Posts

Showing posts from August, 2009

The economics zeitgeist, 30 August 2009

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Three kinds of economic story

Anthony J. Evans (who kindly linked to my camel story earlier in the year - or as he notes, perhaps not all that kindly) has written a paper about economic counterfactuals. He confirms what's now becoming a mantra among economists (if not their public): economists can't make predictions.
However, he says, rather than giving up completely on exploring the future, they should do so with two tools of the economist's imagination: counterfactual analysis and scenario building.
Counterfactuals are stories about the past - a retrospective prediction if you will - considering what might have happened had a different decision been taken at a key moment. For example, what if the financial sector had not been rescued by governments in 2008? Or what if governments themselves had defaulted on their debts?
Scenarios are possible alternative futures - constructed not so that you can predict which one will happen, but so that you can prepare to understand events as they unfold. Each scenario…

Economics blog roundup: healthcare, Sahara and rationality

Tyler at Marginal Revolution has an excellently succinct summary of how politics works in healthcare:
...one needs to signal a more extreme symbolic affirmation with the proper "showing that you care" values than what the other side is doing...This statement is so perfectly borne out by the UK experience since 1997 that there is a kind of beauty to how true it is.

Talking of healthcare, the US plan should become a lot cheaper if this trend continues: placebos are becoming more effective. On current trends placebo should be more effective than all current drugs by 2011; by 2013 sugar pills will overtake some common forms of surgery and in 2016, it should no longer be necessary to use Band-Aids or brush your teeth. Fortunately the US does still have some indirect price supports on sugar, or else the pharmaceutical companies would have no way to make profits at all.

Derek Thompson asks whether the Sahara could power Europe. It's even better than that: I estimated this week tha…

The economics zeitgeist, 23 August 2009

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

What is the return on fiscal stimulus?

Menzie Chinn attempts a valiant defence of fiscal stimulus against innumerate accusations from Richard Posner and others. Posner, to be fair, has corrected his arithmetic now and restated a few of his points in a more nuanced way.
However Chinn is now having to fight a battle against his own anonymous commenters, who say things like: So explain to me still, how an 89B (regardless of interest expense) is a good investment if we only get a 39B return. It seems even if we got a multiplier of 2, we'd still only be at 80B and that is still a negative return. It seems like we're just delaying the pain. This comment misunderstands the nature of stimulus and imposes a meaningless standard on the "return" on government spending. Here is what has actually happened: The government borrows $89 billion.

Savers have handed over an asset ($89 billion in cash) in return for another asset ($89 billion of government bonds). The government gains an asset ($89 billion cash) and creates a new…

Three ways to annoy an economist

1. Confuse causation and correlation.
Economists have to go to quite some lengths to demonstrate that their work is actually correct. Which makes it irritating that any old blogger can just write things like "Blogging dramatically increases website traffic": Blogging is good for your business. A new study from Hubspot shows that companies that are blogging get more visitors than businesses which do not write a regular blog. Indeed, the analysis of data from more than 1,500 businesses reveals that firms which have blogs get 55% more traffic than those which do not. Now I'm sure that firms which have full-time janitors also get more traffic than those which do not. Of course they do - the more successful a company is, the more web traffic it has, and the more likely it is to hire a janitor. Does that mean that my easiest route to increasing my web traffic is to hire a whole team of janitors?
2. Get the whole argument right except the conclusion
I promised not to mention Scott S…

Behavioural economics software

Nice little iPhone application highlighted here at Consumerology.
It is intended to help close the gap between action and reward which is the chief cause of procrastination.
Could be a good add-on to any workflow system - I'll definitely be downloading it (as soon as I get my iPhone, which ironically suffers from a two-month gap between placing my order and getting my reward).
A rather different approach to implementing behavioural economics in software is taken by my company, Inon - have a look at our CVM software, which helps you find better ways to sell more personalised services to each customer.

An alternative interpretation of rent-seeking

This article at VoxEU implies that companies in Italy which are 'connected' with politicians make 5% more profit.
Could be true.
But an equally plausible story is that companies become less profitable around election time because they are spending 5% of their profits on subsidising politicians.
On this interpretation, contributing to political campaigns is seen as a cost of doing business, and depresses profits immediately before an election. Note that in the graphs shown in the article, the firms' profits take a dip in the year before the politician's term ends.
Far be it from me to impugn the Italians' proud record of rent-seeking and corruption - my Italian friends would claim they have a unique comparative advantage in this field, and lead the world in their craftsmanship (though there are some volume producers in Africa and Asia who compete for sheer scale of bribery). But I want to allow them the elegance of a convincing escape clause - which is, after all, an es…

Guest post at missmarketcrash

If you're interested in predicting political behaviour or business outcomes, or want to know what's going to happen in Iran in October, you might be interested in Bruce Bueno de Mesquita's work.
It's written up in my guest posting on missmarketcrash's blog today.

The economics zeitgeist, 16 August 2009

Image
This week's word cloud from the economics blogs. I generate a new cloud every Sunday, so please subscribe using the RSS or email box on the right and you'll get a message every week with the new cloud.

I summarise around four hundred blogs through their RSS feeds. Thanks in particular to the Palgrave Econolog who have an excellent database of economics blogs; I have also added a number of blogs that are not on their list. Contact me if you'd like to make sure yours is included too.

I use Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Saturday links go salmon fishing

A superb little piece from Steven Landsburg. I forget sometimes what a good writer - and what a good economist - he is. This one is about whether it's right to retrospectively punish bad, but legal, behaviour. The same argument could very well be applied to the payment of large bonuses by banks. There are two competing principles here. The first principle is: Nor shall private property be taken for public use without just compensation, a principle enshrined in our Bill of Rights...
But here's the countervailing principle: Bad behavior ---even legal bad behavior---should be punished eventually, because that precedent deters future bad behavior. If that principle were applied consistently and predictably, firms might not have overinvested in the wrong technologies [or overpaid their risk-seeking employees?] to begin with. This speech by James Montier is a very nice, funny and persuasive argument against the EMH. Of course being funny and persuasive can hide many logical flaws and I…

A perfect example

This story, from the Washington Post via Free Exchange, is a perfect example of the challenge for behavioural economics.For weeks after he was laid off, Clinton Cole would rise at the usual time, shower, shave, don one of his Jos. A. Bank suits and head out the door of his Vienna home -- to a job that no longer existed. It's easy to look at this and say "he's not behaving rationally. How amusing - people are a bit nuts sometimes".
It's much harder to look at it, work out a plausible model for why he behaves that way, find an abstract description of the model, extrapolate it to other situations which appear different on the surface, and test your theory against experiment or data.
But that's what behavioural economics - or cognitive economics, or the study of decision-making - has to do.
I've just finished Vernon Smith's memoir Discovery, about which I may write more later - but here's a very perceptive couple of quotes: ...the cognitive psychologists, …

Are negative interest rates enough?

I'm going to mention Scott Sumner one more time and then give him a break.
For the last six months he's been recommending that central banks (mainly in the US, but presumably worldwide) pay a negative interest rate on commercial bank reserves.
(for reference, here's another in a string of recent articles justifying why the Federal Reserve pays positive interest on reserves, without even mentioning the negative interest option. Are they under instruction not to discuss it?)
In short, the argument is this. Quantitative easing works by paying banks cash in return for their government bonds. Since they don't earn any interest on cash (unlike on the bonds they were holding previously) they will want to lend out the newly acquired cash into the private sector so that they at least make some money on it. This (depending on your model) will boost the velocity of money, or increase the relevant measures of money supply, or increase inflation expectations, or increase investment, a…

Healthcare misinformation is contagious

While the Americans don't want a British-style healthcare system, it seems that some Brits are very keen on American-style healthcare rhetoric.
After Alan Duncan's hilarious outburst we now have Chris Ayres in the Times. Claiming that Obama should abandon his plans to replicate the NHS, in favour of a scheme that "combines the best of both systems".
Now anyone who is listening honestly to the debate, or has looked at the healthcare bill being proposed, couldn't possibly think that Obama is proposing a universal, public-funded and public-supplied health sector.
If anything, the main criticism of the proposal is it doesn't go far enough towards this goal. The main content is still a public insurance plan - no public ownership of hospitals or provision of services, and no single-payer system.
If a British writer (based in the US) can't tell the difference between the US plan and the NHS, despite writing more than one article comparing them, why is he still being…

Alan Duncan: the British Art Laffer

In a bizarre Art Laffer-like incident today, Alan Duncan reminded us of the good old days when all Tories were mad.
In the midst of a number of other infelicities, widely reported in left and right wing newspapers nationwide, Duncan said of the House of Commons: Basically, it's being nationalised. Now I am spoiled by my choice of targets. I have: American economists who think that the government doesn't run MedicareAmerican financial journalists who argue that Stephen Hawking would have been left to die by the NHS if he'd been British (which he, er, is)A British MP who thinks - and is willing to admit - that the House of Commons used to be a private company Republicans must be terrified that, if Obama gets his way, they are going to end up with a publicly owned government. Thank goodness free enterprise still reigns in that branch of the economy.

Their favourite monetary economists

An chain of favourites is emerging in recent blogs. Let me show you how it works.

Chuprevich's favourite economist is Tyler Cowen (he is a fewotherpeople's favourite too).

It follows of course that his favourite monetary economist is also Tyler Cowen*.

Tyler Cowen's favourite monetary economist is Scott Sumner.

Scott Sumner's favourite monetary economist is Bennett McCallum.

Bennett McCallum's favourite monetary economist is not currently known.

Can this chain of favourite monetary economists be extended in either direction? Perhaps Professor McCallum will leave a comment to assist. If anyone's favourite monetary economist is Chuprevich, do let us know. I am having trouble investigating that as his website makes me dizzy, not to mention the fact that Chuprevich may not be a real person.

Can we develop a theory of favouritism among monetary economists? This Google search shows a few more favourites (note the American spelling) and a fair inference is that for an econom…

Supply and demand...for anarchy?

Scott Sumner has got me spotting supply and demand mistakes all over the place.
This post combines that theme with the question of 'the price of anarchy', outlined by Gravity and Levity last week.
Niall Ferguson has blended both of them into a particular detail of his FT article on "lucky" Barack Obama. It would take a long time to critique the whole article, but here's the salient point: Iraq is likely to become more unstable as US troop levels are reduced. Now on the surface, that sounds obviously correct. But how about if we turn it around to make the real causality clear: US troop levels are being reduced as Iraq becomes more stable. The thing about supply and demand, like any equilibrium system, is that any change tends to create a pressure to counteract itself. In this case, the reduced "supply" of anarchy has increased its price, thus reducing the production returns on its complementary good, the US Army. Thus the army's supply curve shifts left an…

Solow on rational macroeconomics

I have complimented Robert Solow before on this blog (as if he needs my praise) but I think it's time to link again - via Mark Thoma - to a speech he wrote in 2003. This says, concisely and persuasively, most of what the macroeconomic doubters have been talking about for the last few months. And six years ahead. Impressive.
http://economistsview.typepad.com/economistsview/2009/08/solow-dumb-and-dumber-in-macroeconomics.html

The economics zeitgeist, 9 August 2009

Image
This is a word cloud from all economics blog postings in the last week. I generate this every Sunday so please subscribe using the links on the right if you'd like to be notified each time it is published.

It has been constructed from a list of economics RSS feeds from the Palgrave Econolog and other sources, and uses Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

More buyers than sellers?

David Smith of the Sunday Times is talking about the property market: there are more buyers than sellers... It is a market, though. Trying to predict the balance between buyers and sellers over the next 12 months is hard Just how hard? Here's my prediction: there will be exactly the same number of buyers as sellers over the next 12 months.
Working out how I came up with this prediction is left as an exercise for the reader.

Democracy, markets and perfect information

Matthias Wasser, in a response to Tyler Cowen's progressivism post, writes:In a large state true democratic governance is impossible, because unlike the market, a perfectly functioning democracy would require every voter to have perfect global knowledge. Is this true?
Note that Matthias is not necessarily giving his own view here, but (as per Tyler's challenge) his characterisation of libertarian opinion.
But it's an intriguing statement. Many people think the converse: that the efficient markets hypothesis requires all market participants to have perfect information, and the action of an informed and beneficent government is a way around this problem.
He's correct to point out that this is not in fact a condition of the EMH. But surely it would be possible to design a democratic system where the same thing holds: where, somehow, distributed knowledge enables society to make the right collective choices. What are your ideas on this? Comments are invited.

Misreadings and readings

When the following post from Mark Thoma came up in my RSS feed:Reality Pricks Corn Ethanol's Bubble for some reason I first parsed "Corn" as the verb in the sentence. I don't know quite why my brain responded that way...I am not sure what corning would be, and as for a "reality prick"?
A few other links before I go out for the evening: Mark's contribution to the Lucas roundtable at the Economist (do click through to see the other articles, including Tyler Cowen who seems to be getting good at identifying a nice balance point at the fulcrum of many economic debates)Richard Thaler's FT article (one of many on the EMH in the last few weeks)Another EMH discussion - excerpted from John Quiggin's forthcoming book - at Crooked TimberWhat looks like a fascinating book by Kenneth Arrow (h/t Paul Krugman)The "Cripes" growth model from Worthwhile Canadian Initiative. A very neat idea and entertainingly written but I think it misses some countervaili…

What is libertarianism?

Tyler Cowen challenged progressives to come up with an intelligent defence of libertarianism. While I might not be considered especially progressive by European standards, I probably am on the American spectrum. I thought that a view from a European might be interesting given that he makes several comparisons between the two continents in his list.
Incidentally, I think his list is not a bad summary of the progressive position, though I'd disagree with 3 and the second part of 8. Maybe those points are where I am revealing my libertarian bits.
Here's my attempt to return the favour:
As a matter of principle, freedom is both a good in itself and a bulwark against damaging authoritarianism.In general, each individual knows more than anyone else about their own interests and the context they live in, and by making their own choices they are best able to maximise those interests. Indeed, the only way we can get any genuine insight into someone else’s interests is by observing the cho…

Britain is doing very well - here's why

Paul Krugman has been cheerleading for Britain for a while. I'm not sure I agree with him that the pound is cheap, but it's good to see we that some of our signs of robustness are visible from outside.
Why is our economic performance so good? This is one - charming - theory.

A puzzle about incentives

Interesting puzzle from Chris Dillow today: is it possible to genuinely align the incentives of employees and investors?
This in response to Lord Myners' debate about whether long-term shareholders should have more voting rights than short-term traders. I've touched on this question before but the question of whether shareholders have a real understanding of the company's interests is an excellent one.
I have a particular interest in this question because part of my business is designing structured pricing approaches, which are intended to align the interests of supplier and client in a commercial relationship.
Structured pricing generally rewards the supplier for achieving business objectives of the client. But while it's a big improvement over traditional contracts, it is still not perfect in theory.
For instance, if you hire a telemarketing agency the traditional way to pay them is a fee for each day of time. They'll spend a day on the phone and charge £350. If they…

Slow EMH and diversity

A perceptive article by Tony Jackson in the FT illustrates two theoretical points I'll be developing in more detail over the next few weeks.
First, he equivocates about the efficient markets hypothesis (EMH): When we make a killing in a rising market, we dwell on our own smartness rather than the irrationality of prices having been too low. This is a key point to understand in markets - especially illiquid ones such as property. Some commodities tend to exhibit long-term bear and bull markets. Residential property in the UK showed a consistent rising trend from the early 1990s until 2007. It's hard to argue, even having seen subsequent falls, that this obeyed the "random walk" theory of the pure EMH.
Instead, it's more convincing to posit that there was a "correct" efficient value - perhaps the 2004 or 2005 price? - and that most people from the mid-90s onwards could see that the correct value was higher than the current price. However, natural caution, slo…

Advertising: beer, tax, Gordon Ramsay or Google?

According to this posting from Felix Salmon (if I can match Gawker's CPM) I could make about £150 a month if I sold advertising on Knowing and Making.
Some way to go before I can give up the day job. Please refresh the page a few more times if you want to help.
Still, it could just about pay for one of the following: all my visits to the pubmy council taxdinner at Gordon Ramsay once a montha subscription to the FT, the Economist, and all the economics books I readthe money I pay Google for advertising my software on their siteMaybe it's worth it. That is, if I could get Gawker to sell the ads for me. Think they'd be up for it?

Supply and demand: bank loans

Scott Sumner has published a couple of good articles about the difficulty of understanding supply and demand, and Robert Peston's posting today may be an excellent illustration of that.
Robert says: Here's the great and resonant unknown of the moment.
Is the credit contraction a reflection of less demand from you, me and millions of others? Or are the banks rationing much more than they had been doing?
The answer is - probably - a bit of both. But does that make any sense? Well, it could - but is it plausible that demand for loans just happens to fall at the same time as the banks tighten their standards? And why would the banks "ration" credit anyway? Professor Sumner might give a simpler explanation.
Occam's razor, as you know, says that the simplest explanation is usually the best. So can we identify a single cause of this phenomenon? Yes we can.
Imagine that there is a stable market for credit in 2007. Then just one thing happens: the supply curve for loans shifts l…

Healthcare, trust and selection: comments on other blogs

I heard somewhere that what people do on blogs is write comments about what other people said on blogs. I guess I do a bit of that, but I'm sure my rate is below average. Therefore time to catch up.
In this post I'll look at a couple of interesting points on the American healthcare debate:

Megan McArdle looks at rates of insurance among unhealthy people and finds that the adverse selection theory is wrong. But I think there's a serious flaw in her argument. Her finding is that since uninsured people are about as healthy as insured people, adverse selection can't be happening. But she relies on the following assertion: "we would expect the uninsured to be sicker than the general population". I don't think that's correct at all. Surely sick people have far more incentive to get insured than healthy, and so we'd expect the uninsured to be substantially healthier than the average? After all, we would assume that people who don't own cars probably ha…

The economics zeitgeist, 2 August 2009

Image
This is a word cloud from all economics blog postings in the last week. I generate this every Sunday so please subscribe using the links on the right if you'd like to be notified each time it is published.

It has been constructed from a list of economics RSS feeds from the Palgrave Econolog and other sources, and uses Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data.
You can also see the Java version in the Wordle gallery.

If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch.

Behavioural economics and alcohol limits

Dr Nick Sheron of the Alcohol Health Alliance has objected to the government's publication of daily instead of weekly alcohol limits. But his protest shows a failure to understand both behavioural reasons for the advice, and the economics of alcohol consumption.
First the behavioural aspect: Dr Sheron says we should go back to using the old weekly limits, which are based on sound research. The 1987 sensible drinking limits, which set the bar at 21 units per week for men and 14 units per week for women, remained in place until 1995. I have no doubt that, as he says, the medical research was based on the idea of weekly limits and not daily. The problem is that this is not a medical issue. It is a behavioural issue.
The government's objective in publishing the recommended limits is not to give medical advice or influence doctors. It is to change people's behaviour. It's far easier for people to influence their own behaviour through short-term goals and fast feedback, than thr…