Thursday, 30 January 2014

The week links (2)

Continuing with the weekly overview of the "best of the rest", here's a couple of good ones you shouldn't miss: 

1. A few great posts on social mobility from at the Marginal Revoultion blog:

Cowen citing an interview with Gregory Clark: How much does social mobility ever change? - social mobility rates are apparently impervious to government intervention (upward mobility, that is). 

Cowen citing the new Chetty et al paper: Upward mobility in the US is not declining as many citizens think: a very good and disturbing piece of evidence that intergenerational mobility in the US hasn't changed for the past 20 years! I'll devote a separate post to this topic after I read the paper. 

Tabarrok: Why the worst get on top - Indian edition; ok, perhaps this is not on social mobility per se, but something is wrong in a country if 30% of its members of parliament have criminal cases pending against them. How do these people even get their votes? That's easy, they buy 'em! 


2. Steven Rattner: "The Myth of the Industrial Rebound", New York Times - makes a good case that there isn't any renaissance of manufacturing in the US, as many seem to claim. The obvious decline of manufacturing (see graph below from the text) is mostly due to the decline of the automotive industry, where wages have fallen dramatically. 

Source: NYT

Even more importantly he attributes some of the cheap talk on the rebound of manufacturing to heavy government subsidies: 
"Low wages are not the only price that America pays for its manufacturing “renaissance.” Hefty subsidies from federal, state and local government agencies often are required. Tennessee provided an estimated $577 million for Volkswagen — $288,500 per position! To get 1,000 Airbus jobs, Alabama assembled a benefits package of $158 million.
Now Boeing has just used the threat of moving to a nonunion, low-wage state to win both a record subsidy package — $8.7 billion from Washington State — and labor concessions."
All these efforts resulted in only half a million jobs created in manufacturing, merely a fraction of the 6 million lost from the beginning of the decade. He makes a couple of interesting proposals as to how to help manufacturing:
"Manufacturing would benefit from the same reforms that would help the broader economy: restructuring of our loophole-ridden corporate tax code, new policies to bring in skilled immigrants, added spending on infrastructure and, yes, more trade agreements to encourage foreign direct investment and help get closer to Mr. Obama’s seemingly unattainable goal of doubling our exports."
3. Paris and Wyplosz: The PADRE plan: Politically aceptable debt restructuring in Europe, Vox.EU - a controversial idea, least to say:
"The plan involves an agency that acquires at face value a share of existing public debts and swaps them into zero-interest perpetuities. In practice, therefore, the corresponding debts are wiped out. To that effect, the agency borrows on the financial markets the amount needed to acquire the debts. As it pays interest on its obligations and receives no interest on the perpetuities, the agency makes losses. As it rolls over its obligations, its losses are forever. This is where the costs of the debt restructuring are borne. Existing bondholders are fully protected, eliminating any risk of banking crisis. The agency best suited for the task is the ECB, for three main reasons. First, it is the only institution that can mobilise the required resources (in our main example, we assume that half of existing debts are bought and swapped, which amounts to some €4.5 billion). Second, because central banks do not have to worry about their capital, they have a unique credibility and can sustain large losses. Third, the ECB passes on its profits to Eurozone member countries. This applies to losses as well."
4. Noah Smith: What if preferences are unstable? on his Noahopinion blog citing the new experiment by David Eli from GMU:
"Experimental and field research has shown that individuals often exhibit time inconsistent preferences. Often this is in the direction of “hyperbolic” or quasi-hyperbolic discounting. That is, individuals have a steeper discount rate for a given delay length when that delay comes sooner. This paper presents an experiment that tests this hypothesis with a novel choice task. Instead of being asked how much money today makes them indifferent between some amount later, subjects are asked how long they would be willing to wait to be indifferent between some amount sooner and some larger amount later. In this new task, many subjects exhibit “hypobolic” discounting, the opposite of the standard finding. This result does not appear to be a consequence of payout risk. The result suggests that hyperbolic discounting may be subject to the framing of choices, and therefore not purely an aspect of preferences."
5. In the end a couple of interesting thoughts on economics - first Noah Smith in The Week: Why economists get such a bad rap?, attacking mainly macro:
"When people in the media say "economists," what they usually mean is "macroeconomists." Macroeconomists are the economists whose job is to study business cycles — booms and busts, unemployment, etc. "Macro," as we know it in the profession, is sort of the glamor division of econ — everyone wants to know whether the economy is going to do well or poorly. Macro was what Keynes wrote about, as did Milton Friedman and Friedrich Hayek.
The problem is that it's hard to get any usable results from macroeconomics. You can't put the macroeconomy in a laboratory and test it. You can't go back and run history again. You can try to compare different countries, but there are so many differences that it's hard to know which one matters. Because it's so hard to test out their theories, macroeconomists usually end up arguing back and forth and never reaching agreement."
So he claims micro is the right way to go as the only real way to justify economics as a science (as I also wrote back in October). He cites game theory, statistics, behavioral finance and even policy-oriented economics (labour economics, health economics, environmental, agricultural, developmental, etc.), whose research can actually be used to solve issues. 

However a response came last week from the Economist's Free Exchange blog saying that No, micro is not the good economics:
"What is true of all economics is that as soon as you wander into policy, you find the debate hijacked by policy advocates who write, report and promote research that reinforces their side of the debate while ignoring or disparaging the other. Do higher capital requirements reduce lending? (Yes: it raises the cost of capital! No: Modigliani-Miller tells us firms are indifferent to capital structure! Yes: banks aren’t like other firms!) Do higher marginal tax rates reduce the work effort and tax paid by the rich? (No: their labour supply is inelastic! Yes: They reclassify their income to avoid taxes!) Does Obamacare hurt part time employment? Does it lower labour supply? Do tougher emissions requirements cost jobs? Does net neutrality lead to more investment in technology? Or less?"
I agree with the distinction over policy, which is why I like to separate the science part of economics with the policy part, which often creates scope for many quacks and their ideologically-biased interpretation. The most important part of policy-oriented research is to leave ideology at the doorstep, and just focus on the facts. This is easier said than done. 

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