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Showing posts from May, 2013

The problem with economists

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In their latest VoxEU column, two economists from UC San Diego, Gordon Dahl and Roger Gordon, try to answer the question on why economists tend to be so divided on most important issues, or at least are perceived to be so divided.

It's not hard to realize this perception. Simply by going through the blogosphere daily you run into a variety of strongly conflicting opinions among popular economists/opinion-makers. Some claim this hurts the profession as it seems that economists can't even agree on the basic issues and are therefore not contributing to solving the problem. I would disagree; best ideas often arise precisely out of conflicting opinions. This is why one should regularly read things one doesn't agree with, if nothing to avoid confirmation bias.

However, despite an obvious divergence of ideas (particularly on the recovery), the real picture is slightly different that the prevailing perception.
In the figure above the authors examine how much consensus on differen…

The bonfire of vanities

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No, this has nothing to do with the promising yet disappointing 1990 movie staring Tom Hanks, Melanie Griffith and Bruce Willis; this is a story about vanities in top-tier academia. Paul Krugman has been relentless in attacking Reinhart and Rogoff over their allegedly controversial findings on debt overhangs and recoveries from the crisis after huge debt episodes. Even the WSJ has decided to weigh in on the recent quarrel stating that "the gloves are off in the academic dispute over the merits of austerity and the dangers of debt". The whole thing culminated in his latest column for the New York Review of Books, where Krugman stated, among other, that R&R "haven’t just lost their canonized status, they've become the objects of much ridicule", accusing them further in not making their data widely available thereby rendering it impossible for researchers to reproduce their results. Needless to say, the response from R&R was swift. They call Krugman "…

PSST in the labour and housing market

From Arnold Kling on PSST (patterns of sustainable specialization and trade) and the housing market:  Interesting comment found by Glenn Reynolds. From Jeffrey Levin: If you dig around and research start-ups you will find that the majority of start-ups are funded by second mortgages or HELOC draws. Due to the housing crash, that equity is just not there for the vast majority of people looking to start up a new business. Its one of the large reasons why commercial credit expansion has been so moribund. Without getting off the ground from seconds or HELOC’s all those startups that would have made it past year 1 and then been able to obtain standard commercial business loan never got off the ground and thus never graduated to commercial loan financing. You have to walk first before you can run. Startups don’t start in the commercial loan department (at least most of them don’t)Recalculation means discovering new patterns of sustainable specialization and trade. Doing so requires entrepr…

Loss of hope in Europe (or not quite?)

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From FT Alphaville, using Pew's surveys, concluding on how there is a steady decline in support for the European project, particularly among the youth: 
"Support for European economic integration – the 1957 raison d’etre for creating the European Economic Community, the European Union’s predecessor – is down over last year in five of the eight European Union countries surveyed by the Pew Research Center in 2013. Positive views of the European Union are at or near their low point in most EU nations, even among the young, the hope for the EU’s future. The favorability of the EU has fallen from a median of 60% in 2012 to 45% in 2013. And only in Germany does at least half the public back giving more power to Brussels to deal with the current economic crisis." The economic conditions are particularly bad across the continent; South Europe is in deep moral and economic distress, the French are loosing hope in their newly elected President and for the first time feel strongly …

Graph of the week: total world debt load

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From the WSJ blog:
"$223.3 trillion: The total indebtedness of the world, including all parts of the public and private sectors, amounting to 313% of global gross domestic product. Advanced economies tend to draw attention for their debt at the government and household levels. But emerging markets are gathering debt at an increasing pace to drive their economic development." So if the total debt of the world is 313% of global GDP, one has to ask who are we in debt against? Each other? Yes and no. Taking into consideration the dynamic aspect of the story, we are actually in debt against the future generations. This is in fact one of the reasons politicians like to engage in debt spending; instead of increasing taxes on today's voters to fund their current expenditures, they increase the burden against the future generations. This why public debt is often described as a tax against future generations. Someone will eventually have to pay it off.

Notice also how public debt is…

Akerlof, Blanchard, Romer and Stiglitz (et al) on the state of macro

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An impressive group of economists shared thoughts on rethinking macroeconomic policy. Last month in Washington D.C., the IMF has held a conference on the first steps and early lessons on macroeconomic policy with respect to the ongoing crisis. Simply by looking at the title one would say: a quite common topic that has occupied a majority of space and attention in policy-oriented conferences in the last couple of years. Everywhere you turn you will run into some form of a discussion featuring a variety of economists and non-economists (which ones are more interesting?) on the lessons from the crisis, offering their "unique" solutions on how to emerge from it and achieve a robust recovery. However, when such a conference is being held at the IMF headquarters and the speakers are Nobel prize winners or notable economists like Blanchard, Romer, Roubini, Perotti, Tirole, Fischer, Woodford or policymakers like Mervyn King, Andres Borg and John Vickers, then the credibility of the…

Why do people in societies with low levels of trust advocate higher regulation?

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An insightful working paper by Aghion, Algan, Cahuc and Shleifer can give us a possible answer to this question: "In a cross-section of countries, government regulation is strongly negatively correlated with social capital. We document this correlation, and present a model explaining it. In the model, distrust creates public demand for regulation, while regulation in turn discourages social capital accumulation, leading to multiple equilibria. A key implication of the model is that individuals in low trust countries want more government intervention even though the government is corrupt. We test this and other implications of the model using country- and individual-level data on social capital and beliefs about government’s role, as well as on changes in beliefs and in trust during the transition from socialism." The emphasized sentence is particularly important from a policy-making perspective in transitional economies, which are more likely to have lower levels of interper…

Inclusiveness vs extractiveness, not democracy vs autocracy

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One of the quintessential questions in political economy is which is better for growth: democracy or dictatorship (with the proper preassumptions of course)?
Here's a graph from the Free Exchange blog (click to enlarge):

These are the implications:
"Does economic growth go hand-in-hand with democratic regimes? Not necessarily: correlation does not imply causation. One group of economists found growth induced democracy in East Asia; democracy did not lead to growth. They compared North and South Korea, which were both poor in 1950 and under dictatorial regimes from the end of the Korean War until 1980. From 1980, per capita incomes diverged. The same year South Korea began democratising. But South Korea’s better institutions developed due to dictators’ policy choices, they say.Others, including Daron Acemoglu and James Robinson, attribute this type of growth to political decision-making. “Extractive institutions” sometimes develop as elites feel more secure and seek their own …

The reverse savings glut

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The personal savings rate in the US has experienced a steady decline in the past 30 years, up until the recent crisis:
From the Economist:
"The drop began in the 1980s, perhaps because the Great Moderation made people less fearful of economic uncertainty. When uncertainty returned during the financial crisis, and as credit conditions tightened, the saving rate shot up. Wage stagnation may also play a role; people expected better living standards and cut back on saving to raise consumption. The saving rate fell again this past January. That may reflect greater economic optimism or the return of the full payroll tax, which lowered take-home pay. Rather than decrease consumption people may have saved less." A declining savings rate is a worrying signal to the economy as it increases its vulnerability to crises. The reasoning is clear; the higher the leverage of the private sector in pre-crisis times, the stronger the deleveraging will be after the shock. Private sector savings w…

Graph of the week: Money really can buy happiness

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If in doubt, check it out: 



































This is coming from an NBER working paper by Betsey Stevenson and Justin Wolfers, using data from Gallup's World Poll"Gallup asked respondents around the world to imagine a "satisfaction ladder" in which the top step represents a respondent's best possible life. Those being polled are then asked where on the ladder they stand (from zero to a maximum of 10), and how much they earn. Though some countries seem happier than others, people everywhere report more satisfaction as they grow richer. Even more striking, the relationship between income and happiness hardly changes as incomes rise. Moving from rich to richer seems to raise happiness just as much as moving from poor to less poor. One never really grows tired of earning more." Greed or common sense? I call common sense. There are a lot of things that make people happy, but affluence seems to be the strongest factor. And by far the largest accumulation of wealth in human his…

The divinity of Daron Acemolgu

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A bit of fun "facts" on tumblr regarding today's top economist, Daron Acemoglu:

Who is to say that any of these statements aren't true?