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

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

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

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

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

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

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

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

Obamacare versus the Faculty

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

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

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

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

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

Update: Another example.

Ec 10 Bleg

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

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

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

Which academic field contributes most to economic growth?

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

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

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

Screw Panama; Chinese & $40B 'Nicaragua Canal'

It's been a long time since we've had a video feature, but now is as good a time as any. Recently, a young Chinese telecoms magnate came to an arrangement with the (rather impoverished) Nicaraguan government to develop a Panama Canal alternative slicing through that Central American republic:

Wang Jing, a 40-year-old Chinese telecommunications billionaire, has emerged as the next mogul to give it a go. Nicaraguan President Daniel Ortega, who fought the U.S.-backed contras in the 1980s, signed a 50-year concession on June 14 that grants Wang’s HK Nicaragua Canal Development Investment Co. (HKND) rights to develop a $40 billion project that includes a canal, an oil pipeline, two deepwater ports, an interoceanic railroad, and two airports.

Apart from his youth, question marks surround whether a telecoms guy knows anything about infrastructure development. Certainly there is no lack of such projects in the PRC--it just so happens that Wang has no experience with any of them. So obscure is this guy that the Nicaraguan leader even described him as a "ghost" during the signing ceremony:

Wang, whose HKND Group launched its website just days prior to the concession signing, is relatively unknown. “Why Wang Jing?” asks Margaret Myers, China and Latin America program director of Inter-American Dialogue, a Washington research group. “He has no experience in canals or large infrastructure projects. He is a telecommunications guy in China.”

Wang is chairman of more than 20 enterprises in 35 countries, including Beijing Xinwei Telecom Technology, according to the website. He’ll be owner and chief executive officer of HKND, which describes itself as an international infrastructure developer that will design, build, and operate the canal, its first project. “Here is the ghost,” Ortega said when Wang appeared to sign the concession on June 14. “He’s flesh and bone.”

Still, there is a commercial oportunity here insofar as cargo ships become larger and larger. Pretty soon, the Panama Canal may no longer be able to handle all the volume passing through:

The project comes as Panama prepares to finish a $5.25 billion expansion of its 99-year-old canal. On June 20, Honduras announced plans to work with a Chinese company on an Atlantic-to-Pacific railroad to boost trade across the Central American isthmus. “I think it is the right time now given the expanded ship sizes out there,” says Bill Wild, a former deputy CEO of Australia-based contractor Leighton Holdings (LEI:AU) and HKND’s chief project adviser. “Even the Panama Canal can’t come close to handling the big ships being built.” The Panama Canal Authority refutes this.

Despite the understandable scepticism, it will be interesting to watch whether this is a work of genius or a boondoggle on the part of the Nicaraguans in placing their bets on an unknown quantity.

UPDATE: It seems Ortega and Wang have already disagreed in public over the canal's route. Once more, I am not so optimistic about it coming true since so many grand plans to build this canal have been mooted over several decades.

AEA elections are on, you know for whom to vote

As explained in a previous post, write in Gregory Burge for every slot in the AEA executive, and no one else.

Vote!

If you are a member of the American Economic Association, you probably received an email this morning about the election of AEA officers. Please vote. It is your patriotic duty, or something like that.

Information about the candidates is available here.