Congress held at Subic Bay in Zambales.

Looks matter, and passable answers will suffice during the Q&A portions--especially if delivered in a language other than English.

(3) So the Latin bloc is not doing so well economically, but hey, they do fantastically well in beauty pageants! 4 out of the top five ain't bad, and the award haul of Latin countries like Venezuela is astounding. I suppose beauty pageants act as the opiate for the masses in an increasingly secularized world--especially in Venezuela, a country run by nutters that has made a successful cottage industry of preparing young women for these events. (And don't speak English for crying out loud.)

Consider that the Philippines was a Spanish colony for over three hundred years and the domination would become even more pronounced. Ah well, roll on 2014; we're bound to win this damn thing sometime soon...

Is community rating fair?

A large part of the motivation of the Affordable Care Act is to provide insurance to those with pre-existing conditions. Under the law, insurance is offered to everyone at a price based on overall community risk, not the risk estimated by the insurance company based on a person's particular characteristics. That has been deemed "fair" by advocates of the law.

I wonder whether advocates of this view are concerned with other insurance markets.  Teenage drivers pay a lot more for auto insurance. The old pay a lot more for life insurance.  Life insurance companies require health screening before granting a policy. Is this a problem, or the natural and desirable functioning of markets?

In the law, having children has been deemed a pre-existing condition, although it is not quite described as such. Everyone is now expected to buy insurance to pay for pregnancy and maternity care, even those who never intend to have children. The goal is to spread the risk of childbirth among the larger community.

But having children is more a choice than a random act of nature. People who drive a new Porsche pay more for car insurance than those who drive an old Chevy. We consider that fair because which car you drive is a choice.  Why isn't having children viewed in the same way?

I don't know the answer to these questions. But it does seem that fairness in health insurance pricing is being viewed very differently than fairness in pricing other types of insurance.  I wonder why.

The Washington Consensus Lives On In Pakistan

There is a photo essay on American shopping malls that I found quite amusing on Yahoo! featuring pictures taken by an obviously obsessive chap who took lots of them during that era of high consumerism, the Eighties, entitled "Big Hair, Smoking, and Record Stores." While the IMF now styles itself as not your grandpa's IMF in being a kinder, gentler lender of last resort, I had a distinct 45 RPM retro flashback while reading its latest press release concerning its recent staff mission to Pakistan (where they are not quite fond of Yanquis).

Much as the IMF would like to say otherwise, it seems we have not yet gotten away from the greatest hits of one-size-fits-all quite yet. Liberalization, privatization, deregulation...structural adjustment austerity....is there anything new?

Structural adjustment:

The mission was also pleased with the strong fiscal performance in the first quarter of 2013/14 and the steady implementation of the government’s structural reform agenda...

Belt-tightening:

Fiscal consolidation remains a key component of the government’s economic reform program. The mission was encouraged by the government’s efforts to enhance tax revenues, which slightly exceeded the program target level.

Privatization:

The government is moving forward with the privatization or restructuring of 31 public sector enterprises to improve public sector resource allocation and limit poor performance.

Liberalization:

The authorities are also working towards significant structural reforms in the areas of trade and the business climate to encourage higher investment.

Everything old is new again, and I am afraid that we have not quite gotten into the New Wave, let alone the Alternative era at the IMF since the song remains the same. Is that doom metal? Would you like to, ah, break dance?

What is so strange about the arts labor market?

Why are people drawn to work as an artist? This kind of job seems to have all the characteristics that one would like to avoid for a typical career: very low pay, usually the need to supplement income with another job, the most unequal distribution of income of any field, and with all this a chronic oversupply of labor. One may argue that one should set Economics aside for the arts labor market, but I do not believe that the love of arts can be the only explanation for this uncharacteristic labor market. People need to live, and if they love the arts they can always do this as a hobby.

Milenko Popović and Kruna Ratković find a better explanation. An artist's productivity is a function of accumulated art-specific human capital. If artists are forward-looking and they can cope with very low income during their formative years, it can then make sense to get into such a career. The issue is the uncertainty whether one's artistic career will actually pan out. This is where the oversupply comes in: many people start an artistic career to see how it works out, but eventually drop out. While all this makes intuitive sense this last part about uncertainty is largely hand-waved by the authors and should be subject to some serious quantitative exercise to see whether it can hold water with data, though. Thus, I am still not letting my children get into such careers.

American Exceptionalism: Why So Few Diesel Cars?

It routinely surprises insular Yanks who dare venture abroad that the rest of us are quite fond of diesel cars. In this day and age of dear fuel, improved mileage has it attractions. Americans would beg to differ: They shake! They stink! That's what trucks run on! are among the things you hear them say. Such stereotypes hold only for older generations (up to, say, Eighties vintage) of passenger vehicles. By the Nineties, consumers elsewhere embraced advances in diesel technology that have made them the fuel of choice not only on fuel saving grounds but also performance given the wider torque spread of cars running diesel. Nowadays, of course, the poshest of brands--Audi, BMW, Mercedes-Benz, etc--feature model ranges replete with diesel models. They certainly don't shake, stink, or run like trucks anymore...from Auntie:

A 1.6-litre turbodiesel delivers the torque surge of a much larger gasoline engine, yet with the fuel efficiency of a much smaller one. In the UK, diesel sales account for more than half of all cars sold, and even with a stat like that, Britain lags the rest of Europe, which has long preferred diesel to gas.

So why would more Americans not drive diesels? From the European perspective, it would suit the driving style of the States perfectly, with lots of relaxed muscle available at low rpms to cruise vast interstate networks that are the envy of the world. Better mileage means fewer fill-ups, and the on-paper improvements in fuel economy would, overnight, take the US fleet one massive step toward President Obama’s targeted 54.5 mpg national average by 2025. Simply stated, diesel should “work” in the US.

EPA rules on mileage will probably "force" US consumers to adopt diesels alike Europeans have. OTOH, you can argue that the US market is more primitive in this respect, resembling a pre-enlightened Europe:

In the UK of the 1980s, diesel drivers were outcasts. They were required to fill up around the back of the station, over by the truckers, to be looked upon by gasoline burners with a mixture of pity and smugness. And that presumed diesel drivers could even find somewhere to fill up, as not every filling station bothered to stock their fuel.

This sheer lack of availability led to great variability in pricing. As the only filling-station proprietor in 25 miles to stock diesel, Mr. Smith could subsequently charge more or less whatever he wanted. A survey of diesel prices in the US illustrates a similarly maddening snapshot of how scarcity can produce wide price fluctuations, with pump prices varying by up to 50 cents a gallon. But with more diesel purchasers, the laws of the marketplace would kick in, bringing prices into greater alignment.

Given the need for low-sulphur refining, diesel would not necessarily become cheaper than premium in the US. It is pricier on the other side of the Pond, too, but although Europeans gripe about it, they still know the savings add up. Diesel generally returns 30% better mileage than gas, and in the dominion of $8 gallons, this is no small advantage.

So the Yanks are a bunch of eco-primitives; tell me something new about these folks who still debate about whether climate change exists when the rest of the world has moved on to doing something about it. 

Some pitfalls in establishing the impact of minimum wage hikes

The debates on whether to, depending on the country, introduce, repeal, increase or lower the minimum wage are never going to cease because empirical studies have not been able to give a definitive answer about the impact of the minimum wage on employment. The issue is first that good data is difficult to come by, second that there are many confounding effects and unobservables that may vary from one labor market to the other in significant ways, and third that the true effect may actually be small.

Sylvia Allegretto, Arindrajit Dube, Michael Reich and Ben Zipperer analyze a common way to study minimum wage hikes (to be distinguished from their introduction), cross-state regressions for the US, as US states have the option to set a higher minimum wage than the federally mandated one. They use six techniques employed in the literature to compare outcomes with four datasets. The reason why you want to try so many methods is that a simple regression does not cut it. The level of the minimum wage, for example, is associated with different business cycle characteristics, that is, setting a minimum wage at a particular amount is endogenous with all sorts of things that can be associated with the labor market. Still, no matter how they look at the data, the authors find that the effect of minimum wage hikes on employment is small, if there is any. This increases the odds that the effect is actually small.

Are wages posted or bargained?

Modeling the labor market, we tend to postulate that wages are either posted by employers or negotiated, typically by Nash bargaining. This is especially true of search and matching models, which often study business cycles. Results depend to some degree on this assumption, thus it should be a good idea to check against the empirical evidence how wages are determined in the matching process.

Hanna Brenzel, Hermann Gartner and Claus Schnabel use employer data from Germany and find that it is a mixed bag. But how wages are set in not random. To quote from their abstract:

Wage posting dominates in the public sector, in larger firms, in firms covered by collective agreements, and in part-time and fixed-term contracts. Job-seekers who are unemployed, out of the labor force or just finished their apprenticeship are also less likely to get a chance of negotiating. Wage bargaining is more likely for more-educated applicants and in jobs with special requirements as well as in tight regional labor markets.

This implies in particular that the mix may change over the business cycle (as labor-market tightness changes), and that models that assume that one must be unemployed to apply for jobs and then get Nash bargaining are inconsistent with the data, at least in Germany.

The experimental macroeconomics of monetary policy

One important characteristic of Economics is that it is very difficult to conduct a clean experiment. While one may run little laboratory experiments with a few chosen subjects, there is always the uncertainty whether the experiment generalizes. The randomized experiments typically used in development economics are subject to the same limitations, even if their scope is larger. And in all those experiments, their applicability is limited to microeconomic questions.

Oleksiy Kryvtsov and Luba Petersen venture into experiments directly applicable for macroeconomic policy, and more precisely monetary policy. Monetary policy has bite when there are some frictions, among them expectation formation. Their idea is thus to see how people form inflation expectations in a laboratory setting and within the context of a standard new-Keynesian model. In that model with economic agents having rational expectations, monetary policy can reduce macroeconomic volatility by at least two-thirds. With the bit of irrationality exhibited by participants to the experiment, the reduction is still about half, and thus important. The model is a Woodford-style economy where participants have to provide updates on inflation and output-gap expectations, which can be compared by the observer against rational expectations ones. People learn about changes to fundamentals and can draw on past history. In other words, it is like they would live in the Matrix, they are fed information and are supposed to behave within the confines of a virtual world.

This is very interesting and innovative stuff here. I must concede though that I have still not bought the Woodford model. I cannot understand how one can talk about monetary policy in model with supposedly fundamentals when there is no money.

Are the Port of Hong Kong's Glory Days Over?

How the mighty are falling. Here's another one from the Far East shipping files: Hong Kong ranks regularly among the world's top three busiest container ports in terms of twenty-foot equivalent units (TEUs) handled. Yet, its previously unassailable status is coming under attack due to a number of factors. First, rising labor costs in the Pearl River Delta mean it is being less used to handle shipments of manufactured goods from that part of China. Second, "industrial action" hit Hong Kong for the first time in many years earlier in 2013...

Like Shenzhen, Hong Kong’s throughput has been pinched by the decline of South China manufacturing, as high labour costs impel factory owners to shift operations to China’s interior or elsewhere in Asia. Hong Kong narrowly missed losing its third place position against Shenzhen, which marginally increased volumes in 2012 by 1.6%.

The biggest operator in the port, Hutchison International Terminals, was hit by the first major industrial action in Hong Kong in 20 years that began on March 28, 2013. The strike involved 450 port workers, including crane operators and stevedores, and lasted for 40 days. The strike caused a 20% drop in throughput at the Hong Kong operations of HPH Trust — a Singapore-listed Hutchison spin-off that comprises many of Hutchison’s Hong Kong assets.

As a result, many major port operators are divesting themselves of Hong Kong.  Indeed, the years it served as the world's gateway to China are numbered since, well, the former crown colony was reabsorbed by the mainland in 1997 and became a special administrative region (SAR). The handover happened a long time ago, and there is certainly no lack of mainland ports companies can now use--no need to use HK as an intermediary with the Reds in charge here as well:

Dropping volumes in Hong Kong was a factor in divestments by major port operators. In March 2013, HPH Trust bought Asia Container Terminals Holdings for $503m from joint owners Dubai-based DP World and Singapore-based PSA. Simultaneously, DP World sold 75% of its interest in Hong Kong’s Kwai Chung Terminal berth 3 and in ATL Logistics Centre Hong Kong for $463m to Goodman Hong Kong Logistics Fund.

While Hong Kong still retains an edge for operational efficiency, it also faces continuous erosion of demand, as more operators make direct calls to mainland ports. The competitiveness of Shenzhen ports has been boosted by easing of customs requirements for ocean to ocean transhipment.

Hong Kong retains its place as the world's freest economy, but certain parts of its portfolio no longer dominate its unique selling proposition as others have caught up. I hate to say it, but the port business may truly be a "sunset industry" for HK as some have presaged.

Child labor and fertility

Child labor has often been described as a vicious circle. Parents have too little income to feed their family and require their children to work. Children do not get educated and end up earning too little to sustain their own family. One may then question why they decide to have children in the first place.

Simone D’Alessandro and Tamara Fioroni build a model of human capital and fertility with child labor. At least in theory, they highlight that destitute parents find it relatively advantageous to have children: they are less costly as they can work. If their net contribution is positive, they want to have many children. And this mechanism can be self-reinforcing if the gap between skilled and unskilled wages is large. This is an amplified quantity/quality trade-off that increases child labor and leads to more wage inequality. The only way out is to make it more attractive for unskilled parents to have fewer children and not have them work. Legislating child labor away will not help, as already demonstrated many times. One example was discussed here, and some was to get one of the vicious circle as well: 1, 2, 3.