A debt-free stimulus?

Economies may need to be stimulated sometimes, through tax reductions or public expenditures. The problem is that this costs. Opposition to such stimulus programs is typically grounded on the unavoidable debt run-up, which implies that at some point in the future taxes will need to be raised at a level that is higher than before the stimulus. Would there be a way to pacify this opposition?

According to Laurence Seidman there is. It involves the Federal Reserve, or the corresponding central bank, making a loan to the government treasury for the amount engaged in the stimulus, and then the Fed conveniently forgiving this debt. That is a different way of putting what Seidman proposes: the Fed makes simply a transfer to the Treasury that satisfies the dual mandate of the Fed, full employment and stable prices. Despite what Seidman claims, this is monetizing the debt. Even if no debt is explicitly created, the government is still financing its stimulus by (virtually) printing money, and with the same effect on inflation which guarantees that the dual mandate will not be satisfied for stable prices, and one can have doubts about full employment, too. Seidman argues that there would be no inflation if aggregate demand gets back to the "normal" level with the stimulus. But you still have increased the money supply for the same quantity of goods. The price level needs to increase accordingly. The only way to avoid the inflation is if the Treasury returns the transfer to the Fed. The transfer is thus again a debt.

I find it really strange that a chaired professor at the University of Delaware would write this. The only way I can rationalize his writing is that he confuses real and nominal quantities. He also seems to reason in partial equilibrium, not thinking that prices adjust to such large changes in macroeconomic aggregates, especially in the medium run. We are used to seeing this from crackpots with little economics education, but not with apparently well-educated economists.

An Econ Conference for Undergrads

In April in Washington, DC.

Goldhater: Can India Fix Its Current Account Deficit?

First came the James Bond film Goldfinger, then came the spoof movie Goldmember. Now we have the threequel...Goldhater. It is generally well-known that India is a major if not the #1 market for the precious metal since many cultural traditions are based on it--especially as gifts. However, the substantial rise in gold prices in the past decade or so has served to increase India's current account deficit. How to control rises in the deficit, then? India has been busy slapping one tax on gold after another:

India will not revise its record high import duty on gold and other restrictions on imports until the nation's current account deficit is firmly under control, Finance Minister P Chidambaram said in Davos on 23 January. India has a record high 10% import duty on gold and a rule that says 20% of all bullion imports must exit the country as exports.

The subcontinent used to be the world's largest consumer of the precious metal until the government made three upward revisions to the import taxes on gold, to reign in a record current account deficit (CAD). The country's CAD could hover below the $50bn mark in the year to 31 March, 2014, a $20bn reduction from previous estimates.

In the longer term, officials indicate that changing consumption patterns of gold will be affected less by government fiat and more by cultural changes away from prioritizing exchanges of the precious metal. According to RBI Deputy Governor K C Chakrabarty::

Speaking at a panel discussion on Gold and its status in India - at IIMB, he said gold intoxication [don't you just love that term?] is prevalent only to India, and society as a whole must work together to change mindsets.

"Stop giving or taking gold as dowry and stop giving gold to temples," he advised. Maintaining that RBI has never stopped import of gold, he said: "Do not borrow money from banks to import gold." "Consumer has never benefitted from gold and gold has given a negative return world-wide, it is not an investment but a speculation," he added.

To be sure, the Congress Party has an eye on winning the next elections too, and all of these restrictions of gold imports may partly be responsible for its current unpopularity. Will Congress Party leaders loosen restrictions, then? They at least claim to be sticking to their guns:

Answering a query about an earlier media report that Sonia Gandhi, the leader of the ruling Congress party, had written to the Indian government asking for gold import restrictions to be relaxed, Chidambaram said he had not read the letter.

"Until we have a firm grip on the current account deficit I do not contemplate any roll back in any measure. We will have a full idea of the current account deficit only when the budget is presented and when the year comes to an end," Chidambaram told CNBC TV18 in Davos.

We'll see...

My Proposed (but not accepted) Bet with Paul Krugman on the Obama Forecast

Scott Sumner declares that I would have been the winner.

What worries Americans?

When Gallup recently asked Americans what the biggest problem facing the United States is, the four most common answers were dissatisfaction with government, the economy in general, unemployment, and healthcare.  Each was mentioned by more than 15 percent of those polled.  The gap between rich and poor was mentioned by only 4 percent.


If President Obama wants to make the 2014 electoral debate about income inequality, as he seems to, he has an uphill climb ahead of him.

Capitalism's rapture

Economics is based on a small set of very powerful axioms that a the foundation of utility theory, general equilibrium theory, and more. Experiments have contradicted every one of these axioms one way or the other. We still keep them because they seem to apply most of the time, and the occasional violation does not invalidate the general picture. But it is good to keep an eye on their validity and think about alternative scenarios, especially if they bring us better theories.

Egmont Kakarot-Handtke decides to start afresh with a completely new set of axioms. And instead of choosing some that have some subjectivity, he takes some that are as objective as any axiom could be: four accounting identities and definitions. Yes, you read that right. 1) definition of national product (income approach); 2) a linear production function in labor; 3) definition of nominal consumption as the product of real consumption times a price; and 4) the values of all economic variables this year are last year's variables times one plus their respective growth rate plus an independent and random component for each. Easy. From this Kakarot-Handtke builds an elaborate theory that demonstrates with a mathematical proof (it is in the title, so it must be true) that capitalism is on the verge of collapsing. To me it looks more like his readers could collapse from hyperventilating over this amazing pile of rubbish.

This bizarre scientist has trademarked his models. I am afraid I cannot go into more details about this work without violating some law (Trademark law? Law of sanity?). So I leave it at this.

How an Economist Helped Inspire the Movie Dr. Strangelove

Thomas Schelling, of course.

The best justification for IS-LM?

IS-LM models have always left me puzzled. To me, they are the equivalent to a reduced-form regression with omitted variables and endogeneity issues. Through a lot of hand-waving, you can have any model fit the data. But what I find the most bizarre is this strange obsession with justifying the IS-LM models from micro-foundations. Somehow, IS-LM is taken as an ultimate truth, and one needs to reverse-engineer it to find what can explain it. The ultimate truth is the data, not the model.

Pascal Michaillat and Emmanuel Saez bring us yet another paper that tries to explain the IS-LM model from some set of micro-foundations. The main ones this time are money-in-the-utility-function and wealth-in-the-utility function (and matching frictions on the labor market, which are not objectionable). I find it very hard to believe that by now anybody would consider this a valid starting point. Rarely does anybody enjoy simply having money, the reason why people like having money is that they can buy things with it, things that are already in the utility function, or that money facilitates transactions, something that you can easily model. The same applies to wealth. True, some people may be obsessed with getting richer just for being rich, but for the remainder of the citizen, they like wealth for what it brings in future consumption for themselves and their heirs, and for the security it brings in the face of future shocks. All this easily modelled in standard models.

It seems to me this paper is a serious step back. Macroeconomists try to understand why there are frictions on markets, so that one better determine the impact of policy on such markets. Simply sweeping everything in the utility function, where in addition one has a lot of freedom in choosing its properties, does not help us in any way. And it is wrong, because it is again some sort of reduced form that is not immune to policy changes. Suppose the economic environment becomes more uncertain. Are we now supposed to say that suddenly households like wealth more? They could also like wealth more because of changes in estate taxation or because of longer lifetimes, and these imply very different policy responses in better flushed-out models.

I just do not get it. Maybe some IS-LM fanboys can enlighten me.

Bet on Asia? How Macau Stomps Puny Las Vegas

I did not fully appreciate how well and truly Las Vegas has been eclipsed by Macau. 2006 was the year Macau overtook Las Vegas in gambling revenues. Perhaps reflecting the dour, sour mood of a has-been nation experiencing the overwhelming misery wrought by the BushBama years, Las Vegas has gone nowhere since. However, Macau is going from strength to strength. From crackdowns on free-spending PRC officials siphoning government funds to gamble in Macau to an induced slowdown in growth on the mainland, it doesn't matter. Indeed, the worry is not about Macau losing paying customers, but not having enough facilities to welcome them:

Analysts expect Macau, the only place in China where casino gambling is legal, to widen its lead this year on the Las Vegas Strip, whose revenue was likely only about one-seventh of Macau's in 2013. Deutsche Bank analyst Karen Tang forecasts the territory's gambling revenue will grow by 20% in 2014. Aaron Fischer, an analyst at brokerage CLSA, predicts it will hit $77 billion by 2017. That compares with 360.7 billion patacas ($45.2 billion) in 2013. December's revenue totaled 33.46 billion patacas, also up 19% year to year, according to data from Macau's Gaming Inspection and Coordination Bureau.

In 2012, Macau's gambling revenue rose 14%. Investors in Macau casino stocks have profited handsomely thanks to the tremendous growth. Over the past year, top performers included Nasdaq-listed Melco Crown Entertainment Ltd. as well as Hong Kong-listed MGM China Holdings Ltd. and Galaxy Entertainment Group Ltd. , whose share prices all more than doubled. Each of those companies, along with Las Vegas Sands Corp. and Wynn Resorts Ltd. of the U.S. and SJM Holdings Ltd. of Hong Kong, is investing billions more in expansion projects in Macau, betting that the phenomenal growth over the past decade or so won't fizzle.

Many analysts remain bullish on the sector, which has been among the region's best performers for years, but investment concerns include issues such as Macau's limited hotel-room growth in the near term, delays on major infrastructure projects, and labor shortages amid a building boom, says Morgan Stanley analyst Praveen Choudhary.

In terms of gambling revenue, there is simply no contest as Las Vegas is a pipsqueak in comparison. To make a tennis comparison prior to the 2014 Australian Open (the sport is popular with gamblers), it's a Rafael Nadal versus Stanislas Wawrinka story. Las Vegas revenues were a puny 1/7th of Macau's. I thought it was a typo, but no. The big spenders are in the Orient; small fry go to Vegas. It's a microcosm of their nation's respective trajectories:

Las Vegas has been struggling to recover since the financial crisis, which left the vaunted Las Vegas Strip littered with abandoned, multibillion-dollar casino projects. For example, the Fontainebleau resort, which was supposed to have 4,000 rooms, halted construction and sold off all its furniture after falling into bankruptcy protection in 2009 as the economy sank. For 2013, analysts expect the Strip's revenue edged up 3% to $6.4 billion from $6.2 billion. Las Vegas represents about 10% of the U.S. gambling market, according to a 2011 report by PriceWaterhouseCoopers.

What's more, octogenarian billionaire Lui Che-Woo momentarily eclipsed Hong Kong's Li Ka-Shing as Asia's wealthiest person on the back of Macau's booming economy--it places either as first or second fastest-growing (after Mongolia) worldwide:

Lui Che-Woo, founder of casino operator Galaxy Entertainment Group Ltd., remained Asia’s second-richest person yesterday, trailing only Hong Kong real estate investor Li Ka-Shing, according to the Bloomberg Billionaires Index. The gambling mogul’s net worth had risen $2.9 billion this year to $23.7 billion as of 5:30 p.m. yesterday in New York. Li has a $29.5 billion fortune and has been the richest in the region since April 9, 2012, when he passed Indian billionaire Mukesh Ambani.

Lui’s wealth is anchored by his family’s 51 percent stake in Galaxy, Asia’s third-largest casino operator by revenue. The company’s shares rose 129 percent last year as gaming revenue in Macau, the only city in China where casinos are legal, climbed 18.6 percent to $45.2 billion. Gamblers converged on the island’s biggest plot of land in Cotai, Asia’s version of the Las Vegas Strip and home of Lui’s biggest casino, Galaxy Macau.

Of course, all the Strip's bigwigs have set up shop in greener pastures--Sheldon Anderson, Steve Wynn, you name it. What sort of idiot would bet on America circa 2014? Not Steve Wynn. To paraphrase the old tagline, what economic misery happens Stateside stays in Vegas. The irony is not lost that Las Vegas' revenues are flatlining just as it has become the United States' fastest-growing city population-wise. That so many Yanquis are flocking to this faded gambling destination speaks volumes about how it's even more miserable elsewhere in America.  Fortunately, there are much more happenin' places elsewhere in the globe.

US-Owned Cruise Lines: Guaranteeing Misery at Sea

So many people to poison, so little time

American air lines and cruise lines are renowned worldwide for their absolutely abysmal standards (if they have any). There is nothing as soul-destroying as taking a flight on American, Delta, United. US carriers are rightly regarded as utter garbage by global standards, and these purveyors of human misery will never win any global travel awards.

Not content with immiserizing American flyers, Yanquis dabbling with the travel industry have expanded operations to cruise lines. Carnival Cruise Lines are famous for sickening passengers on their pile 'em high and sell 'em cheap misadventures to parts of travel misery unknown. And, of course, they recently decided to go one step further by grounding one of their vessels on the Italian coast and sending paying customers to the Great Port of Call in the Sky. The Costa Concordia may have fooled some into thinking it was operated by a "safe" European line, and people literally paid with their lives for this error.

So it is with the Royal Caribbean Explorer of the Seas turning into the Vomiter of the Seas as it somehow managed to sicken 600 passengers. Again, the Royal Caribbean name may have fooled some into thinking they were journeying on a decent European liner. Actually, Royal Caribbean used to be a pretty respectable liner.  It was founded by Norwegians after all, but it was purchased by US-based Celebrity Cruise lines in 1997. Celebrity, of course, is also famous for sickening its passengers in that quintessentially American style. It thus comes as no surprise that Royal Caribbean would adopt the same sort of, er, "management techniques."

Bottom line: Stay away from all these race-to-the-bottom American cruise lines. The Carnival-Celebrity axis of sink 'n' spew is justly derided, but they also have subsidiaries that try to dissociate themselves from their horrid US owners. Nice try, but I think the global public is [pardon the expression] catching on.

UPDATE: Royal Caribbean is now lowballing its ghastly cruises to $32/night. Classy, huh?

Does income inequality increase mortality?

In his recent Times column, Paul Krugman writes:

Rising inequality has obvious economic costs: stagnant wages despite rising productivity, rising debt that makes us more vulnerable to financial crisis. It also has big social and human costs. There is, for example, strong evidence that high inequality leads to worse health and higher mortality.

The links are from the online version of Paul's column.  I followed the second link to an interesting article by Angus Deaton.  Angus writes the following (emphasis added):

Darren Lubotsky and I ⁷ have investigated the relationship between income inequality, race, and mortality at both the state and metropolitan statistical area level. In both the state and the city data, mortality is positively and significantly correlated with almost any measure of income inequality. Because whites have higher incomes and lower mortality rates than blacks, places where the population has a large fraction of blacks are also places where both mortality and income inequality are relatively high. However, the relationship is robust to controlling for average income (or poverty rates) and also holds, albeit less strongly, for black and white mortality separately. Nevertheless, it turns out that race is indeed the crucial omitted variable. In states, cities, and counties with a higher fraction of African-Americans, white incomes are higher and black incomes are lower, so that income inequality (through its interracial component) is higher in places with a high fraction black. It is also true that both white and black mortality rates are higher in places with a higher fraction black and that, once we control for the fraction black, income inequality has no effect on mortality rates, a result that has been replicated by Victor Fuchs, Mark McClellan, and Jonathan Skinner⁹ using the Medicare records data. This result is consistent with the lack of any relationship between income inequality and mortality across Canadian or Australian provinces, where race does not have the same salience. Our finding is robust; it holds for a wide range of inequality measures; it holds for men and women separately; it holds when we control for average education; and it holds once we abandon age-adjusted mortality and look at mortality at specific ages. None of this tells us why the correlation exists, and what it is about cities with substantial black populations that causes both whites and blacks to die sooner.

In a review of the literature on inequality and health, I note that Wilkinson's original evidence, which was (and in many quarters is still) widely accepted showed a negative cross-country relationship between life expectancy and income inequality, not only in levels but also, and more impressively, in changes. But subsequent work has shown that these findings were the result of the use of unreliable and outdated information on income inequality, and that they do not appear if recent, high quality data are used. There are now also a large number of individual level studies exploring the health consequences of ambient income inequality and none of these provide any convincing evidence that inequality is a health hazard. Indeed, the only robust correlations appear to be those among U.S. cities and states (discussed above) which, as we have seen, vanish once we control for racial composition. I suggest that inequality may indeed be important for health, but that income inequality is less important than other dimensions, such as political or gender inequality.¹⁰

Is Angus's article really support for Paul's claim?  It seems to me that it is more the opposite.

Ageing and deflation in Japan

Inflation rates across industrialized economies have been remarkably low in the past decades, and at the same time these economies have been subject to considerable demographic ageing. Nowhere has this been more true than in Japan. What are the government's or the central bank's incentives to set policy that triggers lower inflation if the population gets older? I do not see where monetary policy would matter, but the fiscal theory of inflation may tell us something.

Hideki Konishi and Kozo Ueda study the latter in an overlapping generation model where the fiscal authority has a shorter lifespan than residents, but takes into account the impact of its actions on future governments. The fiscal theory of the price level tells us that inflation goes up when more debt is accumulated, and that is certainly the case when the population gets older and requires more retirement benefits. But the authors point out that this does not necessarily hold once you take into account the endogenous responses of income tax rates and public expenses. Then, because of the policy response it matters why the ageing is happening: lower mortality or lower fertility. Deflation is more likely in the former case. Now we just need someone to bring this to the data...

On Assortative Mating

A new working paper concludes:

"Data from the United States Census Bureau suggests there has been a rise in assortative mating....[I]f matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller"

Tax refunds and myopia

From anecdotal evidence, it appears that many Americans like to use the refund from their yearly tax filing for various home improvement projects. That seems like a strange habit, but could be explained by its timing (Spring season) and the unexpected nature of this windfall that is large enough to allow some major purchase that would not happen during the rest of the year. For perennially cash-constrained households, being forced to put a little aside for a one-time cash-out is the only way to do some capital purchase. Does this theory make any sense? It does in developing countries where ROSCAs are popular for this reason.

It looks like the same holds for US households. Brian Baugh, Itzhak Ben-David and Hoonsuk Park look at purchase patterns when the tax forms are filed and when the tax refund check arrives. The first finding is that consumption does not move at the filing, even though uncertainty about the refund resolves. In other words, a change in the permanent income here does not matter, presumably because there is some constraint. When the refund check is cashed, though, consumption jumps up and returns to the previous levels within weeks. It looks like households are cash-constrained. But the composition of the purchases indicates that there is a substantial amount of non-durables in the basket, showing also they are rather impatient. In fact very little remains for savings. I would have expected that at least credit card debt would be drawn down. One can thus conclude that their myopia dominates the cash constraint. Sad.

USAID Told to Get Lost Pt. 3 (Ecuador Edition)

I almost forgot to post about this one (apologies). Mostly on the grounds of political interference, the United States Agency for International Development (USAID) has, in the past few years, been bounced from Russia and Bolivia. The proximate cause is when USAID provides funding to civil society organizations which may not be in the best standing with the leaders of these countries. And so the story repeats itself in Ecuador:

The United States has canceled aid to Ecuador worth $32 million over the coming years after long-running disputes with the government of socialist President Rafael Correa, according to U.S. officials. Correa, a U.S.-trained economist, has often been at odds with Washington since winning power in 2007. He accuses the U.S. government of trying to undermine him and this year Ecuador renounced U.S. trade benefits dating from the early 1990s [see here].

According to a U.S. State Department spokesperson, Ecuador recently informed the U.S. Agency for International Development (USAID) it could not undertake new activities or extend existing ones without an accord governing bilateral assistance. This led to the U.S. decision to cancel the aid. "Our planned $32 million in assistance programs for the coming years would have allowed us to partner with Ecuadoreans to achieve their own development goals in critical areas," said a letter dated December 12 from USAID to Ecuador seen by Reuters.

Ecuadorean grievances with American interference during the term of Correa are plentiful:

President Correa has made no secret of his disdain for US officials who he sees as overreaching their diplomatic duties and meddling in domestic affairs. In 2011, he kicked out the US ambassador for comments made in a diplomatic cable published by WikiLeaks that said Correa might have been aware of high-level police corruption. A year later, he granted asylum to the face of WikiLeaks, Julian Assange, who is still holed up in Ecuador’s London embassy.

“In some ways these actions, and the [USAID decision] can be put in there too, are intended to say that we are an independent sovereign nation,” [...] “In the perspective of many in Latin America, and with good reason, USAID is seen as an agent of US imperialism.”

Last year, Correa ordered his government to analyze the impact of a USAID exodus. Requests for comment to Ecuador’s Foreign Affairs Ministry were not returned Friday. Correa in June was granted wide-ranging powers to intervene in the operations of non-governmental organizations (NGOs), which often receive funding from USAID. The decree also created a screening process for international groups wanting to work in the country.

It is ironic, really. In the name of "development," the US funds politically-opposed NGOs that make no bones about their disdain for the host government and openly wish it replaced. Meanwhile, the supposedly "anti-imperialist" Ecuador is especially prone to muzzling dissenting voices. There are no real protagonists here. Still, the end result of this power play is (again) adios, USAID. 

How much income inequality is explained by varying parental resources?

When people think about inequality of incomes, a key issue is inequality of opportunity. Some people are born to rich parents who can afford private schools, summer camp, SAT tutors, etc., while others have poorer parents who cannot easily afford such things. One might wonder how much of the income inequality we observe can be explained by differences in the resources that people get because of varying parental incomes.

Let me suggest a rough calculation that gives an approximate answer.

The recent paper by Chetty et al. finds that the regression of kids’ income rank on parents’ income rank has a coefficient of 0.3. (See Figure 1.) That implies an R2 for the regression of 0.09. In other words, 91 percent of the variance is unexplained by parents’ income.

I would be willing venture a guess, based on adoption studies, that a lot of that 9 percent is genetics rather than environment. That is, talented parents have talented kids partly because of good genes. Conservatively, let’s say half is genetics. That leaves only 4.5 percent of the variance attributed directly to parents’ income.

Now, if you let me play a bit fast and loose with the difference between income and income rank, these numbers suggest the following: If we had some perfect policy invention (such as universal super-duper pre-school) that completely neutralized the effect of parent’s income, we would reduce the variance of kids' income to .955 of what it now is. This implies that the standard deviation of income would fall to 0.977 of what it now is.

The bottom line: Even a highly successful policy intervention that neutralized the effects of differing parental incomes would reduce the gap between rich and poor by only about 2 percent.

This conclusion does not mean such a policy intervention is not worth doing. Evaluating the policy would require a cost-benefit analysis. But the calculations above do suggest that all the money the affluent spend on private schools, etc., explains only a tiny fraction of the income inequality that we observe.
----
Addendum: A few readers seem confused about how to infer an R2 from a coefficient.  The key is that the left and right hand side variables in the regression have the same variance.  In this case, the R2 is the square of the coefficient.  This conclusion is a standard result for AR(1) models, which is what we have here, as applied to generational data.  (Also, a few readers are confused when they look at the paper's Figure 1. The points plotted are not the raw data but binned averages, so you cannot see the R2 in the plot.)

Can [Mexico, Turkey] Withstand EM Selloff?

OK, here's the quick version of What's Going On in the World Economy. Despite the US jokeonomy failing to revive from comatose to, say, zombified as witnessed by the labor force participation rate falling with no end in sight, the rumor is that the Fed will further slow down its purchases of US Treasuries. In turn, expectations of higher interest rates Stateside is causing a selloff in emerging markets as investors repatriate their funds.

Who, then, is macho enough to weather this Made In America @&^*storm? Argentina is putting the pedal to the metal on the highway to hell, but it was headed in that general direction anyway. Hence the emerging markets' latest battle cry to all those who care to listen: Developing countries are not all alike! We're not Argentina! Or so they say from Davos, Switzerland.

Among those protesting most loudly there is Turkey, most likely because many commentators have lumped it with the "developing economies likely to falter" category. And so the lira goes...but not as far as the Argentinean peso, officials claim:

Turkey's Deputy Prime Minister Ali Babacan said the lira's tumble on Friday was a "re-pricing process" due to recent political turmoil as well as the U.S. Federal Reserve's plan to gradually withdraw stimulus.

"What's happening in Turkey mostly is a re-pricing process. Not only just because of the Fed's tapering but also the recent political events have triggered some market volatility," he told a panel at the World Economic Forum in Davos. Turkey's lira tumbled to new lows on Friday and investors doubted its central bank's ability to stem the rout as Prime Minister Tayyip Erdogan seeks to defuse a corruption scandal and stem a challenge to his power.

As an import-dependent economy with a quickly depreciating currency, I am unfortunately wary of Turkey's situation. OTOH, similar protestations about economic health are being made by Mexico:

The current volatility in currency markets will have some effect on Mexico, but without major disruption, Mexican Finance Minister Luis Videgaray said in an interview with Reuters Television. "Mexico is an emerging market, so all volatility is going to have some effect, but Mexico is well-positioned to weather the currency storm," Videgaray told Reuters TV on the sidelines of a gathering of business and political elites in this Swiss mountain resort...

Looking ahead, emerging markets are expected to face a volatile 2014 as the U.S. Federal Reserve scales back its stimulus programme. "We expected this year to be a volatile year for EM as the Fed tapers," he said, adding that volatility "will happen throughout the year as tapering goes on." The minister said Mexico's currency, the peso, was currently quite liquid. Should that change, Mexico would consider intervening, he said. "I don't see any problems of liquidity in the market for the Mexican peso," he said. "We would intervene to provide liquidity in the market, but this is not the case now; the peso is quite liquid now." 

Mexico has better macroeconomic fundamentals to withstand the EM selloff. Most importantly, it has a healthier balance of payments than Turkey, which has a gaping current account deficit it is (unsuccessfully) trying to belittle. Mexico will take its lumps, but I expect it to fare well among the EMs.

Exchange rate commitment always beats capital controls

The recent financial crisis has scared a lot of countries into adopting so called macro-prudential policies that introduce frictions into capital market that can be best summarized as capital controls. The idea is that you want to make sure that market participants are constrained in a way that makes them consider the consequences of their actions onto others. The IMF has encouraged a lot of countries to adopt such policies, in stark contrast to previous stances. And this is backed up by a recent literature that shows these policies are welfare-enhancing.

Gianluca Benigno, Huigang Cheng, Christopher Otrok, Alessandro Rebucci and Eric Young show this is right but suffers from the absence of other policy options. Specifically, once you add a policy to the mix that would be to stabilize the real exchange rate of the local currency in times of crisis, then macro-prudential policies are dominated. I suppose one could then even imagine better policies or policy combinations. But the point is that you need to expand the set of policy options. Why is this exchange rate commitment better? Capital controls act like Pigovian taxation that applies always and leads to a constraint-efficient outcome. A commitment to a real exchange rate applies only at particular times and leads to a conditionally-efficient outcome. That flexibility is key.

Has economic mobility declined?

No, says a new paper by Raj Chetty et al.:

"We present new evidence on trends in intergenerational mobility in the U.S. using administrative earnings records. We find that percentile rank-based measures of intergenerational mobility have remained extremely stable for the 1971-1993 birth cohorts....[C]hildren entering the labor market today have the same chances of moving up in the income distribution (relative to their parents) as children born in the 1970s."

Why firms do not like cutting wages

Nominal wage downward rigidity is a feature of many macro-models that help justify positive optimal inflation rates. In fact, that is pretty much the only way to get a monetary monetary model not to conclude that the Friedman Rule and its deflation is optimal. This rigidity is always assumed on the presumption that somehow employers and employees do not like to reduce nominal wages. Are they subject to a nominal fata morgana or is there more to it? Instead of pontificating from theory and limited data, maybe asking market participants could help.

Philip Du Caju, Theodora Kosma, Martina Lawless, Julian Messina and Tairi Rõõm conducted a survey of firms across 14 European countries. They conclude that issues with unions contracts or collective bargaining were of secondary importance to worker morale and staff retention. This means that including renegotiation costs seems misguided. This does, however, not explain why this is so important to staff morale. After all, what really matters is the real wage. What is this psychological factor that makes us think foremost in nominal terms? Or is it that managers only have the impression that this matters? What we need here is some experimental data where some employees are hit with a nominal wage decrease and others not, and see whether it makes a difference. Good luck finding a manager willing to do that, though. And I wonder whether the surveys results would be different in economies where the social mission of employers is less developed.

Party Like 2001: Argentina Again Headed for Default

There is no shortage of bad news these days...even The Captain and Tennille of "Muskrat Love" fame are calling it quits. In a sort-of related story, the Argentinian love affair with the retro-Peronist Fernandez-Kirchners appears to be coming to an end. Buoyed earlier by disavowing its foreign debt and engaging in a program of massive government spending powered by money printing, things were bound to come to an unfortunate end sooner or later. 2014 may be the year when the hurt that has been storing up since Argentina's 2001 default comes back in a big way:

Thirteen years after that collapse, President Cristina Fernandez de Kirchner is running out of time to avert another crisis. The policy mix that Fernandez and her late husband and predecessor, Nestor Kirchner, used to usher in 7 percent average annual growth over the past decade -- higher government spending financed by printing money -- is unraveling. 

Populism plus mismanagement equals a fine mess as the government has issued economic statistics from fantasyland to hide the extent of its woes. The government claims inflation "only" in the low double digits, but more reality-based calculations suggest more than that--even double:

Inflation soared to 28 percent last year, according to opposition lawmaker Patricia Bullrich, who divulges monthly estimates for economists cowed into silence by Fernandez’s crackdown on price reports that clash with official figures. By the government’s count, inflation was less than 11 percent.  

And we get to the most dispiriting thing: the 2001 crisis was accompanied by the Argentine currency board being shattered to smithereens as its pegged rate could not be maintained. Well, guess what? In 2014, the Argentine peso is worth even less than way back when. Some progress, huh?

The peso sank 3.5 percent to a record low of 7.14 per dollar yesterday, according to Banco de la Nacion Argentina, and has plunged more than 25 percent in the past 12 months. That’s its worst selloff since the devaluation that followed the default. Currencies from only three countries in the world have fallen more: war-torn Syria, Iran and Venezuela.

Power outages like the one that sunk Kanaza’s shop into darkness are becoming more frequent, deepening the economic slump, after the nation’s grid atrophied under a decade of government-set electricity price controls. The International Monetary Fund, which censured Argentina last year for misreporting inflation, predicts economic growth will slow to 2.8 percent this year, about half the 5.1 percent average across developing nations. 

No electricity, soaring inflation, violent protests, worthless currency...some successful anti-neoliberal project this is. The general pattern of what's happened in Venezuela and Argentina are similar. The populists Hugo Chavez and Nestor Kirchner were able to buy off public support in the face of rising global commodity prices. However, their successors Nicolas Maduro and Cristina Fernandez have been unfortunate enough to be in office at a time when commodity prices have slumped and these countries' economic fortunes have become pear-shaped. Against such an unfavorable backdrop, they have no money to go where their mouths are at.

Argentina is also beginning to play nice with the international community after years of playing the "screw the foreigners"  cards to win domestic approval. It's probably too little, too late:

As dollars vanish from the central bank, the government has begun to seek to normalize relations with foreign creditors. On Jan. 20, Argentina presented a proposal to the Paris Club of creditors to seek a negotiated resolution to outstanding debt of about $10 billion. The government also has begun talks to compensate Repsol SA for the stake in oil company YPF SA it nationalized in 2012, and is preparing to unveil new inflation and growth data to address International Monetary Fund concerns over the accuracy of official statistics. 

Taxing banks does not tame them

During the last financial crisis, it was quite obvious that at least some banks were taking excessive risks. What do economists usually advocate when it comes to discouraging particular behaviors? Taxes. And that is popular as the foolishness of banks has imposed costs on the taxpayers. Thus, some countries such as Germany, the UK and the Netherlands have imposed taxes on banks. Did that work?

Not really, tell us Michael Devereux, Niels Johannesen and John Vella. They look back at the experience in various European countries and conclude that while this taxation on borrowed funds indeed reduced borrowed funds, and therefore loans, it turns out that it also increased the riskiness of the funding. These are two bads. First, loans actually encourage the economy. Second the risk has increased is of course counter-productive. Even worse, it is the safest banks that reduced most borrowing the the unsafest ones that took on additional risk. How could this happen? As there were fewer borrowed funds, and hence relatively more own assets, regulations allowed banks to modify their risk-weighted portfolio. In other words, regulation that was invariant to the introduction of the taxes made things worse.

Do department chairs have real effects?

Apparently we do:

"There is one robust predictor of a department’s future research output. After adjustment for a range of personal and institutional characteristics, departmental research productivity improves when the incoming department Chair’s publications are highly cited."

Consumption taxation is not that regressive

It is a fact of life that governments need revenue. How to get this revenue without hurting the economy too much has been the topic of much research. Quite obviously, you first want to tax activities that are optimally discouraged, such as smoking and polluting. But that is not sufficient. You do not want to depress the labor supply and thus you want to avoid taking labor income. The alternative is taxing consumption, which you indeed want to discourage in favor of investment, but a consumption tax is deemed regressive and unfair: it hurts proportionally more the poor than the rich.

Nico Pestel and Eric Sommer claim that this perception may only hold in the short-term. Indeed, they find the standard result that a revenue-neutral switching from labor income tax to value-added tax is regressive in the short run. This seems to reverse itself in the longer run, though, thanks to a shift in the labor supply. Using a model estimated on German data, they highlight that the ones responding the most to the reduction in the wage taxation are indeed the poorest, and their response overcomes the progressivity of the income tax. The key here is also reducing payroll taxes which seem to be very discouraging for low income workers.

A Summer Opportunity...

...for graduate students with an interest in matching theory, especially as applied to market design. Click here to learn more.

Lampooning PRC 'Non-Interference' in South Sudan

Does China side with President Salva Kiir or Rick Machar? Both? Neither?

 Us folks working in development studies are simply fascinated by the mysterious foreign aid activities of China. Unlike rich countries which are members of the OECD Development Assistance Committee (DAC) and disclose who receives their aid, for which projects and in what amount, China does not feel an obligation to do so. A few years ago now, China released a white paper on foreign aid that gave a fleeting glimpse of its aid practices, albeit without disclosing how much it has actually provided over the years and much more.

China's practices do not really qualify as "official development aid" in the Western OECD sense. As AidData noted:

Chinese foreign aid has long been a subject of scrutiny and controversy. It doesn’t easily fit into the OECD’s definition of Official Development Assistance (ODA). Much is financed through the China Eximbank in the form of concessional loans that directly support Chinese economic interests, and carried out by embassies and consulates rather than development agencies. Most importantly, project-level data on Chinese aid is essentially non-existent

Such lack of transparency and emphasis on extractive industries in places alike the African continent occasions much hand-wringing. The cartoon above lampoons China on two of its main selling points to the rest of the world: (1) its non-interference in the internal affairs of other countries and (2) its status as a developing country alike them. South Sudan's early post-independence years are turning out to be tumultuous indeed, with political factions fighting in what remains an exceedingly poor country despite its vast energy reserves.

As is often the case, the countries that can least afford such unproductive conflicts often engage in them. The cartoon asks us, is China making the situation in South Sudan worse because of its indifference to politics for as long as it gets its cut of energy supplies? You can argue that China is caught in the midst of someone else's conflict it has played little part in fostering. OTOH, its indifference combined with a generous dole out to those willing to support its energy extraction needs may literally be fueling the conflict. At any rate, the current conflict crimping its supply is urging it to mediate to some extent between the two sides--both of which whose favor it has courted before.

There are no easy answers. All the same, China should be increasingly mindful about how Africans are portraying its activities as in the cartoon above.

Secrets of Orlando's 'Harry Potter' Theme Park Success

You needn't be a movie star to enjoy Butterbeer,; just head to Orlando FL

Here's another example of the fallibility of what you read on the Internet--this time from, er, me. Three years ago, I thought that the development of a Harry Potter theme park in Orlando, Florida based on the world-conquering series of books and cinematographic adaptations was a bad idea. Why? Simply put, it deals with location, location, location. If the series were set in a sunny and humid climate where the protagonists wore beach shorts and flip-flops all the time, then there would be no problem. As it is, however, the series is set in a dark, dank, and damp England.

So, kudos are due to Universal Studios since things have turned out very well. They took risks and have been handsomely rewarded. All the same, the secret weapon behind its success is an unlikely one: Harry Potter happens in a virtual (non-existent) space you must reach by boarding a fictional train. However, the evocative appeal of hypothetical foodstuffs being served in this realm have long attracted attention from fans and foodies alike. Use "Harry Potter cookbook" for your search terms on Amazon and knock yourselves out. As it so happens, much of Universal's financial success has to do with being authentic--in spirit at least--to foodstuffs from the movie.

For the first time ever, we have an excerpt from Tourist Attractions & Parks magazine on food theming:

Yet, despite these three different [ride] thrills, the real story behind the success of Universal’s Harry Potter world centers around the less publicized but higher profit food, beverage, and merchandise operations that seem to have cast an irresistible spell on guests and their pocket books...

According to Brent Young, the president of Super 78, a visual solutions company with deep roots in the theme park industry, “it is well known in the creative community that theming food and beverage creates a consistent guest experience and park attendees are much more likely to want to interact with the themed environment in a real way.” This is what makes the food and beverage operations at the Wizarding World even more impressive:  Universal was able to take an existing concept, themed dining, and transform it into part of the overall “storyline” while still making mounds of money in the process.

Take, for instance, "butterbeer":

Up until the Wizarding World debuted, the fascinating drinks and meals that Rowling created in Harry’s World had been intricately described by the author but never really tasted.  After all, these dishes and beverages never actually exist beyond the pages of the novels [but see my rejoinder above on unofficial themed cookbooks].  This meant that, in developing the culinary side of Harry Potter’s world, Universal had to transform fictional items to real-world tastes.

An easy and less expensive route could have been to de-emphasize the culinary authenticity of that part of the Wizarding World.  Sources close to the project, though, explain that [series author J.K.] Rowling would have none of this.  Her dictate was that all aspects, not just the attractions and physical buildings, must transport the guest into Harry’s world.

As a result, Universal spent large amounts of time and money to refine the recipe for the iconic Butterbeer beverage from the Potter novels.  Numerous recipes and taste tests were held to refine every aspect from the first sip to the final aftertaste.  This was all done to insure that Butterbeer was not too sweet nor too bitter, not too syrupy nor too watery.  Not too everything nor too everything else but instead the perfect replication of a heretofore fictional drink.

The end product was one of the amusement industry’s most expensively designed beverages ever, and, according to these same sources, one of the most financially successful ones ever.  Indeed, this investment has yielded amazing revenue for Universal, more so than even their most optimistic expectations.

As far as I can tell, the shortcomings of the Orlando climate in mimicking that of England are more than made up for in the minds of punters (Brit-speak for paying customers) by authenticity to fictional foodstuffs. They stand in line for minutes and are more than happy to do so. Go figure; I guess there are good reasons why I'm not in the theme park business.

Uncertain times and price setting

Much has been written, including here, about how policy uncertainty is bad for business. Firms do not want to invest much when it is not clear what lies ahead in terms of fiscal policy, for example. This is particularly bad in countries where such uncertainty is chronic. If fiscal authorities or the government cannot get their act together, maybe the central bank can.

Isaac Baley and Julio Blanco show that if firms face uncertainty, monetary policy has less bite. The reason lies in the endogenous price formation (no Calvo fairy here). Specifically, firms are modeled to forecast their nominal costs, but the learning process is obviously imperfect. As the forecast variance increases, for example due to uncertainty about after tax returns, firms become more sensitive to new information and adjust prices more frequently, paying a menu cost. This effect is stronger than their urge to wait-and-see in the face of uncertainty. All this accelerates the transmission of information about the monetary policy, further dampening its impact. In other words, an ineffective government renders the central bank less effective as well.

So Long, Asia: Africa is Now Fastest-Growing Continent

At  midyear 2013, IMF bloggers declared Africa to be the second-fastest growing region in the world after (developing) Asia. Fast-forward a couple of months and it now has the distinction of being the world's fastest-growing region outright. Given that Africa has unfortunately lagged behind other regions in terms of growth during the past few decades, this occurrence is a welcome one, and this Asian certainly bears no grudges in seeing our African peers outperforming. Well done!

However, this distinction being bestowed by the African Development Bank, the AfDB unsurprisingly asks for more of the "good governance" agenda it has championed for quite some time alike its other regional development bank counterparts as well as the World Bank. It is still very much in vogue in development circles:

Africa is now the fastest growing continent in the world, the African Development Bank’s Annual Development Effectiveness Review 2013 [ADER] states. The report, just published, says this growth has been driven mainly by improved economic governance on the continent and the private sector. “Africa’s economic growth could not have happened without major improvement in economic governance.

More than two-thirds of the continent has registered overall improvement in the quality of economic governance in recent years, with increased capacity to deliver economic opportunity and basic services,” it says. 

What kinds of improvements in governance are we talking about here? The AfDB centers on another chestnut of these institutions, the ease of doing business. Instead of having to pay bribes to various officials working in different government agencies to start up a (formal) business, African nations are supposedly reducing such opportunities for petty corruption and making it easier for entrepreneurs to get started:

The report says the costs of starting a business, for instance, have fallen by more than two-thirds over the past seven years, while delays for starting a business have been halved. It says the private sector has become the main engine of growth as the continent continues to improve its business climate. This growth is increasingly driven by internal demand.

“This progress has brought increased levels of trade and investment, with the annual rate of foreign investment increasing fivefold since 2000. For the future, improvements in such areas as access to finance and quality of infrastructure should help improve Africa’s global competitiveness,” the report states.

Better yet, the growth seen in recent times should continue into the medium term:

According to the ADER, growth in the continent’s low-income countries exceeded 4.5 per cent in 2012 and is forecast to remain at above 5.5 in the next few years. Africa’s collective gross domestic product (GDP) reached US $953 while the number of middle income countries on the continent rose to 26, out of a total of 54.

“Strong economic growth has made major inroads into income poverty. The share of the population living below the poverty line has fallen from 51 per cent to 39 per cent. Some 350 million Africans now earn between US $2 and US $20 a day, and the middle class is increasingly becoming an active consumer market,” the report says.

Some good news amidst doom and gloom in the developed world. 

Economic Logic, Too is posting

The companion blog, Economic Logic, Too that was created last December has started posting. This blog features similar posts to Economic Logic, but submitted by guest bloggers. Two posts are up, one is in the works, and I hope more will be coming. If you are reading this through an RSS feed, consider subscribing also to EL2 (RSS). And if you are interesting in posting, shoot me an email (submission rules).

How much is a Lars Hansen autographed reprint worth?

A student is trying to find out.  He emails me:

I'm a 1st year MBA student at Chicago Booth -- where even the Marketing Professors have a PhD in Economics. 

I'm taking a class this quarter called Entrepreneurial Selling (more info here). One of the coolest assignments is a bartering challenge: Prof. Wortmann gives everybody a simple Chicago Booth pen and we need to barter it for something with larger monetary value, and then keep bartering once a week until the end of the quarter. 

I did my first trade with Prof. Lars Peter Hansen (Economics Nobel Prize 2013). In exchange for my pen, he gave me an autographed copy (he wrote a cool anecdote as well) of his most famous article. I'm now running an auction at eBay (it's OK to trade things for cash): see here.

Why China Holds Upper Hand Over US in Asia for 2014

Or so the Nikkei Asian Review believes. And the reasons for China reasserting its sphere of influence in the region are straightforward. On China's part, it has the bully pulpit in 2014 as the host of the Asia-Pacific Economic Cooperation (APEC). So, member economies' ministers--maybe even the Philippine president the PRC has put in its doghouse--will be trooping to the Middle Kingdom over the course of the year:

Holding the rotating chair of the APEC forum this year, China will host a series of APEC meetings, including those of ministers in charge of trade, energy and finance, in various parts of the country starting in May. The series of APEC events will culminate in a summit of leaders in a Beijing suburb in early autumn, which will be chaired by Chinese President Xi Jinping.

The APEC meetings will cover issues in a wide range of areas, including trade and investment rules and environmental and energy cooperation. By presiding over them, China will try to demonstrate its growing presence in the Asia-Pacific region. "The Xi administration sees the proposed Trans-Pacific Partnership pact, which the Obama administration is actively promoting, as part of Washington's efforts to leave China out and cement the U.S-led international order in Asia," said one source close to U.S.-China relations.

This fear will probably prompt China to try to take advantage of its role as APEC chair this year to regain some of the lost ground in the competition with the U.S. for influence in the region.

OTOH, the United States foreign diplomatic machinery will be stuck in its usual holding pattern due to the midterm elections, set to be held just as APEC gatherings reach their summit:

The odds seem to be against the Obama administration, at least this year. The energy the Obama administration can devote to promoting its Asia policy will be fairly limited as it will have to concentrate on campaigning for the Nov. 4 midterm Congressional elections in early autumn, when the APEC summit will be held.

The quadrennial Congressional elections will be very important for Obama's Democratic Party, which has a majority of seats in the Senate, but not in the House of Representatives. If the Democrats fail to end the divided Congress by wresting control of the House from the Republican Party in November, the Obama administration could lose some steam, with two years left before his term expires.

If Obama becomes an even lamer duck due to electoral setbacks for his party, then he will have even less leeway on the foreign policy front to make a major push towards Asia. 

Are NBA coaches behavioral or neoclassical?

Snnk cost do not matter once spent. Yet, we just cannot help thinking that if we already paid so much for something, we should rather use it, even if it is inferior to something less expensive. With this reasoning, we deviate from neoclassical theory into behaviorial theory. Such attitudes are not well documented, and it is not quite evident how one would put together a dataset to study attitudes towards sunk costs.

Daniel Leeds, Michael Leeds and Akira Motomura found a way, and it is in front of everyone. Professional sports teams sometimes invest or commit considerable resources to recruit players, and a substantial amount can be considered sunk, as it is in the form of a signing bonus, guaranteed pay, or by using an early draft pick for new players. A neoclassical theorist would say that this sunk cost only allows the coach to expand his decision set, but who actually plays on the team should only depend on the players' current performance. This study shows that at least NBA coaches do follow this neoclassical thinking and are not more likely to let under-performing young player stay on the team if they were drafted in the early rounds. Indeed, the data focuses on players in the first five NBA seasons when they all have a uniform contract, thus only draft order should matter. However, there could have been a perfectly neoclassical justification for a bias on the part of the coaches: some players were drafter early because they have potential, and that potential is going to develop with playing time. If there is a puzzle it is thus rather why early draftees get so little playing time.

The Rise and Rise of FDI From the Global South

Much has been made of the protectionism which firms such as those from China have encountered investing in the West. I have called specious arguments on "national security" grounds unvarnished racism, and such discrimination certainly plays a part. Moreover, I have been further vindicated by leaks that reveal massive American spying on its own citizens and those of the rest of world. Who's the real "national security" threat here when one of the largest US tech firms labels its government as an "advanced persistent threat"? You are, quite frankly, a bleeping moron to believe in US security guarantees, especially when it comes to online activity. Internet freedom is effectively unlimited America freedom to spy on you.

However, developing countries' efforts to invest elsewhere is largely driving the ongoing controversy. That is, there would be nobody to discriminate against if their firms stayed home. Accordingly, there's interesting stuff in the current issue of Global Finance about the ever-rising amount of FDI originating from poor countries. Otherwise put, these are countries that in the not-so-distant past would have been mere recipients of FDI:

By far the biggest FDI story of the past few years is the rise of developing and transitioning countries as a source of outward FDI, which jumped from $65 billion in 2003 to $481 billion in 2012. Naturally, China is in a league of its own. In 2012 it came in third among the world’s top 20 investor-economies, behind only the US and Japan. Beyond the acquisitions it has been making across OECD countries, China is aggressively developing natural resources and infrastructure from Africa to the Middle East.

For example, in 2013, PetroChina bought a 25% stake in the Iraqi oilfield of West Qurna 1, right around the time construction of the new Mombasa-Nairobi railway line began in Kenya, financed by the Export-Import Bank of China to the tune of $4 billion. But the new FDI landscape does not include just China. FDI originating from emerging markets is multiplying around the world. In 2013 a Chilean bank took over an American one, a Thai energy company made its first investment in Australia, and the largest Coca Cola bottling company in Mexico acquired a competitor in Brazil.

Notably, however, Global South investors do not invest in the same way their Global North counterparts--traditional TNCs--do:

Importantly, developing and transitioning country investors display characteristics that set them apart from traditional developed-world multinationals.

For one, state-owned enterprises and sovereign wealth funds generate the lion’s share of outward investment. This raises concerns about fair competition. “SOEs may have access to lower-interest loans and better financing conditions [than non-SOE competitors],” says Masataka Fujita, who heads the investment trends section in the division of investment and enterprise at Unctad. “SWFs even have a large amount of assets under management, and, like in the case of SOEs, their governance structure is not always transparent.” Their operations are also viewed with suspicion by host economies because a foreign government is behind them.

In addition, emerging markets companies seem to prefer mergers & acquisitions over greenfield investment as a mode of entry, especially when it comes to FDI into developed countries. “They look to OECD countries because these remain the world’s largest markets and because they are interested in the technology found here,” says José Guimón de Ros, associate professor of economics at the Universidad Autonóma de Madrid in Spain. “Since the crisis, many developed-country companies are under stress and therefore cheaper, so now is a good time to buy them.” Partially as a result of this phenomenon, cross-border M&A has held steady in 2013, stabilizing global FDI flows even as investment in new productive assets has declined.

Finally, emerging markets companies are inherently more familiar than their OECD counterparts with how to do business in a developing-country setting. In part as a result, the majority of investment from emerging markets is going to other emerging markets. According to Unctad, in 2011, China exported 70%, and Brazil 40%, of its outward FDI stock to neighboring emerging economies. “Regulations in developing countries are less complicated,” says Du The Huynh, senior lecturer at the Fulbright Economics Teaching Program in Ho Chi Minh City, Vietnam. “The competition is also less fierce.”

The telecom sector illustrates this well. Vietnam’s largest mobile-network operator, Viettel, has successfully established itself in Mozambique, Haiti, Laos and Cambodia, countries that by most OECD investors’ standards are difficult places to do business.

True, the Western media headlines are dominated by South-North FDI. real Yet it's not mostly the formerly colonized investing in the heartlands of the erstwhile colonizers, but poor countries venturing where rich countries dare not--scared off by corruption and other bogeymen for white people. Yes, South-South investment is happening:

to paraphrase Aretha Franklin, Queen of Soul, poor countries are doin' it for themselves.

No need to ban incandescent lightbulbs

It is sometimes difficult for a shopper to understand all the consequences of purchasing choices. Take lightbulbs, for example. The variety in price is large, and so is the variety in expected life or energy consumption. When more efficient lightbulbs came on the market, they were massively more expensive than existing bulbs, yet in the long run worth it thanks to much lower energy consumption. Consumers did not seem to understand that, along with what this entails for pollution, hence the old bulbs were banned. Was this really necessary?

Hunt Allcott and Dmitry Taubinsky exploit two randomized experiments to look into this. The first is computer based and gives participants a budget and different information about lightbulbs. The second is a field experiment at a home improvement retailer where shoppers where given different information and discount coupons. They find that people do not undervalue energy costs that much, meaning that only minor, if any, subsidies were necessary to win them for next-generation lightbulbs. Once more, it looks like a ban is outdone by the nudging that the price mechanism can do with appropriate subsidies or taxes. They also find that there is a large fraction of shoppers that wants to stick with incandescent lightbulbs, indicating a substantial welfare loss from a ban that is similar to standard rationing. One more piece of evidence that bans need to be banned.

All that financial innovation has not lead to more transparency

What is the purpose of financial innovation? I would say it is to find new ways to insure against risk, to finance projects and to allocate funds optimally. We are taught that generally the price mechanism is the best way to do the latter, as long as it is contains all the available information. Thus, a good way to measure whether financial innovation has improved things is to measure whether prices have become more transparent.

Jennie Bai, Thomas Philippon and Alexi Savov take the idea that stock and bond prices should contain information about future earnings. Thus if you regress future earnings on current valuation (and some controls), errors should become smaller over time, because information costs have decreased and we have become more efficient at allocating financial resources. But over the last 50 years, no progress is to report. No matter how you decompose the errors, there is nothing to write home about. That is quite disappointing after all the increased financial sophistication of the financial industry. Or did this sophistication lead to more obfuscation?

PRC Industrial Policy: Killing Off 75% of Solar Makers

Well surprise, surprise: Having reached a settlement last August with the European Union which was previously set to slap anti-dumping tariffs on its solar panels, we now get word on the extent of China's subsidies for the industry. At year-end 2013, the PRC's government rolled back the industrial benefits allotted to this industry, and there is now expected to be a bloodbath on the production floor of China's manufacturers. How bad will things get? Try a 75% "death sentence" rate as only a quarter or so of firms will remain eligible for government support. From the Nikkei Asian Review:

The Chinese government is pushing for a drastic shakeout of the country's overcrowded solar cell industry, supporting only a quarter of players and practically telling the rest to get out of the business. The Ministry of Industry and Information Technology has announced a list of 134 producers of silicon materials, solar panels and other components of photovoltaic systems as meeting certain conditions, as measured by 2012 production, capacity utilization and technical standards.

In a sector said to have more than 500 companies, the ministry's move means that three-quarters didn't make the cut -- including the core subsidiary of Suntech Power, which went bankrupt in March, and Jiangsu Shungfeng Photovoltaic Technology, Suntech's startup rescuer.

These firms will not be able to get credit lines from financial institutions and thus will have a tough time borrowing, according to industry insiders. They will also no longer be eligible for refunds of export tariffs, a huge blow to companies that depend on overseas business. On the home front, it will be difficult for them to participate in state-run utilities' auctions, sharply curtailing their opportunities to win orders.

Bye bye subsidized loans, export tariff refunds, and ultimately financial viability. Even in this part of the world, the alternative energy revolution seems to have bitten the dust before it got started as matginal Chinese manufacturers are being fed to the 120 hungry dogs of cold, hard market reality. 

Did home ownership made things worse in the Great Recession?

I have complained several times already that house ownership should not be encouraged by public authorities, mainly because it prevents diversification of risk by households and because there is slim evidence at best that home owners are happier and better contributors to society. It also quite obvious that high ownership rates have contributed to make the last recession worse in the United States. A recent trio of papers studies this last point.

Silvio Rendon and Núria Quella show that higher homeownership rates fed by easy financing lead to higher unemployment rates. This is because homeowners have higher reservation wages through a wealth effect. They find that in the US this has increased the unemployment rate by an incredible 6 percentage points. You may also want to add to this that homeowners are less willing to move for a new job, further increasing the unemployment rate, something the model does not capture.

Ahmet Ali Taṣkin and Firat Yaman look at unemployment duration in the US and find that renter stay unemployed the shortest and homeowners the longest, especially those who do not carry mortgages. Following this result, facilitating home financing would lengthen a little unemployment spells and increase the unemployment rate, under the hypothesis that job losing rates are unaffected.

Stijn Baert, Freddy Heylen and Daan Isebaert show that the unemployment spell length depends on the housing tenure situation in Belgium. The homeowners with mortgages exit the fastest, those without mortgages the slowest and renters lie in between. Easier home financing would thus reduce the unemployment rate here, again assuming it does not affect the rate at which people lose jobs. Keep in mind that Belgium is unique in that unemployment insurance benefits can last forever.

Which US-Led FTA Nego is Lamer, TPP or TTIP?

You say "TPP," I say "TTIP"; let's call both things off

One of the many reasons why the Doha Round of WTO trade negotiations has been put on indefinite pause is due to Americans holding out for stronger intellectual property protections. Typically hard-headed, the Yanquis have not really given up on their pet causes. Instead, they have merely resurrected them in plutilateral arrangements being touted by the US Trade Representative.

(1) Let us begin with the much-ballyhooed expansion of the Trans-Pacific Partnership (TPP). Originally a grouping of trade-willing APEC member countries Brunei, Chile, New Zealand and Singapore. the US is seeking to crash into their party. With the release of more leaked documents, the secretive TPP negotiations apparently involve the US barging into someone else's FTA and attempting to shape it to its own ends. Surprise, surprise. In simple terms, it aims to revive its failed Doha wish list with suck...I mean, "Asia-Pacific countries keen on concluding a high-quality FTA." Joseph Stiglitz, for one, is wary of its goals of extending medicine patents of American Big Pharma into near-eternity and circumscribing the ability of developing countries to manufacture generic versions--especially if they are needed due to health crises (i.e., "compulsory licensing"):

The IP chapter is also worrisome to others. Joseph Stiglitz, an economist, Nobel Prize winner and professor at the Columbia University School of Business, asked negotiators in an open letter sent Friday to resist proposals to weaken consumer rights in intellectual property. The letter was published by Knowledge Ecology International (KEI), a group lobbying for fairer distribution of information, which has taken a close interest in the TPP and was also concerned by the contents of the leaked treaty draft.

Negotiators should resist mandating extensions of patents terms, narrowing the grounds for granting compulsory license on patents and increasing damages for infringements of patents and copyrights, Stiglitz wrote. Moreover, they should also oppose mandating excessive enforcement measures for digital information and requiring more than 70 years of copyright protection, among other proposals, Stiglitz wrote.

Damn Yanquis. They keep yapping about freedom and transparency Obama-the-hypocrite style when, in reality, they seek to pull a fast one on a large chunk of the world's population.  Considering that the TPP expansion participants are generally a coalition of American sycophants, toadies, yes-men and hangers-on, it is remarkable how little traction US negotiators have gained. Can't cow the cowed, eh? American negotiators hoped for a end-of-2013 completion; I think events have shown them to be unrealistically optimistic about concluding a deal, let alone one so lopsided in favor of US interests. Either nothing is concluded, or one is that is watered-down and riddled with opt-outs.

(2) There is also the so-called Transatlantic Trade and Investment Partnership (TTIP) between the US and EU underway. However, alike TPP, it appears to be a US-led attempt to introduce its favored IP regimes first and a trade agreement second. Ho-hum, what else is new, Sammy?

TTIP negotiations last year were already going nowhere in particular rather quickly, and that was before the US was revealed to be a massive spy on European citizens and leaders. Why are we to believe that Europeans are so interested in further protecting the intellectual property rights of those who are so callously indifferent to violating European privacy rights on an unprecedented scale? Beats me, pal.
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For both the TPP and TTIP, intellectual property is far from the only point of contention. Agriculture in particular is a tough nut to crack with many sensitivities in Asia and Europe. Which is lamer, then? It's hard to say since both negotiations don't seem to be heading anywhere at the moment, so call it a draw.

Message to the US: Did you simply think you could take the least popular items on your Doha wish list and get them accepted elsewhere? Think again.

Minimum Wage as an Antipoverty Tool

David Henderson reports:

If the federal minimum wage were increased to $9.50 per hour:

•  Only 11.3 percent of workers who would gain from the increase live in households officially defined as poor.
•  A whopping 63.2 percent of workers who would gain were second or even third earners living in households with incomes equal to twice the poverty line or more.
•  Some 42.3 percent of workers who would gain were second or even third earners who live in households that have incomes equal to three times the poverty line or more.

Do MRSPs (manufacturer suggested retail prices) have an impact on prices?

In some countries, manufacturers are allowed to suggest to retailers how to price their goods. What does this do to prices? It may increase them if it reduces competition and the MRSP is set high. It could also increase competition if set low, as retailers may find it difficult to sell at a higher price than printed on the packaging.

Babur de los Santos, In Kyung Kim and Dmitry Lubensky report on a natural experiment in South Korea where MRSPs were banned and then allowed within a one-year span. The ban increased prices on average by 2.3%, the reintroduction reduced them by 2.6%, from which you can conclude that MRSPs increase competition. Prices were significantly below MRSPs, so it is not likely MRSPs acted as price ceilings. Rather, the authors conjecture that MRSPs help consumers in forming expectations of prices at other retailers once they see the mark-down at the current retailer. Absent the MRSP, the consumer faces higher search costs, and the retailers takes advantage by increasing the price. To be convinced of this argument, I would have liked to see some estimates by product category. Different mark-downs must have had different implications for price changes, and those should help us distinguish theories better than aggregate results.

World Bank President and Bono [?!] on Ending Poverty

We haven't had a video feature in ages, so here's one that should be of general interest. Current World Bank President Jim Yong Kim has not really received much popular public attention--or even in development circles for that matter. (Notice how the YouTube clip doesn't actually name him but instead his title. Kim's reserved manner certainly doesn't generate outlandish headlines that he fed his out-of-favor uncle to 120 hungry dogs alike that other Kim.) What better way, then, to raise his public profile but to pair this reserved intellectual with the extroverted entertainer Bono? The latter is known for his passionate espousal of vastly increasing aid to the developing world, although he's encountered much criticism along the way about being ill-informed about the subject matter Still, it's a potentially smashing concept, and they actually try it out in this 2012 clip in which both discuss ways to end poverty.

The pairing works to a greater extent than you would expect: Bono actually provides a decent "big picture" overview of the challenges we face, while Kim does the same in spelling out the "small picture" minutiae on aid delivery challenges and so forth. Watch it and see what you think. With or without you, the quest to end poverty goes on...in the name of love. [Insert your favorite U2 song allusions to poverty alleviation here.]

Stanley Fischer as the Fed's Vice Chair

President Obama just nominated Stanley Fischer to become vice chair of the Federal Reserve.

Stan is a great choice: smart, sensible, open-minded, and experienced.  He also has first-rate people skills, which will come in useful handling the many personalities on the FOMC and in Washington. He will be a perfect #2 to Janet Yellen.

In related news, Stan recently became a Distinguished Fellow of the American Economics Association.