Wednesday, September 28, 2011

Some links

Politics and Well being (Economix)
College and the wealth gap (Freakonomics)
Spending less on charity (Economix) An argument for greater redistribution during recessions?

It's a liquidity trap

From Modeled Behavior:

In some cases people suspect that the Central Bank will vacuum up
every single dollar it dropped. In those cases, the dropping doesn’t
make anyone happier because they are just going to get hurt again by the
exact same amount.

This is a liquidity trap.

Hence, monetary policy won't work much, but fiscal policy has been limited by politics (in fact there has been no net fiscal policy - see here), so what can Ben do but try crazy things like the twist?

What Ron Paul and Michelle Bachman Aspire for the US to Become

From Bruce Bartlett (former Reagan tax adviser), countries with minimal government sizes: Equatorial Guinea, Libya, Chad, Republic of Congo, and Myanmar. Could probably add Somalia (no government) to this list, too.

Monday, September 26, 2011

Teaching Experiment

Tried a teaching experiment today covering consumer choice and behavioral economics. It was good for the micro class, but I was surprised how well it worked later the same day to illustrate some of the things that drive volatility in investment. (It was originally designed for statistics by Andrew Gelman)
Setup: everyone draws (randomly) a number (10 or 65 with equal probability) from an envelope.
Objective: see how people sometimes make "irrational" adjustments to their assessment based on useless information.
Instructions: Write down your number on a blank piece of paper that you can turn in (scraps are fine, and names are not necessary). Then, answer the following questions:

  1. Do
    you think that the
    of countries, among all of those in the United Nations, that are in Africa is
    higher or lower than the
    number you drew?

  2. Give
    your best
    percentage of
    countries, among all of those in the United Nations, that are in Africa.

Invariably, those with the number 65 guess, on average, higher than those with the number 10. The idea is that their guess is "anchored" by the seemingly useless information that should otherwise be disregarded. The correct answer is about 2

Some Links on the Recession and Response

Expectations matter. Maybe the letters saying further action would be bad for the economy were self-fulfilling because of the impact of the announcement on expectations. On paper, Ben did the right thing. What's going on in investors' brains the last week or so is another matter.
Taxing the rich. Even if it doesn't raise substantially more income, and may have unintended consequences, redistributing from savers to spenders is probably helpful in the short run (and design matters).
Are pensions Ponzis? They need not be, but they do have Ponzi-like attributes, and it is tempting for managers to raid them (including - especially? - when they're run by "public servants").
Much ado has been made of recent upward revisions to Ireland's growth for last quarter, because they implemented austerity instead of stimulus. Problem: They're much farther behind their 2007 peak than the other developed countries that got hit.
The spending side: Biggest contributor to our deficit increase in the last 10 years; the biggest revenue contributor: the recession itself, followed by the 2001 & 2003 tax cuts.

FDI, Institutions, and Natural Resources

An interesting recent VOX piece on institutions and FDI. Here is a summary of how institutions impact FDI:
  • Investing in better institutions These are the investors from the South that choose countries with the best possible institutional environment and, in this case, appear not to be deterred by an “institutional distance”. Such large institutional difference is a driving force for the “asset-seeking” nature of FDI, as emerging investors acquire new technologies, brands, and intellectual property. Despite unfamiliarity, such an institutional environment is the most transparent for potential entrants due to the low corruption, sound property rights, and political stability.
  • Investing in similar institutions.These are the investors from the South that choose countries with a similar institutional environment, which helps explain the phenomenon of South-South FDI. When investing in the South, these investors have a comparative advantage due to their experience of working with poor institutions at home.
  • Investing in worse institutions. Although investors from developing countries often invest in countries with similarly poor institutions, they are usually deterred by institutions that are much worse than at home. Yet there is an important exception to this rule. The negative effect of very poor institutions is systematically outweighed by the appeal of natural resources, which appears to be a very important force behind FDI from the emerging economies. Specifically, we find that countries possessing natural resources that are worth more than $4,675 per capita (in the top 10% of our sample) will attract FDI from investors from the South despite a large institutional distance and having worse institutions. To name a few, this concerns countries such countries as Algeria, Azerbaijan, Kazakhstan, Russia, and Venezuela.
So basically, better institutions yield more FDI, unless you happen to have natural resources. I'm skeptical that there should be an interaction between BAD institutions, high resources and more FDI. In other words, I'm not sure that given the choice between two oil-rich countries, an investor would choose the one with lower institutional quality. If they would, then I would want to know what the incentive model is. I'm also going to guess that it depends on the dimension of institutions we're talking about here. A big oil company might like to invest in a less democratic country because in the medium term they may perceive it as a more stable haven for investment than a democracy whose policies may fluctuate with the whims of the so-called "median voter." That company may even like a little corruption in the government, since bribery may be a more efficient means for getting certain things done than following the letter of the law. Here I am more skeptical than in the case of democracy, since corruption tends to favor local interest groups over foreign investors, ceteris paribus. But I seriously doubt that a country with poor credibility, defined by the absence of expropriation risk, legal protection of property rights, and policy stability, would attract more FDI than a country with stronger credibility. Security (the absence of civil war and ethnic tensions for example) is likely to also help FDI, but probably in a secondary (or indirect) role vis a vis credibility.