Quick Movie Review

I just saw American Hustle.  Great movie, loosely based on the Abscam investigation.  Much better than Gravity, the other movie I have seen recently that got rave reviews.

How politicians lie

We all know politicians lie, no surprise here. What we do not quite know is how and why they lie. Indeed, they generally do not tell outright lies. They exaggerate or add some "extra spice" to their statements. How badly they lie likely depends on the political context.

Alessandro Bucciol and Luca Zarri, from a country long lead by a professional liar, decide to focus on politicians from the United States. They use data from PolitiFact.com about 7000 claims by 1000 national politicians from 2007 to 2012. They determine that Republications lie more than Democrats, which should not surprise given the influence of the Tea Party on Republicans. I am thus not sure this ranking will last once the Republican Party gets back to its roots. More interesting are variations across party lines. Politicians lie less in battleground states (when the stakes, or scrutiny, are higher), in more educated states, and in the South. And health-related issues are the subject of the most lies.

I am not quite sure how to generalize these results. As mentioned, the current context for the Republican Party is out of the ordinary. Also, health care has been a central issue on the national political agenda over these years. All this can change, and it may be different in other countries. But it is interesting to see that definite patterns are emerging. If we can rationalize them, maybe we can then think about policies that would minimize lying. And hope for politicians to adopt them. A good resolution for the new year.

Is there a small-state effect?

In countries where some parliament chamber allocates the same number of seats to each member state regardless of its population, small states are deemed to enjoy a disproportionately strong influence. One paper that analyzes whether this small-state effect is empirically significant is by Gary Hoover and Paul Pecorino which shows that US states with higher per capita representation also get more federal funding. Does this mean that the open question is now closed? Of course not, as the scientific process would tell us to revisit this to test whether it holds more generally, whether the effect disappears with time, or whether it is robust to different specifications.

Stratford Douglas and Robert Reed (link corrected) address the latter question. They run a robustness exercise that is unfortunately too rare in Economics. They confirm the results of Hoover and Pecorino, but find that when you switch from ordinary least squares to cluster robust standard errors and include population growth that small-state effect vanishes. So we are not done with this question.

We should have more replication studies in Economies. It saddens me that Douglas and Reed felt the need to add the following footnote on the front page: "we wish to express our special appreciation to Gary Hoover and Paul Pecorino for their willingness to allow their study to be subject to critical analysis. Openness and integrity such as theirs is the basis by which science advances." This should be obvious.

Merry Christmas!

Click here for some Christmas humor.

Wikipedia...sigh

For better or worse, Wikipedia is a go-to site for information.  Often it is quite good.  Sometimes it is not.

I happened to notice over my Wikipedia entry this sentence about the student walkout several years ago:

"Mankiw published his class attendance at the end, and it showed more students showed up to class that day than on average class day, as many counter-protested by coming."

This is false.  In fact, I do not even take attendance in ec 10 lectures.  I know anecdotally that some counter-protestors did come to that class (as I noted in this article, the only thing I published about the walkout), but I have no idea of the numbers, and I did not publish anything like class attendance.

If someone could fix that sentence over at Wikipedia, I would appreciate it.  And while you're there, add some (truthful) stuff about me.  Consider it a Christmas present.

Commercialism & Christmas in Non-Christian Societies

Thailand features Christmas elephants, f'rinstance

Your Asian correspondent--obviously Catholic with a name like "Emmanuel"--has always found it curious that some of the most extravagant Christmas pageantry can be found in predominantly non-Christian societies. With the exception of the Philippines and (tiny) Timor-Leste, that's practically everyone else in Asia--Hong Kong, Japan, Singapore...you name it. Spending your Christmas holidays in these metropoles and indeed pretty much elsewhere nowadays, you wouldn't even be able to tell that you weren't in a Christian country given the amount of Christmas decorations lining the streets. What's more, their habits of ornamentation and gift-giving usually are more lavish precisely because they are comparatively wealthier countries.

Remarkably, the increasingly cosmopolitan nature of any number of Middle East societies has resulted in a similar phenomenon. Witness even more gigantic Christmas trees in the lobbies of hotels and shopping malls of places alike Abu Dhabi or Dubai. The UAE, of course, is ruled by an Islamic monarchy. But, alike in the Far East, the Middle East has succumbed to similar temptations. As you would suspect, the influx of foreign commercial interests buttresses the natural inclination of expatriates to celebrate the holidays and memories of days gone by. From the Christian Science Monitor:

One curious trend in the global economy is how many countries with few Christians now enjoy aspects of Christmas – the giving of gifts, an exchange of cards, even singing “Last Christmas” by Exile [???--their words, not mine]. What other religion has had its holiday traditions transcend so many borders?

Christmas has become the world’s most widely celebrated religious holiday, even if it is more commercially exploited than religiously observed in non-Christian countries – and even if the Santa Claus fantasies overshadow the day’s real meaning: the coming of Christ to humanity.

To be sure, the spread of Christmas is driven in large part by retailers – and governments – trying to find new reasons to drum up consumer spending. (Halloween and Valentine’s Day are becoming popular, too.) In many Muslim countries, it is this materialistic aspect that is often decried by Islamic preachers. And sometimes, the Christian part gets lost in translation: Foreigners in Japan tell the tale of a Tokyo department store that once decorated a window with a Santa Claus on a cross.

The obvious growth market in a globalized era is the purportedly godless society of the People's Republic of China:

The most explosive growth in celebrating a secular Christmas has been in China. Since the 1990s, the Communist Party has loosened its control over this “Western holiday.” Urban youth have embraced it, seeing Christmas as an opportunity to give gifts, celebrate with friends, and tie up a romance with a wedding. Stores often record their biggest sales around Christmas. Many Chinese can be seen wearing reindeer antlers or Santa hats. Some give specially wrapped apples as gifts (the Chinese word for apple sounds like “Silent Night.”)

As long as Chinese see only the commercial aspects, the government may not worry about the religious meaning. Still, in 2006 a group of university students started an online petition to boycott Christmas, claiming it is a Western plot to erode Chinese culture.

It's a lot of lavishness for a holiday meant to celebrate the coming of a person born in the stables, but I do not necessarily scoff at these practices. During a time when so-called Christian Europe still has a holiday season but has largely forgotten the "Christian" bit retains the "holiday" part, who am I to say the secular celebrants are "wrong"? The IPE of Christmas is simply that its European-based lore is more suitable for commercial exploitation than any other holiday of the major religions. If the Europeans are increasingly secular but still observe Christmas--at least its more overtly commercial aspects--then who am I to judge others who do the same? At any rate, a Merry Christmas to one and all. Somehow, I know you're doing your bit to prop up the consumer spending portion of GDP.

Burj Al Arab, Christmas 2009

Returns to Skills Around the World

From a new working paper:

On average, a one-standard- deviation increase in numeracy skills is associated with an 18 percent wage increase among prime-age workers. But this masks considerable heterogeneity across countries. Eight countries, including all Nordic countries, have returns between 12 and 15 percent, while six are above 21 percent with the largest return being 28 percent in the United States. Estimates are remarkably robust to different earnings and skill measures, additional controls, and various subgroups. Intriguingly, returns to skills are systematically lower in countries with higher union density, stricter employment protection, and larger public-sector shares.

Soviet general equilibrium theory

When we think about a social planner that maximizes welfare by assigning optimal allocations without an explicit price system, we are really describing a Soviet economy. History has shown that this utopia does not quite work out for a variety of reasons. Yet, Soviet economies were following this doctrine and their governments must have acted on some principles that must have come from somewhere: what should one allocate where, how should allocations change according to changes in exogenous factors, etc. Russia actually has a rich history of economic theoreticians who have worked out models to guide the policy makers, who liked to think themselves as technocrats. These theoreticians were mostly mathematicians working on various optimization techniques.

Ivan Boldyrev and Olessia Kirtchik describe the life of Victor Polterovich, who expanded Walrasian theory to non-market economies in the 1970s and was the only active Soviet economist with visibility in the West during that period: he has an Econometrica in 1983 and another one in 1993, and a few articles in the Journal of Mathematical Economics in between (see his page on IDEAS) and is a fellow of the Econometric Society. While Polterovich started as many others his academic career of Marxist planning theories, his move to general equilibrium theory may seem puzzling. Indeed, the welfare theorems have often been touted as a victory for the market economy, and Polterovich would certainly have been ill-advised to promote a market economy.

The paper is largely based on interviews of Polterovich that reveal interesting anecdotes, such as the unique history of his first Econometrica and how some of his most important results never got translated. The other Soviet economists did not go through the trouble of integrating with the international research community, and I am sure their are still interesting results that are ignored by the wider general equilibrium theory community. Polterovich came to general equilibrium theory by realizing that one needs at least as many instruments as objectives to manage optimally an economy. That did not seem feasible to him, hence his interest in decentralization. In his early models, agents interact, possibly forming coalitions. Keep in mind that to Soviets, agents were not individuals but political entities or firms. Later, price constructs are introduced, and they are helpful in understanding coordination among agents.

And on to the seventh year

Yes, this is the seventh year of blogging. Will I enter a a prolonged slump like some faculty do after obtaining tenure? Am I due for a sabbatical? Unfortunately, both may happen. As announced last Summer, my new responsibilities make it difficult for me to maintain the pace I have had in previous years. And it has shown in the last six months: I have missed days, I have been wrong on at least one occasion, and my posts have become shorter. Yet, I am more and more impressed by the following this blog is receiving and I hope the same will hold to Economic Logic, Too, where I invite others to post comments about papers they read.

Traditionally, I have reviewed the most popular posts of the year. For reasons I do not quite understand, this year's lists only contains posts from this year. So here they are:

1. Top Economics graduate programs are not as good as you think
   
2. Teen sex: are females dropping scruples due to the lack of men?
   
3. Are economists really uneasy about studying inequality?
   
4. The fundamental equation of economics
   
5. Is money a factor of production?
   
6. Five universal laws of economics
   
7. Forecasting the weather using the market
   
8. Test statistics and the publication game
   
9. How econophysics describes the income distribution
   
10. Overconfident NBA players are lead to their financial demise
    
11. Lack of transparency at the American Economic Association
    
12. Can IKEA replace the BigMac or the Ipod?
    
13. Procrastination is a strong predictor of academic performance
    
14. The price of diamonds
    
15. Flying in Europe and North America, puzzling differences
    
16. Which academic field contributes the most to economic growth
    
17. The obscure economics of vampires
    
18. homo socialis
    
19. The experimental macroeconomics of monetary policy
    
20. AEA elections are on, you know for whom to vote
    
21. Why are prices sticky?
    
22. What kind of jobs are academic scholars looking for?
    
23. Large GDP shocks are permanent
    
24. Reconciling macro and micro estimates of the Fischer labor supply elasticity
    
25. Some people go to classical concerts to cough
    
26. The AEA executive is still not representative
    
27. New responsibilities
    
28. Leaning against publication bias: about the experiments that do not work out
    
29. Why Keynes dominates Hayek
    
30. The brain drain from financial liberalization
    

Meaningless Sentence of the Day

This NY Times story on the middle class's struggle with the new healthcare law is generally pretty good, but this sentence struck me as comically meaningless:

Experts consider health insurance unaffordable once it exceeds 10 percent of annual income.

What the heck does this mean?  The typical American spends more than a third of income on housing.  Does that make housing unaffordable?  Presumably not.  What makes 10 percent the magic threshold for health insurance but not for other categories of crucial spending?  Who are these experts, and what criterion do they use to determine what is affordable?

Probably what the sentence means is that people have become accustomed to spending less than 10 percent of income on health insurance and are unhappy when they have to spend more.  But if healthcare costs keep rising as a share of national income, as many economists believe they will, then we will have to adjust our perceptions of what is affordable.

Addendum: The Times story, particularly the graphic, suggests that the implicit marginal tax rate some people face under the Affordable Care Act subsidies can sometimes exceed 100 percent.  It is hard to believe that the law is so badly written as to have this feature, but that seems to be the implication.

Family wealth persistence over several centuries

Social mobility has been much studied to understand how the poor have a shot at becoming rich and how the rich manage to preserve their status. Such studies are usually limited to mobility during a lifetime for a single individual or for a family from one generation to the next. Going beyond this time frame is virtually impossible, because there is no panel dataset for wealth or income that spans over several generations. One can, however, discover some interesting proxies that allow to create such a dataset.

This is what Gregory Clark and Neil Cummins do in a pair of papers that exploit the fact that people with rare surnames are highly likely to be from the same family. Using national birth and death registries for England and Wales as well as probate registries that recorded wealth at death, they gather records for 21,618 people over about 150 years in the first paper. The second paper focuses on educational status instead of wealth over eight centuries and uses registries of students at Cambridge and Oxford universities as well as censuses for the rest of the population. In both cases, intergenerational correlations are estimated to be much higher than in studies with shorter samples. It can take 20 to 30 generations for an initial status to disappear. This may be indicative that social mobility has increased in recent generations in England and Wales (my interpretation, although Clark and Cummins argue that intergenerational persistence is stable over centuries despite stark changes in inheritance taxation) or that families have an underlying social status that changes much more slowly than characteristics that are easier to observe (the authors' interpretation).

PS: If you are looking at the papers, do not be surprised to see the same abstract on both. Very negligent LSE staff posted similar cover pages on both papers.

Solow on Greenspan

Bob reviews Alan's new book. (In case you missed it, here is my review of the book.)

Aid (Not Death) from Above: Drones for Disaster Relief

Some of these things don't come with missiles but with goodwill

The American habit of using drones on supposed "terrorist" targets that frequently results in killing civilians instead--"collateral damage"--has outraged a significant part of the civilized world. Former US President Jimmy Carter criticizes their use as a gross human rights violation. Meanwhile, the UN General Assembly only yesterday passed a resolution aimed at limiting their use as erstwhile American allies in the global war on terror alike Afghanistan and Pakistan have sought to limit myriad incursions in their airspace for the purpose of raining death from the skies.

Despite the quite frankly horrid purposes the Yanks use them for, drones are a neutral technology that can be used for good or ill. An unmanned aircraft is merely in the hands of those controlling it, no? Somewhat encouragingly, a former student of mine has written an interesting article for Devex--the website for development professionals--discussing how drones may be used for disaster relief instead. In the aftermath of Typhoon Haiyan devastating large swathes of the Philippines, this technology has been used with some success in the leveled city of Tacloban:

More than a month after Super Typhoon Haiyan hit the Philippines, operations on the ground remain in the relief and response phase instead of rehabilitation and recovery, with several areas still unreached by aid groups and comprehensive damage assessment still unfinished. To address these needs, several NGOs on the ground in Tacloban, the “ground zero” of the catastrophe, have been using unmanned aerial vehicles to further improve their operations — something they hope would be a standard in disaster risk reduction efforts in the future.

But can drones truly become standard operation procedure in humanitarian crises? Experts consulted by Devex believe so, although they do admit mass use of these devices will have to overcome serious challenges, like their relatively high price [elsewhere in the article it says the tab runs to $55,000 for each operating Huginn X-1] and legal issues over privacy and sovereignty rights...

In Tacloban, Danish firm Danoffice IT, which has been providing drones to U.N. agencies and several NGOs involved in the relief and response operations, said faster disaster assessment means faster disaster response, which, ultimately, saves lives. “The idea is that you have a drone and you deploy it quickly to have an assessment and overview immediately. It means that first, you save some time. After a disaster, time is very important because time has a link to life,” Denis Kerlero De Rosbo, Danoffice IT corporate social responsibility and marketing head, told Devex. “If you move quicker, you will save more lives and resources."

How, then, can drones be used to assist disaster relief?

1. Immediate assessment.

The first few hours after disasters are the most crucial moments for disaster response, particularly in search and rescue operations. But poor assessment of the affected areas can significantly reduce the effectiveness of these operations and even endanger aid workers.

Drones can be deployed for immediate assessment of disaster situations, providing detailed information to first-responders like local governments and humanitarian groups. Information is key to disaster response and mobilization.

2. Strategic planning.

Following the initial assessment phase, the information gathered will prove helpful in crafting an effective strategic plan in responding to disasters.

Scores of international aid groups and partner governments have continually extended their help to the country given the scale of devastation Haiyan brought — including the information gathered by the drones in the plans will make relief and response operations more effective.

3. Search and rescue operations.

A month after the onslaught of Haiyan, dead bodies are still being recovered in disaster areas, with some fearing a number of these people died days after the storm hit due to lack of aid.

The Huginn X1 drone, according to De Rosbo, is equipped with high-definition video and is capable of providing a live feed for the controller, making assessment and response real-time. The device can also produce thermal images, essential for finding people alive during the search and rescue operations.

4. Protecting aid workers.

Another very important area where drones can be very useful in disaster response is ensuring the security and safety of aid workers.

Humanitarians deployed on the ground are not immune to the kinds of hazards disaster victims face. They are humans too, and susceptible to these threats...Days after the storm, reports of looting in disaster areas were rampant due to hunger and desperation, while a number of local rebel groups wreaked havoc in the ravaged communities. Drones can help identify these threats.

More information on the Philippine operation is available from the site of application provider Danoffice IT. (Alike the drone manufacturer, it's obviously Danish.) It's very interesting stuff. Going forward, using drones for disaster relief may help give them a good name elsewhere in the developing world. 

About faculty participation in university administration

A major difference between American and other universities is the professionalization of their administration. Typically, they are managed by former faculty who have specialized in higher education administration, and what is become more and more frequent, by administrators who have never been academics. While the result are universities that put in my opinion excessive emphasis on non-academic endeavors like athletics, students living and other student entertainment, there is little doubt that the academics are also in better shape than elsewhere. When faculty are in charge, I suppose there is too much rent seeking. It would be good, though, to have this formalized in some way for better analysis.

Kathleen Carroll, Lisa Dickson and Jane Ruseski build a model of university administration where the extend of faculty involvement may vary exogenously. The model is rather trivial and does not deliver unexpected results, the more faculty participate, the more academic affairs get priority, and this is social optimal if there are externalities from academics to non-academics. What would have really made the paper interesting is to put the model to the data and actually provide some quantification of effects. How much does faculty participation matter? What is the size of cross-effects between academics and non-academics? How big should the administration be? Too bad this paper was only about trivial theory.

When job search frictions are good

Generally, frictions in markets are viewed as something to avoid, except in rare cases like when they prevent excessive and damaging volatility. For labor markets in particular, frictions lead to unnecessary delays in matchings, misallocations of talent and higher unemployment. It would be difficult to find an advocate for frictions on the labor markets, unlike for some financial markets.

Well, there are in fact some advocates, such as Andriy Zapechelnyuk and Ro'i Zultan. Their point is that frictions on the labor market are costly for those unemployed, thus the employed will exert extra effort to avoid becoming unemployed. The same applies to employers who dread the cost of an unfilled vacancy and avoid firing workers. While this could leads to misallocations not being dissolved, Zapechelnyuk and Zultan claim that it is possible to find some level of search frictions that is optimal for welfare as long as there is a sufficient level of moral hazard in job search. This means also that higher unemployment benefits could lead to lower productivity for those working as they feel less hard-pressed to perform to avoid losing their job. But keep in mind that these unemployment benefits also allow the unemployed to wait for a better match, so it is really difficult to sort all these effects out without some quantitative exercise, which this paper is unfortunately lacking.

If my favorite textbook hasn't simplified things enough for you...

My friend and former student Miles Kimball takes a stab at explaining some basic macroeconomics through the vehicle of a child's storybook.

Russia's Price for Buying Off Ukraine: $15B

Put 'er there, Vlad, my country's yours for $15 billion

Let us update this strange tale of Ukraine. Having told his opponents to in effect get lost since they didn't win any elections or succeed in gaining a vote of no-confidence, President Viktor Yanukovych headed to the Kremlin to speak to his Russian counterpart Vladimir Putin. What is the price of fealty to Russia? Gulf Cooperation Council bigwigs bought off Egypt for $9.9 billion (so far)--$5B from the Saudis and $4.9B from the Emiratis to wean it off the upstart Qataris. Meanwhile, Yanukovych was able to wangle a $15B bailout from Russia to buy that much worth of Ukrainian sovereign debt over the next two years. Not bad, eh?

Ukraine sealed $15 billion of Russian financing and a one-third discount on energy imports from its neighbor as anti-government protesters in Kiev demanded to know what President Viktor Yanukovych had ceded in return. Russia will buy government debt this year and next and will cut the price it charges for natural gas to $268.5 per 1,000 cubic meters, President Vladimir Putin said today after meeting Yanukovych in Moscow. 

Ukrainian debt--certainly more than mildly distressed at this point--is slightly more relaxed as a result:

The yield on Ukrainian dollar bonds due 2023 plunged more than 1 percentage point to 8.833 percent as of 7:11 p.m. in Kiev, the lowest since June 17, data compiled by Bloomberg show. The yield on government debt due 2014 fell more than 6 percentage points to 15.193 percent. Putin said the financing is being provided in light of “the problems of the Ukrainian economy linked to the world financial crisis, and to support the budget of the Ukrainian government.” Trade restrictions on Ukrainian goods will also be lifted. 

However, the opposition may be further inflamed by the Russian bailout. Alike Saudi Arabia and the UAE lending, Russia lending is not exactly a "seal of good housekeeping" alike that granted by the IMF which opens doors to unbiased lending from more impartial sources:

“The shift towards Moscow risks inflaming the anti-government protests,” Capital’s Chief Emerging Markets Economist Neil Shearing said by e-mail. “While a deal with Russia was always likely to offer the best terms on short-term financing, closer ties with the EU were more likely to provide an anchor for the structural reforms needed to reinvigorate Ukraine’s faltering economy.”

Ukraine’s opposition had planned a rally for this evening and protesters flocked to Independence Square on hearing news of the Russian agreements. There were about 30,000 people there as of 7:30 p.m., according to The RBC-Ukraine news service. The Interior Ministry put the turnout at about 8,000.

“What did Yanukovych promise in exchange?” said 57-year-old Vera from Kiev, who declined to give her last name. “Nobody gives anything without a reason. Now we have only questions.” Opposition leaders addressing the crowds, who’ve blocked central Kiev since the government pulled out of a planned European Union association agreement, were similarly skeptical.  “I know only one place where there’s free cheese -- a mouse trap,” said Arseniy Yatsenyuk, head of jailed ex-Prime Minister Yulia Tymoshenko’s party. “We want to hear what he gave in return.” 

Your country's been sold, my friend. Collusion between Yanukovych and Putin reminds me of a gangster movie (not "gangsta," homey) with a dodgy plot and poor acting. Except in this case it's true-to-life. Most importantly, I hardly think it's solved its balance-of-payments issues by getting into bed with the country that's done quite a lot to exacerbate its situation by blocking trade and threatening to cut off gas supplies during winter. First, there's no guarantee this lifeline will be continued if Ukraine shows signs of disobedience. Second, Ukraine's habit of burning foreign exchange is hardly stopped by a lender with many strings attached showing up.

But hey, they voted for this guy, right?

How to model China

Many people are thinking about the Chinese economy, and all too often they apply for this the tools they are used to, for example models with competitive markets. That does not quite apply to China, despite its recent liberalization, as vast sectors of the economy are still under government control. The fact that China is different is quite apparent in the fact that it is the only economy (that I know of) where the share of labor income in national income is less than half. One needs some serious market distortion to get to such an abnormal outcome.

David Dollar and Benjamin Jones do the right thing and make the effort to model the Chinese economy like it should be done: capital controls, 5-year plans trying to maximize output, controlled internal migration with wage discrimination, state ownership of all land. With this, Dollar and Jones are able to replicate the labor income share, as well as the high investment and savings rates. They find also that if one where to relax China's special features, the economy would first deviate even more from standard characteristics. This is a model people should take very seriously for future modeling of China.

On Measuring Changes in Income

To divert attention from the disastrous rollout of his health reform, President Obama has decided to change the national conversation to discuss increasing inequality.  This phenomenon is not new--the trend started about four decades ago--but it is real and important.  In case you are a new reader of this blog, you can find my personal views on the matter in this paper.

This national conversation has generated renewed attention to the highly influential Piketty-Saez data.  It is worth pointing out, therefore, some limitations of these data, which have been stressed by Cornell economist Richard Burkhauser: The data are on tax units rather than households, they do not include many government transfer payments, they are pre-tax rather than post-tax, they do not adjust for changes in household size, and they do not include nontaxable compensation such as employer-provided health insurance.

Does this matter?  Yes!  Here are some numbers from the Burkhauser paper:

1. From 1979 to 2007, median real income as measured by pre-tax, pre-transfer cash income of tax units rose by only 3.2 percent.  That is a paltry amount for such a long period.  You might conclude that middle class incomes have been stagnant. But wait.

2. Households are more important than tax units.  Two married people are one tax unit, whereas a couple shacked up are two tax units.  We would not want to treat the movement from marriage to shacking up as a drop in income.  If we look at households rather than tax units, that meager 3.2 percent rises to a bit more respectable 12.5 percent.

3. Now consider government transfer payments. If we add those in, that 12.5 percent number becomes an even better 15.2 percent.

4. What about taxes? The middle class received some tax cuts during that period.  Factoring taxes in, the 15.2 percent figure rises to 20.2 percent.

5. But not all households are the same size, and the size of households has fallen over time. Adjusting for household size increases that 20.2 percent to 29.3 percent.

6. There is still one thing left: employer-provided health insurance, an important fringe benefit that has grown in importance. Adding an estimate of that into income raises the 29.3 percent figure to 36.7 percent.

So, during this period, has the middle class experienced stagnant real income (a mere 3.2 percent increase) or significant gains (a 36.7 percent increase)?  It depends on which measure of income you look at.  It seems clear to me that the latter measure is more relevant, but the former measure of income often gets more attention than it deserves.

Take this as a cautionary tale.  When people talk about changes in income over time, make sure you know what measure of income they are citing.

Early uses of accounting: to help in firm management or to pursue an agenda?

You may think that accounting practices are straightforward and have been in place for a long time. Actually, good practices are actually fairly recent, especially in terms of making them useful diagnostic tools for firm management. But with sophistication comes also the temptation to become creative and use accounting for purposes that are borderline legal, such as escaping taxation, or outright fraud. For this, you would need to be a sophisticated accountant, and one would think that one would not find such sophistication a century ago, let alone during the British Industrial Revolution.

Steven Toms and Alice Shepherd show that in the second case there were surprising sophistication, with creative accounting being used by industrialists to counter the "Ten-Hour" movement that sought to limit work hours. Specifically, they show how the the numbers from a cotton manufacturer were used in the policy debate and how his creative accounting made it appear as though he was facing excruciatingly high fix costs and thus low profits. Where he got creative is with the treatment of capital accumulation, thereby proving that the accusation of making most of his supposedly high profits during the last hour of the shifts was not true.

Boxers-Turned-Politicians: Pacquiao vs Klitschko

Fighting Russkies, Striking a Blow for the EU

If this were an actual fight, it would be a grossly unfair one since Manny Pacquiao stands 1.69m tall and weighs 65kg whereas Vitali Klitschko--older brother of fellow heavyweight champion Wladimir of Hayden-Panettiere-is-my-girl fame--is 2.01m tall and weighs 110kg. However, this comparison is grossly unfair in other respects of political consequence. In terms of celebrity, the Filipino boxer is far better known competing in the welterweight division where the glamor, money and attention in prizefighting is now concentrated, whereas the heavyweight division lacks compelling personalities. Yet, Vitali Klitschko makes up for the lack of star power with brain power since, like his brother, he has a PhD. Manny Pacquiao famously dropped high school to start fighting since his family needed the money.

I bring up this comparison because the Klitschko brothers are among the most prominent figures in the current campaign to force Ukranian President Viktor Yanukovych to ink a free trade deal with the European Union. Problematically for the brothers and their prospects for Ukraine politics, both have lived virtually all their professional lives outside their homeland in Hamburg, Germany then La La Land, California. Unlike Congressman Manny Pacquiao, they do not simply go abroad to ply their trade and then return home. Nevertheless, the WSJ op-ed pages recently ran a rather fawning feature on Klitschko the Elder as a champion of freedom and free markets (hey, would you expect anything else given the source?)

Yet Mr. Klitschko stands out among the opposition, and not just because of his breathtaking physical size. He's the one new face in a crowd of familiar political mediocrities. He has a Ph.D. in physical sciences, hence his nickname, Dr. Ironfist. His considerable fortune earned from boxing reassures people about the sincerity of his commitment to fight corruption and resist temptation...

He has broken out in the polls, leading Mr. Yanukovych in a head-to-head match, which may come sooner than the presidential election due in early 2015. The government fears him enough that earlier this fall it fiddled with the residency requirement for the presidency, patently to stop him, since he had trained and lived in Germany for most of the previous decade. Mr. Klitschko says the retroactive legal change won't hold up in court, but in another context notes that the judges are in Mr. Yanukovych's pocket.

"In these hard days, the moral support from friends of democracy is very important," says Mr. Klitschko. While the nationalists in Maidan [Square--protest site] play up Russian meddling, he is always careful to insist that the fight isn't so much about personalities or geopolitics as about values—democracy, human rights, the rule of law. In short, Europe.

It's all very anti-Russian if that's your sort of thing and imagine the Iron Curtain still hangs across Eastern Europe. As the proprietor of the IPE Zone, however, I am more interested in how these two pugilistic politicians regard trade. As I mentioned before, Manny Pacquiao sponsored the passage of trade exemptions for Philippine textile exports to the US that would have likely violated WTO strictures [1, 2]. Meanwhile, Klitschko is championing a preferential trade agreement with the EU. It's not necessarily trade-positive--trade diversion and all that--but the sentiment is there. Who wins in this respect? I'd say Klitschko by a technical knock-out since the Philippine congressman's proposed deal never made it off the ground.

At any rate, we'll probably have more time to learn about both fighters' views on trade since Vitali Klitschko now suggests he will run for the presidency in 2015. Pacquiao meanwhile has long set his sights on the Philippines' highest office.

On education grounds, I prefer the guy with the PhD, but I'm stuck being in the country with the high school dropout.

World's Smallest Currency Union: Caribbean Challenges

Yes, Virginia, these dollars bear Queen Elizabeth II's image

The Eastern Caribbean Currency Union (ECCU) is the world's smallest currency union among the four existing worldwide. The European Monetary Union (EMU) is known by all, whereas the other two are in Africa. What makes the ECCU doubly interesting is that it is pegged to the US dollar. In fact, it predates the EMU by half a century, although it changed the currency it is being pegged to from GBP to USD halfway through:

The OECS members share a common currency, the Eastern Caribbean dollar, which has been pegged to the U.S. dollar since 1976 at EC$2.70=US$1, and was pegged to the British pound at EC$4.80=£1 from 1950 to 1976. Prior to the recent inception of the European Central Bank, the ECCB was one of only three common central banks in the world and the only one where the member countries have pooled all their foreign reserves, the convertibility of the common currency is fully self-supported, and the parity of the exchange rate has not been changed.

Now, there's thought-provoking stuff over at the IMF site concerning the challenges faced by ECCU. Overall, it makes economic sense for micro-sized economies to band together currency-wise:

In terms of the benefits, the small size of these countries means that the currency arrangement allows them to take advantage of scale economies. It also allows them to diversify risk. This means that if one country gets hit by an external shock or natural disaster, the other countries can pool resources and deal with the shock more effectively.

Again, because of their size, these islands can provide, at the regional level, more cost-effective public services. So that is a major benefit. What also matters a great deal is when the union speaks with one voice the countries can be better represented at the global level. 

That said, it is subject to the same sorts of problems the Eurozone faces:

Interestingly enough, the ECCU is actually a microcosm of the European Economic and Monetary Union, since the ECCU has also faced rising fiscal deficits, unsustainable debt levels in a number of states, a lack of fiscal integration, and challenges in parts of the financial sector that can undermine the stability of this union. As illustrated by the European experience, overcoming these challenges is particularly difficult in monetary unions. 

What can I say? God save the queen--and the East Caribbean Dollar

A T Shirt for Princeton Students

Princeton University--the ivy league school known for its policy of "grade deflation"--has been experiencing a small outbreak of Meningitis B, for which students are now being vaccinated. Hence, this T shirt:

Bad News for New PhDs

From The Chronicle of Higher Education:

Economics Ph.D.'s on the academic job market had fewer jobs to apply for in 2013 than a year earlier, according to new data from the American Economic Association. The number of new academic job openings listed with the association fell 6.6 percent, to 1,924, in 2013. However, the number of nonacademic jobs rose slightly, from 856 to 866. Overall the number of new jobs fell 4.3 percent in 2013, to 2,790.

More Selective than Harvard

Why americanize your name?

Why do immigrants americanize their name? Evidently, they feel that this will help them integrate into the host society and bring them some advantages. It is well documented that the more integrated an immigrant is, or the more alike to a native she is, the more likely she is to find better jobs, earn higher wages, and feel better.

Costanza Biavaschi, Corrado Giulietti and Zahra Siddique analyze immigrants to the United States from the 1930's and find there can be a mighty pay-off. Those who chose the most common American name got up to 14% higher pay. And I like how they determined linguistic complexity of the names by using Scrabble points from the American version of the game.

Answer Sheet

Here are the answers to the Fun Quiz I posted a few days ago:

1.         For 35 years, Bob Barker welcomed those who had "come on down" to this TV game show.

The Price is Right

2.         New Ec10 soap opera starring Luke, Laura, and Francis Edgeworth.

General Equilibrium (or General Equilibrium Hospital)

3.         First U.S. car manufacturer to offer seat belts as an option.

Nash

4.         Neurosis shared by bus rides and margarine .

Inferiority Complex

5.         One-word term for one's first apartment.

 

Efficiency

6.         The result of Atlas's misplacing his celestial sphere.

Deadweight Loss

7.         "Careful!  The Bayeux Tapestry's wall mounts are loose!"

Mural Hazard

8.         Can we use this same phrase for the sensitivity of either crucifix or rosary bead demand to the cost of the crucifix?

 

Cross Price Elasticity of Demand

9.         Metropolis governed by U-boat captains.

 

Sub City

10.       Pushpins adorned with benzene rings.

Carbon Tacks

11.       My cousin Vinny is a sports reporter and is always asking coaches at press  conferences, "May-a I-a ________________ you-a on-a that-a?"

Quota

12.       Tony Award-winning Miss Saigon actor's hardwood entryway.

 

Price Floor

13.       Flo's employer.

Progressive

14.       Red Sox / Yankees:  the most heated one in professional sports.

Rivalry

15.       What we might have when Pamela Ewing's rep is out of control. 

A Principal-Agent Problem
 
16.       What we've made upon deciding which poem to use in our Super Bowl commercial.

Ad Verse Selection

17.       New Parker Brothers board game fashioned after Laurel & Hardy or Burns & Allen or Rodgers & Hammerstein or Marx & Engels or Masters & Johnson......

 

Duopoly

 

18.       If an MP were to suffer a heart attack during David Cameron's question time,  it would be a _____________________________ .

Tragedy of the Commons

19.       The best comedians/comediennes reach the highest point on the  ________________________.

Laugher Curve

20.       Past, Present, or Future Perfect equivalent of the price of our bathroom basin.

 

Sunk Cost

To discount or not to discount?

In Economics, it is standard practice to discount future periods and generations. This is done throughout economics fields, even in the valuation of future benefits from nature, despite objections from biologists. Besides, we would not know how to solve our intertemporal models without discounting, unless one assumes a finite number of generations.

But this was not always so. As Pedro Garcia Duarte points out, Cambridge (UK) in the 1930s was lobbying against discounting. Surprisingly, Frank Ramsey (of the Ramsey model) was part of this faction, following his mentor Pigou. Their reasoning is purely ethical: future generations should be valued the same as the current one. But Ramsey pioneered an intertemporal model with infinite horizon, how did he solve it, you might say. Here is the trick. He assumed there is a finite maximum utility and a finite maximum production, called bliss, and minimized the deviation from it. A cheap trick, as this is essentially looking at infinity minus infinity. Garcia Duarte also explains the first intertemporal models and how discounting was either ignored or not viewed as a technical necessity. It is only in the mid-thirties that arguments about risk and impatience start appearing, and in the 1960s that work on the neo-classical growth model established discounting as an essential ingredient of any intertemporal theory.

World's #2: Yuan Overtakes Euro in Trade Finance

Trade finance is a somewhat arcane area despite its obvious importance to keeping world trade afloat. To make a long story short, a loan taken out by a trading firm for an international transaction is known as a "letter of credit." [LC] In effect, the lending bank's creditworthiness substitutes for the debtor's, allowing the counterparty to be assuaged regarding credit risk.

In recent times, the Chinese yuan or renminbi has come on like gangbusters as more and more of these instruments are denominated in RMB. Reflecting China's emergence as the world's largest trading nation in merchandise, a significant minority of the world's letters of credit are now in RMB. In fact, it has now reached a milestone of overtaking the vaunted Euro in this application in the month of October of this year:

China’s yuan overtook the euro to become the second-most used currency in global trade finance after the dollar this year, according to the Society for Worldwide Interbank Financial Telecommunication [SWIFT]. The currency had an 8.66% share of letters of credit and collections in October [2013], compared with 6.64% for the euro, Swift said in a statement Tuesday. China, Hong Kong, Singapore, Germany and Australia were the top users of yuan in trade finance, according to the Belgium-based financial- messaging platform.

So the dollar remains far and away the largest prominent currency in trade finance, but keep in mind where the yuan came from as late as January 2012 when it held less than a 2% share. Moreover, the appeal of the currency is coming on strong outside of China:

“It’s true that overseas exporters are using the renminbi more as the contract currency to increase the attractiveness and competitiveness of goods or services sold to China,” said Cynthia Wong, the Hong Kong-based head of emerging-market trading for Singapore and Hong Kong at Societe Generale SA.

That said, the Chinese currency still has a long way to go in terms of becoming a vehicle currency for all sorts of payments and being widely exchanged one in forex markets:

The Chinese currency ranked No. 12 for transactions in the global payments system in October, unchanged from the previous month, according to Swift figures. Payment value for the currency rose 1.5% that month, less than the 4.6% growth for all currencies, the Swift data showed. That saw the yuan’s market share drop to 0.84% from 0.86% in September.

Daily yuan transactions surged to $120 billion in April from $34 billion in 2010, making it the ninth most-traded currency in the world, according to a September report by the Bank for International Settlements in Basel, Switzerland.

So there's still a long way to go in terms of China allowing further capital account openness and market-trading for the yuan to become a legitimate rival to the dollar and the euro. Yet, the demand is likely there--especially for those who regularly trade with mainland China. That the currency is steadily appreciating is a further bonus to those who wish to hold it. To non-mainland residents, that is not an inconsequential draw:

The yuan has appreciated 2.3% against the greenback this year, the best performance in Asia, according to data compiled by Bloomberg...“I’m not surprised as cross-border trades between China and Hong Kong have been quite dominantly denominated in yuan,” Raymond Yeung, a Hong Kong-based senior economist at Australia & New Zealand Banking Group Ltd., said by phone today. “Yuan trades usually increase when there are strong expectations for yuan appreciation.”

A Harvard Victory

Congratulations to the Harvard Fed Challenge Team, which recently won the national title.  Here is a picture of the team, together with a soon-to-be-unemployed Harvard alum.

Meta-analysis of the elasticity of intertemporal substitution

The elasticity of intertemporal substitution is one of the most estimated parameters in Economics. Why is it estimated over and over again? Because some results are positive, some are negative and some are zero. To have a clearer idea of what its true value is, we have to keep estimating it. However, the econometricians also need to get their results published, and the publishing tournament has not only an impact on which results get published but also on which ones the econometricians submit for publication.

Tomáš Havránek performs a meta-analysis of estimates of the elasticity of intertemporal substitution. That is, he gathers 169 studies and looks at their 2735 estimates. He finds significant under-reporting of results close to zero or negative, because of this publication bias. While the published mean is 0.5, the true mean should somewhere at 0.3 to 0.4. Negative results make little sense, but they can happen with some draw of the data. If editors and referees systematically discard such results, and positive ones, no matter how large they are, get a pass, we have a bias. But given the distribution of published ones, and knowing this bias, one can infer the full distribution of estimates, and hence Havránek's new estimates.

Mechanism design in attorney fees

When it comes to extracting money from clients, you cannot deny that attorneys have learned their Economics. You cannot say the same about the rest of the legal profession, though. So what makes attorneys so smart? Look at how they evaluate which cases to take. It is not about justice for the plaintiff, it is all about what will give them the highest expected return. And the fee schedule can change dramatically according to circumstances.

Take the paper by Winand Emons and Claude Fluet. They observe that defense attorneys use fixed fee contracts while those representing plaintiffs use contingent contracts with a smallish fixed fee. The latter are offered because it provides incentives to pursue strong cases only, they say. Defense attorneys fight all cases, while plaintiff ones can select, and they do it in a way that makes it worth their time. In addition the latter have privileged information: they can figure out the expected winnings, while the plaintiffs are in the dark. The attorneys thus adjust the schedule accordingly. With all this, I wonder whether there is a way to regulate the fees, say by allowing only particular fee structures, that would maximize the well-being of plaintiffs or some combination of plaintiffs, defense and attorneys, not attorneys only.

EITC is better than the Minimum Wage

From David Neumark:

Suggesting that federal policy addressing low-wage work and low-income families has somehow failed because the minimum wage has not kept pace with inflation ignores the fact that we have moved away from a focus on the minimum wage — a policy with many flaws — and toward the earned-income tax credit.  We shouldn’t be asking simply how much the real minimum wage has changed, but rather how much the combined income floor generated by the two policies has changed.

To provide an example, the blue line in the figure below shows the wages received by a single adult worker earning the minimum wage and working full time throughout the year. This can be interpreted as the income floor established by the minimum wage. The red line shows the level of family income when the earned-income tax credit for a family with two children is added (all in 2012 dollars). The lower line illustrates the income consequences of the real decline in the minimum wage. But the upper line shows that, because of the sharp increase in the generosity of the earned-income tax credit, the combined effect of the two policies is that the real income of this family is as high or higher than it was in past decades — when the real minimum wage was relatively high — and much higher than it was in most of the intervening years.

 

Nonetheless, there are important differences between the earned-income tax credit and the minimum wage. The fundamental difference is that the earned-income tax credit aims benefits at low-income families with children, rather than simply low-wage workers. This is in large part its virtue, and it makes a lot more sense than the minimum wage’s focus on low-wage workers. Do we really care if a low-wage teenager in a middle-class family makes an extra dollar an hour?  Economists of all persuasions in the minimum-wage debate agree that mandated wage floors do a bad job of directing benefits to low-income families.  This is confirmed in recent research by my graduate student Sam Lundstrom, calculating who would be affected by increasing the current federal minimum to $8.25 from $7.25.  He finds that only 21.3 percent of the affected workers would be in poor families, while 30.9 percent would be in families with incomes more than three times the poverty line.

I Wanna Riot...In Singapore [?!]

@#$% the Police, Singapore Edition

Singapore has acquired a reputation for being squeaky-clean to the point of being antiseptic. It is particularly famous for two things in this respect: banning bubble gum in public that can litter surroundings and caning juvenile delinquents alike the Yankee brat kid Michael Fay [whappack!] In reality, though, there are tensions bubbling under the carefully stage-managed facade. There were race riots between ethnic Chinese and Malays in 1964 and 1969 whose records time has not erased. In their wake, Singapore has been at pains to level the playing field for all three major ethnic groups (including those of Indian ethnic descent) by, for instance, having a more diverse civil service, but things are never quite perfect.

Like many Asian nations, Singapore is highly inequitable and is becoming more and more so. Its Gini coefficient stands at 0.478. At the same time, the locals' very low birth rate results in few Singaporeans left to do blue-collar jobs...such as construction. Hence the elements for this year's sudden outburst as an Indian migrant construction worker was struck down by a wayward bus, resulting in that ever-so-rare event: a riot in Singapore.

A crowd of about 400 foreign workers, angered by a fatal road accident, set fire to vehicles and attacked police and emergency services workers late Sunday in Singapore's ethnic Indian district, injuring at least 18 people in a rare riot in the city-state

Police and eyewitnesses say the riot, the first major outburst of public violence here in more than four decades, started at about 9:23 p.m. local time (1323 GMT) after a bus hit and killed an unnamed 33-year-old Indian man in the Little India neighborhood, prompting large groups of South Asian workers to attack the bus with sticks and garbage bins.

Authorities quelled the violence before 11 p.m. after deploying 300 police officers to the scene, including its riot-control squad and Gurkha unit, police officials said in a news briefing early Monday, adding that officers didn't use any firearms to end the riot...

Police officials said 10 officers were hurt, none seriously, while the bus driver involved in the fatal accident—a Singaporean—was hospitalized. Five vehicles were burned—including three police vehicles, an ambulance and a motorcycle, the Civil Defense Force said. Several other vehicles—including police, civil defense, and privately owned cars—also were damaged, officials said...

The role of migrant workers has come under scrutiny:

The riot has sparked concerns of festering unrest amid the large foreign workforce, numbering about 1.3 million as of June, in this island state of 5.3 million people. In recent years, some foreign laborers—particularly low-pay unskilled workers in construction—have resorted to protests against alleged exploitation by employers, including a rare and illegal strike last year by about 170 public-bus drivers hired from China.

There is also, unfortunately, an element of racial profiling

Even so, police would "pay extra attention not just to Little India, but also to foreign-worker dormitories and known places of congregation, moving forward," Police Commissioner Ng Joo Hee said at the briefing. Police officials said they were treating the incident as a case of "rioting with dangerous weapons," an offense that carries penalties including up to 10 years' jail, as well as caning.

Good ol' caning; would this be Singapore without it? Yes, Singapore is highly inequitable, but its claim to fame has been different races living in relative harmony in recent years. I guess the seams are beginning to show once more as inequality becomes more evident based on racial differences. Then again, demographic realities probably mean that flashpoints of this sort will continue to occur in the near future, especially as income and racial divides reinforce each other.

This ain't Disneyland, folks.

UPDATE: Racial profiling in "Little India" is not new, and these events may further inflame matters.

Numbers Don't Lie: Catholicism is Growing

It remains remarkable how a non-negligible portion of the world population can be classified under a single church with a single leader and a single history: the Catholic Church. I've been performing religion-related research and came across a 2013 Pew Research poll describing the extent of this faith. To be sure, there is fragmentation among Christian denominations: born-agains, charismatics and so on have mixed in with Anglicans and even Catholics. However, as fads in Christianity come and go, one thing remains fairly stable in terms of global proportion and growing in terms of absolute numbers--St. Paul's brand:

Over the past century, the number of Catholics around the globe has more than tripled, from an estimated 291 million in 1910 to nearly 1.1 billion as of 2010, according to a comprehensive demographic study by the Pew Research Center.

But over the same period, the world’s overall population also has risen rapidly. As a result, Catholics have made up a remarkably stable share of all people on Earth. In 1910, Catholics comprised about half (48%) of all Christians and 17% of the world’s total population, according to historical estimates from the World Christian Database. A century later, the Pew Research study found, Catholics still comprise about half (50%) of Christians worldwide and 16% of the total global population.

What has changed substantially over the past century is the geographic distribution of the world’s Catholics. In 1910, Europe was home to about two-thirds of all Catholics, and nearly nine-in-ten lived either in Europe (65%) or Latin America (24%). By 2010, by contrast, only about a quarter of all Catholics (24%) were in Europe. The largest share (39%) were in Latin America and the Caribbean.

Now, as then, the Catholic Church's critics are myriad. In the longer historical sweep, though, its geographic reach ostensibly in the business of saving souls is broader as stagnant-to-declining markets  (North America, Europe) are supplanted by more dynamic ones (sub-Saharan Africa, Asia-Pacific), while holding on to saturated markets (Latin America).

A Fun Quiz

For the holiday party for ec 10 section leaders, head section leader David Johnson prepared the following "quiz," which he has allowed me to share with blog readers.  The quiz is open book, open internet. The winning team got 18 out of 20. Try your hand at it.  I will post answers in a few days.

Good luck!

Ec 10 -- End of Semester "Quiz"

[Hint:  Each Answer Has a Certain Ec10 "Flavor"]

 
1.         For 35 years, Bob Barker welcomed those who had "come on down" to this TV game show.

2.         New Ec10 soap opera starring Luke, Laura, and Francis Edgeworth.

3.         First U.S. car manufacturer to offer seat belts as an option.

4.         Neurosis shared by bus rides and margarine .

5.         One-word term for one's first apartment.

6.         The result of Atlas's misplacing his celestial sphere.

7.         "Careful!  The Bayeux Tapestry's wall mounts are loose!"

8.         Can we use this same phrase for the sensitivity of either crucifix or rosary bead demand to the cost of the crucifix?

9.         Metropolis governed by U-boat captains.

10.       Pushpins adorned with benzene rings.

11.       My cousin Vinny is a sports reporter and is always asking coaches at press  conferences, "May-a I-a ________________ you-a on-a that-a?"

12.       Tony Award-winning Miss Saigon actor's hardwood entryway.

13.       Flo's employer.

14.       Red Sox / Yankees:  the most heated one in professional sports.

15.       What we might have when Pamela Ewing's rep is out of control. 

 
16.       What we've made upon deciding which poem to use in our Super Bowl commercial.

17.       New Parker Brothers board game fashioned after Laurel & Hardy or Burns & Allen or Rodgers & Hammerstein or Marx & Engels or Masters & Johnson......

 

18.       If an MP were to suffer a heart attack during David Cameron's question time,  it would be a _____________________________ .

 19.       The best comedians/comediennes reach the highest point on the  ________________________.

 20.       Past, Present, or Future Perfect equivalent of the price of our bathroom basin .

SCORE:   _______ ( "correct" answers are worth 1 point each ! )