The Political Economist

My new paper  (open access; meaning free to read) is out in the new edition of Public Choice (published online first in February this year). This was my second PhD paper at Oxford, and one I am particularly fond of given the importance of the topic and one of the cornerstone arguments of my upcoming book Elite Networks: The Political Economy of Inequality (more on that below).  What's the main finding?  In short, I looked at the effect of political connections on the allocation of TARP funds to US banks, and found that TARP recipients that lobbied the government, donated to campaigns, or whose top execs had direct connections to politics received better bailout deals. Let’s unpack this. In 2008, as the crisis unfolded in the US, the banking industry elevated its lobbying and campaign spending activities.  You might remember the panic days in Sep & Oct ’08 where it seemed like the financial world is collapsing. Getting bailed out was a priority for many banks, es...

In a  previous post I discussed the changing nature of the economics profession and the importance of achieving the experimental ideal in social science research. I briefly discussed the logic and even some methodological approaches that are useful in achieving randomization, or at least as-if randomization in order to make our treatment and control groups as similar as possible for comparison. In this post I'll use an example that I like to teach to students to illustrate how we can make causal inferences using natural experiment research designs. A quick reminder: natural experiments are not experiments per se. They only provide us a good way to exploit observational data to emulate an experimental setting.  Let's use the very basic example and look at the relationship between student grades and earnings – a topic is usually heatedly discussed among students – do better grades result in higher salaries? Consider the following correlation between grades and earn...

I'm a football fan (European football of course). In addition to my family, my work, my interests in economics, politics, cooking, and a host of other stuff, I enjoy football. Watching, playing and reading about it. It's a complete put-my-mind-at-rest kind of thing. So yesterday before the Chelsea-PSG game (I'm a fan of neither clubs actually), I read this article on Eurosport entitled: "Chelsea’s strange success under interim managers – here’s why they CAN win the Champions League" . I'm not here to pick on them for their terrible prediction. Bad predictions are normal in sport sections. No, I was more infuriated with the tone of the article and the apparent incredible success of Chelsea's interim managers who, after the team was performing badly in the beginning of the season, managed to pick the team up, and used all their wit and expertise to turn things around and even win trophies (Di Matteo won the Champions League, Benitez the Europa League, Hi...

Back in October and November I was a part of a three man academic team with a job to do some forecasting for the general election in Croatia that was held in November 2015. We were hired by the largest domestic daily newspaper, Jutarnji list , and were given an opportunity  to introduce, for the first time in this part of Europe, a prediction model of general elections which simultaneously uses election polls, previous election results, and a range of socio-economic data for a given electoral district. So something similar to what  Nate Silver  does.  All three of us are academics, but in different fields. Prof Dejan Vinkovic , PhD is a physicist with a postdoc from the IAS in Princeton, Prof Mile Sikic , PhD is a computer scientist and bioinformatician from FER in Zagreb and A*STAR in Singapore, and finally, myself , a political economist.  See some of our findings in greater detail on our new webpage: Oraclum .  The forecasting model  ...

First of all apologies to my regular readers as there hasn't been a lot of blogging activity during the past two weeks. The reason for that is primarily my busy schedule as the academic year has started, in addition to a few papers I have in the review process, but mostly it was the media attention that has caught up with me lately.  The reason for that was a research paper I did for the Croatian Banking Association on the topic of corruption in public procurement in Croatia and the relationship between local corruption and re-election (the research paper will be available soon on their website, and I'll post it on the blog as it happens; note: the paper is in Croatian - I do intend to translate it though).  Almost all domestic media outlets (even the local ones) covered the story. After the main results of the study were presented in the monthly financial/business magazine Banka  (where I tend to have more or less regular columns ), all the major newspapers ( J...

Or Which is more important in competitive sports, money or talent? The Economist once again paired an interesting relationship which could be suspect to the most obvious mistake in social sciences - interpreting correlation as potential causality. As I've pointed out in my earlier text on a similar topic linking wine consumption and academic performance , just because we inferred a pattern in the data doesn't mean that there is an actual causal link between the two observed variables.  This time they look at the English Barclays Premier League (BPL) and compare club performance in the league (points) for the past 20 years with the money spent on player wages as a percentage of the season's median. Basically the question is how much does money matter?  Source: The Economist According to the graph above it seems that it matters a lot. The more money the club spent on player wages, the higher, on average, the points they gain by the end of the season and hence the...

From Washington Post  comes a very disturbing piece of information (HT:  Business Insider ). A couple of political scientists from Dartmouth, Harvard and Princeton did a survey of 2066 Americans (sampled in a usual way) and asked them what action they wanted the US to do in Ukraine. In addition, they've asked them to locate Ukraine on the map:  "We wanted to see where Americans think Ukraine is and to learn if this knowledge (or lack thereof) is related to their foreign policy views. We found that only one out of six Americans can find Ukraine on a map, and that this lack of knowledge is related to preferences: The farther their guesses were from Ukraine’s actual location, the more they wanted the U.S. to intervene with military force." Correlation doesn't imply causality, of course. However there is something to this - more ignorance implies further ignorance. I guess military interventions in Iraq can be justified the same way?   But anyway, what surpri...

Well, it seems this too has become possible. The Economist decided to introduce an index of crony capitalism, where the index depicts billionaire wealth as % of GDP, however adjusted for sectors that have a higher probability of being "crony". I'm a bit skeptical towards such a measure.  Before we go into more detail, read this short intro on rent-seeking from the article:  "Inventing a better widget, tastier snack or snazzier computer program is one thing. But many of today’s tycoons are accused of making fortunes by “rent-seeking”: grabbing a bigger slice of the pie rather than making the pie bigger. In technical terms, an economic rent is the difference between what people are paid and what they would have to be paid for their labour, capital, land (or any other inputs into production) to remain in their current use. In a world of perfect competition, rent would not exist. Common examples of rent-seeking (which may or may not be illegal) include forming ca...

One of the most important lessons of economics is that correlation does not imply causation . Just because we see a pattern in the data, or we observe one event following another, does not mean one event CAUSED the other. In order to prove (abiet partially) a causal relationship you need to observe the two effects while controling for a whole number of possibilities that can affect both. This is why econometrics is used in social sciences which tend to suffer from a deficiency of clearly proving a certain hypothesis. Keeping this in mind we have a look at this week's graph of the week, depicting the alleged relationship between wine consumption and student achievement. The graph was originally produced by a Cambridge graduate, and was used by the Economist : Source: The Economist The graph seems to point to an interesting positive correlation between how much does a Cambridge or Oxford college spend on wine to the percentage of students gaining a first class degree. Thi...

From TED talks comes this excellent presentation delivered by Hans Rosling , a professor of global health at Karolinska Institute (the institution that decides upon the Nobel prize in medicine). The focus of his talk is on disproving the myths about the developing world, which is, according to Rosling, actually quickly closing the gap with the rich countries and is moving forward the same direction (following the same pattern) of the Western world. They are now where the West was some 40-50 years ago. Basically he claims, and I agree, that we shouldn't generalize aid policies towards one area, since within this area there are huge within and across-country inequalities. The same policy on curing diseases cannot be applied towards the top income groups in South Africa and the low income groups in Nigeria (as he mentions in the video; or in this great slideshow: Africa is not a country! ). There's many more good points being made, so I recommend the video:  He has a few m...

This title is actually taken from Paul Krugman . For once I agree with him. Krugman's blog came as a response to a great text by this year's  John Bates Clark medal recipient  Raj Chetty from Harvard. Chetty wrote a column for the New York Times this weekend where he defended the field of economics on the basis of its scientific rigor. His text came as a reaction to many non-economists questioning the recent Nobel prize being awarded to two opposing theorists explaining the same phenomenon ( Fama and Shiller ), but also (I believe) to a series of texts about economics and philosophy started in the NYT back in August, initiated by two philosophers Alex Rosenberg and Tyler Curtain writing a text called  "What is Economics Good For?" . Their main resentment towards economics is the imprecision in its predictive abilities. Or in other words, economics, with all its new modern analytical tools, not only couldn't predict the crisis, but is also failing to solve it...