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Showing posts from February, 2010

The economics zeitgeist, 28 February 2010

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.
The words moving up and down the chart are listed here.
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.

The price of ideas: competing incentives for innovation

[I intended my next post to be a followup to yesterday's, but I need a bit more time to work on that. So you can have this one instead - it's quite good too]

Only someone with Nathan Myhrvold's Microsoft money - and reputation as a mad genius - could get away with starting Intellectual Ventures and still being taken seriously. But since he can, it makes it an interesting concept.

This article by Ryan McClafferty raises some tricky questions about whether the company's attempts to create a marketplace in ideas will encourage, or instead stifle, innovation.

Normally if we deepen the market for a commodity, more of it will be produced. It gives producers more chances to sell, consumers more places to buy and lets price discovery be more accurate. As a side-effect it will usually improve the quality of the good - imagine that instead of a competitive dealer network for buying and selling cars, the government simply issued one to every family. It's very unlikely we'd…

RBS, Lloyds, lending and taxpayer value

Robert Peston has been working hard reporting on results from RBS and Lloyds the last couple of days.

A couple of points.

He claims that taxpayer's money has gone down the drain at RBS, because:
we as taxpayers put in £25.5bn of new equity into this bank last autumn...but...the equity of this bank has increased by less than £16bn to £80bn.So almost £10bn of the £25.5bn we've only just put into RBS has already been wiped out by losses.Well, that's half true. £10 billion has indeed been wiped out by losses. But it's not £10 billion of our money, it's £10 billion of the former shareholders' money.

Our £45.5 billion has bought 84% of that £80 billion in equity, a £67.2 billion asset.

The reason we're not in profit yet is because the market is still applying a discount due to uncertainty over future losses. We don't know if those losses will happen yet - it depends mainly on economic recovery - but on the book value of the bank, we got a good asset at a disco…

Cheryl Cole and the liquidity paradox

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This may be the first time I've linked to a story in The Sun, but it illustrates a striking economic puzzle, so here goes:
"[Cheryl Cole] will not be fighting for a huge settlement. She just wants to get out fast so she can press on with life and move on."The initial advice is that it speeds up the process if there is no claim for money"...Cheryl hopes to keep the couple's £6million home.So wait...this transaction will be more liquid with lower transaction costs if it takes place in property instead of cash?

This goes against all standard microeconomic theory, which strongly implies that cash transactions should be more efficient than barter. Cash is a fungible asset, highly granular, and any transaction involving other assets will be an imperfect match for the agent's preferences, reducing the available consumer surplus.

What could be the explanation for this?

Cheryl could be rationally giving up a potential material gain simply to reduce likely negotiation a…

Dodgy arithmetic - but if it proves the point, who cares?

I don't have time to write a detailed post today so let me do something slightly unfair by picking holes in somebody else's.

Stephanie Flanders writes about (among other things) the risk to UK exports posed by the slowing eurozone economy.
Germany seems to have had no growth at all, the Italian economy shrank by another 0.2%, and Spain by 0.1%. Between them, those three countries accounted for 15% of UK exports in 2008.Sounds terrible. But wait, there is a little bit of good news to partly make up for it:
British exports to China were 53% higher last month than in January 2009. But they start from a very, very low base: just 2% of our exports went to China in 2008.In total, about 12% went to the Brics - with about 75% going to advanced economies, primarily the the US and the EU.Solid growth in Europe is a necessary condition for a healthy recovery in the UK. So the latest weak numbers from across the channel have given the MPC one more reason to keep the door to further quantita…

Free lunches (wrapped in vine leaves)

This quite clever proposal from Cavallo and Cottani sounds plausible at first but my immediate reaction is: how can it work?

The idea is to eliminate payroll taxes in Greece and instead raise VAT to 25%. This is meant to increase competitiveness while reducing distortions in the economy.

It feels like a magic solution - which naturally makes me suspicious. If the economy really needs a devaluation, then how can they miraculously solve the problems without one?

But then I realise that magic really can happen.

A devaluation is only a nominal change - it simply breaks people's money illusion and affects relative prices. In fact, a devaluation requires no real actions at all, although it does change the pattern of of future real demand. All the benefits of a devaluation can, in principle, be achieved through the coordinated individual choices of all the agents in the economy.

Of course such coordinated choices are highly implausible, which is why devaluation is a good shortcut to achi…

Could you name five female CIOs?

This article bemoans the fact that a 13-year-old girl:
was able to name five favorite female authors but couldn’t name five female CIOs.A terrible indictment of the perception of science among young female students? Well...could you name five female CIOs? Never mind that - could you name five CIOs?

OK, maybe that's not quite fair. Let's make it easier.

Could you name one CIO?

Agreements and disputes: Tim H and Chris D

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Tim Harford's on a couple of rants this weekend: a light-hearted bitch about non-mathematical economists alongside a more serious argument against the "Robin Hood tax" (a much catchier, or perhaps I should say Orwellian, name for the Tobin tax).

I'm with Tim on this one. There's a typically Curtisian video on the front page of the campaign's website (about as blatantly manipulative as the director's better-known work, Love Actually, and with about the same amount of factual content). It attempts to put across the idea that the tax is simultaneously tiny and huge - small enough to have no impact on financial efficiency while being large enough to solve all the world's problems at home and abroad.

Tim makes the case against it pretty well - here's a key example:
For instance, I might buy car insurance which could – if I knocked somebody down and permanently disabled them – trigger a payment of £1m. My insurance company might want to reinsure that mil…

The economics zeitgeist, 21 February 2010

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.
The words moving up and down the chart are listed here.
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.

The appeal of the sweatshop

This beautifully shot photostory isn't strictly about sweatshops, but it might as well be. The women who work as porters in Ghana's city markets must endure:

Long hoursBackbreaking physical labourLow payLiving in cramped slum conditionsMoving from a village where there's food to share, to the city where you starve if you have no moneySounds terrible, right?

And yet:

People are doing it voluntarilyIt lets them build up savingsThey can reinvest those savings in a business, or in going home to start a familyIt is being used to finance their own or their children's education, so the next generation won't have to do the sameNobody is idealising this lifestyle. It's hard work, I wouldn't want to do it, and at least one of the women in the story who has left the job is glad to be out of it. There is an element of randomness, and if you have no money one day, nobody is going to feed you.

But it's more dangerous to idealise the alternative. Subsistence farming is …

Economics live!

Sports fans will mostly be familiar with the idea of live text commentary. If you can't watch the game, you can often find a live text stream on the BBC or Guardian websites giving you a minute-by-minute description of events. It's a good idea - it's much easier to multitask with the text stream in a window than while watching TV, while still retaining the dramatic tension of the game.

Today, for some reason, the Guardian has come up with the hilarious idea of running a live commentary on the economics news. And yet - there is nothing to comment on!

Here is the link - it started out at some think tank conference but I think they've swiftly given up on anything good happening there. So they've started pasting in press releases from economics consultancies and updating us on the dollar-pound exchange rate.

They did find one interesting piece of news, from the US inflation data. Mirroring the UK's experience last week, an announcement of monetary tightening by the …

Athens in Wonderland

Have a look at the following very odd statement from Laurence Kotlikoff in the Economists' Forum. He is suggesting that Greece does not need to devalue, because its prices and wages will quickly adjust regardless:
In the US...the past two years has seen essentially zero inflation leaving prices today substantially lower than where they’d be today had there been no recession.This is hardly evidence of sticky prices.I find it difficult to interpret "zero inflation", and prices exactly where they were two years ago, as anything other than evidence for sticky prices.

He then goes on to address the important question of sticky wages in exactly the same way:
Nor is there strong evidence that wages don’t adjust to market pressures. In the US, median real wages have hardly moved for decadesHuh?

I haven't seen the new Alice in Wonderland film, but I have the feeling this must be what it's like. Syllogisms whose premises and conclusions point precisely in opposite direction…

Were we wrong about the minimum wage?

Stephanie Flanders points out some huge discrepancies in the labour market between older and younger workers, and between the current recession and that of the early 90s.
But of the 16-17-year-olds not in full-time education, nearly 41% were economically inactive during the last quarter of 2009. Back in 1992, the figure was less than 15%....consider the following astonishing fact.In the second quarter of 1992, two-thirds - 65% - of 16-17-year-olds who were not in full-time education were reported to have a job. Now the figure is 35%.These figures are startling and, especially having got used to economic statistics measured in increments (unemployment 2% higher, inflation 1% lower), really worrying.

What's more - though Stephanie surprisingly does not point this out - there is a very clear suspect here: the minimum wage.

Like all card-carrying bleeding-hearted liberals, I was in favour of the UK's minimum wage when it was introduced in 1997.

I did have some minor reservations, a…

CDS spreads on spreads

In defence of Greece, I pointed out to a colleague the other day that the cost of a Greek CDS is only 4% for a five year period - meaning that you only need a 0.8% interest premium to make a Greek bond worthwhile, or that the market only gives Greece a 1/125 chance of defaulting each year.

He responded with the valid observation that this is all very well, but who's offering this insurance policy and will they be around to pay it if Greece does default? After all, AIG wasn't.

In fact, the 4% is not the spread between the chances of Greece defaulting and a risk-free bond, as it's commonly presented. It is actually the spread between the chances of a Greek default and an insurance company default.

It's a lot easier for an insurance company to go bust than it was two years ago. Not only have risk conditions deteriorated, but after AIG, Citi and the rest, it would be immensely tough politically to bail out another big insurance company or bank which had issued CDS it could…

The FT's thoughts on my pricing post

I had a nice email from the FT today in response to this previous item (posted with permission):
Hi LeighSorry to hear about your recent FT.com subscription problems. I thought I might try and explain a couple of the oddities you encountered in your renewal process.When we moved to a 'metered' access model for FT.com in November 2007, we upgraded all of our long-standing customers, like yourself, to the newly-created 'Premium' service level. We did this so that you wouldn't lose access to parts of the site, like Lex, that had been included in your old subscription package. Naturally, we kept you on the same 'old' rate.By the time your subscription fell due for renewal, your 'old' rate had fallen considerably behind the £25.99 a month we charge new 'Premium' subscribers, and even behind the £17.50 we charge new 'Standard' subscribers. Fortunately, you have a long history as a customer of the Financial Times and therefore qualify for sp…

My BBC interview on inflation

I'll be on the BBC News channel at about 6.40pm today talking about the newly released UK inflation figures.

Inflation has risen to 3.5% in January, driven by VAT, oil prices and lower retail discounting. It's interesting to see some analysts comment that the VAT rise has not been fully passed on, and yet consumer prices show a less-than usual level of discounting in the January sales. I am not sure how these two are meant to be disaggregated (or if they even can be).

Overall, higher inflation is a good thing for the economy and will help us to get out of recession faster. While it will have a short-term impact on savers, if it helps to work out some of the inflexibilities in the economy, they will benefit in the long term along with borrowers and wage-earners.

What is interesting is the Bank of England's pause to the QE programme - I suspect the inflation rise is the main reason for this (after all their job is to target inflation at 2%). I hope they will signal a willing…

Beliefs not motivations

Anthony Evans at The Filter makes a suggestion I agree with:
...I recollect a conversation I had with Russ in class once, where I cast doubt on the "follow the money" implications of public choice. He suggested that if you look hard enough it's usually the case that poor policy stems from vested interests. At the time I was unable to articulate my feeling that often it's simply mistaken beliefs.Yes indeed. In fact, many economic phenomena - micro and macro - stem from mistaken or incomplete beliefs. I am developing a model which will shed some light on this, but it may take some time.

In the meantime, a simple question. The world is complicated; and there are millions of things I could do that might very well be in my interest. How would I know about all of them?

Private ownership, public services - a depressing theory

Robert Peston highlights the Conservatives' idea (I originally wrote 'plan', but it's too vague and too early to be convinced they will actually do it) of moving public service provision into employee-owned, profit-making companies.

He points out a few political constraints, in particular:
If a John Lewis style primary school were a floperoo, would all the teacher-shareholders be sacked, or only the head? A resolution procedure for failing co-ops that didn't harm pupils - or patients of community nursing teams - would plainly be essential.In fact, this is probably a constraint on all private provision of public services. The co-op structure is not really an issue either way, except that it sounds nicer and less cut-throat than straight privatisation.

I'm a fan of market solutions and have generally been well-disposed towards the idea of private companies bidding to do public work - why shouldn't a company be able to offer medical treatment or training if it …

The economics zeitgeist, 14 February 2010

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.
The words moving up and down the chart are listed here.
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.

Is the euro doomed?

There's a meme around which says that the euro is destined to break up because countries like Greece are fundamentally less productive than countries like Germany. A strategist at Societe Generale has put his name to this idea, as has the director of the Open Europe (anti-EU) think tank.

This argument supposes that the only way to become competitive is to devalue one's currency.

But surely this applies within countries too? The southern half of Italy is much less productive than the north, while the reverse is true in Britain. But there are no calls for a London currency and when the lira existed, it was never under the threat of an Italian breakup. Different states in the US are just the same - with widely varying fiscal problems as well as the same diversity of competitiveness.

At the individual company scale, Yahoo is less competitive than Google, but does Yahoo need its own currency to devalue? And 22-year-old new college graduate Travis is less productive than his experie…

Markets in nothing: El Bulli

Economics appears to have failed today.

El Bulli ("the world's best restaurant") is permanently closing in December 2011. According to owner Ferran Adria, it's because they are losing half a million euros per year. This poses two problems for economic theory.

First - why is it losing so much money when demand is so high? The 48-seat restaurant has a six-month season with about 8,000 covers a year. It receives 300,000 applications for those seats [though this article says a million and this one two million], selling out the whole year's reservations on the same day that bookings open for the season. Why wouldn't they bump up the price from 230 to 330 euros, to simultaneously manage demand and eliminate the losses? Price elasticity can't be that high.

Second - why is there no resale market in the small number of reservations available? Neither the US nor UK Ebay site has any results for El Bulli, except a few copies of the cookbook. Normally, when a venue i…

Britain and US shouldn't criticise Greece - ECB

Great interview of Jürgen Stark (chief economist of the ECB) by Spiegel Online. He's a very funny guy for a central banker (maybe I'm revealing too much about my sense of humour).
SPIEGEL: You are maneuvering yourself around an answer to the main question: What happens if Greece doesn't make it?Stark: I do not think that is the most important question, but I will answer it with a clear statement: The country must and will make it.More importantly, he is very clear that Federal Reserve-style monetary expansion is not on the cards for the ECB, and that he thinks eurozone governments should be cutting deficits faster. Also:
Stark: ...I would like to point to one aspect in this context: Great Britain has a budget deficit of the same magnitude as Greece's. The US budget deficit is also more than 10 percent of GDP. All advanced economies are currently having problems. In fact, it is astonishing to see where most of the criticism of the euro is coming from at the moment.SPIEGEL

Correction: the action is at the margin

Barbara Kiviat at Time writes about the jobs bill Harry Reid is trying to pass:
The bill would temporarily exempt employers from paying Social Security payroll taxes for new hires, and give a $1,000 tax credit for new workers kept at least a year. This type of move isn't really about creating jobs, but about accelerating those that would have been created anyway. (I've yet to find a businessperson yet who has said he or she would create a job out of thin air just to grab a tax break.)Not right.

The point of tax breaks is to move the margin. Indeed, nobody will create a whole job just to get a $1000 tax break (let's say $3000 including the payroll taxes). But the case that matters is where the employer's gain from employing someone would have been $29,000 and the cost $30,000. A net loss, meaning no job. The subsidy changes the equation; the cost goes down to $27,000 - and suddenly it's worthwhile for the hire to take place.

What's more, the government will more …

Behavioural economics, industry specials

I'm on a deadline for a magazine article today so I'm not going to write much.

But a heads up on some articles coming up in the near future. I plan to write a series of analyses of individual industries from a cognitive/behavioural point of view and would welcome suggestions on which sectors to pick.

Current plans are:

Market researchPRAccounting & auditingAll of these are industries which, in a neoclassical world of pure rational preferences and perfect information, would have no reason to exist. But because the world is not like that, they do.

For each one I'll be exploring which aspects of bounded rationality give the industry a reason to exist, and what this means for practitioners in the field and the way they do business.

Suggestions for other sectors or disciplines you'd like me to cover? Email me or post a comment here.

Rolling in Wonga(tm)

[Update: Someone from Wonga has responded in the comments - please read their clarifications]

This won't be new to some of you, but it deserves highlighting.

Yesterday I saw a TV ad for a company called "Wonga" (a British slang term for money). This is what's called in America a payday lender.

The character in the ad needed to borrow £70 for five days. Wonga proudly announced that they can help him out - for a fee of only £9.22.

Let's look at that for just a second.

£9.22/£70 = 13.17%. For five days.

Imagine you lose your job and don't have the money to repay at the end of the five days. Maybe you'll borrow another £79.22 from Wonga (or a different lender). In another five days you still haven't found work so you roll it over again. You keep this up for a year before finally getting an inheritance from your dear great-aunt Mildred. How much would you have to inherit to pay off the bill?

Take a guess, off the top of your head, before you read further.

Make your mind up, Mervyn

Mervyn King said today that the UK economy might go back into recession and that the recovery is weaker than hoped.

So, Mervyn, what possessed you to stop quantitative easing less than a week ago? Scott must be so disappointed. Unless you can come up with a solid rationale for why QE can't work, this is bizarre and inexplicable.

p.s. to be fair, he has also said today it's 'far too soon' to assume there will be no more QE. David Wighton in The Times points out that this behaviour looks 'downright peculiar'.

Murders in London hit a new record...a record LOW

As a footnote to a sad story in the Evening Standard today:
The killing is the first suspected homicide in London since 15 January and ends one of the longest periods of time in the city without a murder.Surprising (on the face of it) but very good news. A reminder that, consistently over long periods of time, society becomes safer and more civilised as it becomes richer and better educated. Progress is the default state in modern life; fear and decay is not.

Oddities in the media

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I'm stretching a point to make an economic connection on this post, but Nick Rowe has had a coupleof items recently relating to infinity.

This news item, on the other hand, evokes a much more potent image:
He said his design means patients can have their modesty covered but still allow medics immediate access through clever "entrance points" in the gown."It's infinitely dignified, yet practical. And Velcro doesn't enter into the equation."
While we're on the BBC news website, take a look at the new regulatory powers now available to soap opera actors:



Finally while researching a previous posting, I came across this gem: Senior sources at the FT have confirmed that the group is in discussions with a number of payment processor companies to establish a simple "one-lick" procedure that would enable consumers to pay a small fee for single articles that would otherwise be available only to subscribers.I can't wait for that micropayments system …

Hector Sants as a prediction market?

The interpretation of Hector Sants' resignation announcement seems to be that it's a protest against the Tories' plans to gut the FSA if they are elected.

But the Tories haven't been elected. So it's a little odd to make a protest gesture like this.

Thus, despite Robert Peston's speculation that this might be bad for the Tories, it actually suggests the converse: that Sants is very confident they will win. And he's putting his money - as it were - where his mouth is.

Although this isn't exactly a prediction market, it has some of the same incentive characteristics as one. And looking at a real prediction market (Betfair) the Tories have decimal odds of about 1.5 to win an overall majority (indicating about a probability of about 66%). Not sure I'd leave my job on those odds, but his contract does expire in the summer so it's decent of him to allow some time to find a successor.

Aww...*sniff*

Nothing to do with economics, but...

The FT's pricing department are cunning devils

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I finally got fed up of not being able to read FT articles after my debit card expired, so I went in to update the details. I'm not a huge fan of paying for content online - actually I'm not a huge fan of paying for anything, as both a Scot and an economist - and if I have to, I would prefer to pay per article. But the FT is both high quality, and its content is sufficiently important to this blog, that it's worth the subscription.

My recollection of the price was around £6.99 a month [I have now checked this - it was £6.25, dropping to £6.12 with the VAT cut last December], so I was a little surprised to see this:


They've upgraded me to a premium subscription by default, I thought - sneaky. I don't think I need a premium account - from memory it gives access to stock data or something else that I don't use. Easy, I thought - I'll go and change it back to a regular sub again.

So click on 'Change or upgrade access level' and this is what you see:

I&#…

Snow and demand

The snow in America seems to be pushing consumers out to the right-hand end of the demand curve. So how should retailers respond?

First Marginal Revolution (Alex for once) points to this Bryan Caplan article:
A blizzard is about to hit DC...people unsurprisingly rushed to grocery stores to stock up....For any given type of product, the most popular brand always sold out first. There were no Eggo waffles, but plenty of Wegmans brand waffles. All the national brands of hot dogs and sausages were gone, but there were plenty of obscure sausages still on the shelves.Can you guess my explanation? Click through to the MR link to see my answer in the comments, or look at the comment from Eric on Bryan's page for a similar idea.

Then Pricing for Profit asks the question: how should hardware stores optimise their profits when everyone wants a snow shovel? By now of course the answer is clear - at least if they have any foresight.

Simply get a bunch of cheap shovels with an unusual brand in…

The economics zeitgeist, 7 February 2010

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.
The words moving up and down the chart are listed here.
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.