Links on institutions

Commodity Prices and Institutions

Property Rights and Growth - some interesting historical perspective. For more on property rights in medieval England, I am currently reading North, Wallis, and Weingast, Violence and Social Orders.

The Value of College

Now for my two cents on the debate in the blogs over what college is for. Is there significant value-added that justifies the cost? Some bloggers (and especially the commenters) have suggested that it is largely signaling your ability and/or your motivation. Others claim that there is revealed value deriving from the large and widening differential in lifetime earnings between high school and college graduates. An interesting discussion and summary can be found here, where Steve Postrel argues that the inflated demand for college education by students and by employers boils down to the fact that college is getting dumbed down, but high school is getting dumbed down by a proportionally greater margin. This implies that the increase in demand (and tuition) is fundamentals-based.
I found the argument about the dual decline in high school and college quality compelling at first, but I always have to remind myself to be skeptical about the perceptions of academics about the quality of the average student "back in my day." For example, Mr. Postrel notes that, " It used to be that everybody could read and understand something like Orwell’s Animal Farm, but the typical college graduates could also understand Milton or Spencer."  But I am a bit skeptical. It may have used to be that more graduates survived Milton or Spencer, but I'm not sure that the typical graduate really grasped deep literature or philosophy as deeply as Postrel suggests. Much of his "evidence" is based on perceptions by professors. This is likely to be biased by the fact that professors tend to be right-tailers.
I'm inclined to believe that at most levels depth of understanding has been sacrificed for breadth of coverage, and perhaps we need to rethink where we are on the margin. Judging from economics curricula, I would say that this is the case. More topics are covered in, say, intermediate microeconomics, but with less mathematical rigor and depth than when I was taking it almost 20 years ago. Additionally, grade inflation has made completing the degree (and doing so with a reasonably high GPA) somewhat less informative than it perhaps once was).
Which brings me to "signaling". Let's suppose it's all about signaling. Many have used this to suggest that college doesn't "do" anything that job market experience or military service or whatever can do just as well, which in turn leads some (like Mark Cuban) to conclude that college education is a bubble. Why? If the signal is valuable for both applicants and firms, then why does this not have value. Which brings me back to Milton. Did kids who learned Milton ever use that knowledge (or the literary analysis they applied in their class) on the job? So, as my students frequently wonder "why did I have to learn that stuff?" Because, for employers, it is useful to know that someone wants to learn new things, or that they can learn new things.
Ninety percent of the folks in my intermediate microeconomics class in college will never solve a Lagrangian optimization problem again, and probably have forgotten how. But having been able to learn the necessary calculus to do it is worthwhile, and signalling that ability is not trivial.

Exponential Economist Meets Finite Physicist | Do the Math

Exponential Economist Meets Finite Physicist | Do the Math:

Interesting piece, but not very mindful of history. The Malthusians have been proven wrong time and again. Physical limits exist, but 400 years is a long time. Plus, geoengineering is already here. A trumped up straw-man "debate" written from one side of the issue does not much convince me.

Paul Romer on Ending Poverty

I'm less bullish on charter cities than some of my other colleagues in institutional economics. It seems like institutional arrangements would be sensitive to the prevailing local relative prices and preexisting distribution of property rights (a la North, 1981).

STEM or LAS?

This article seems to lament the low rankings the US brings in on STEM education. At first blush this seems serious. But, is STEM really the future? Is STEM a comparative advantage worth pursuing (assuming we don't already posess it)? It seems like it would be, but it may only be part of the story. The other part of the story is here (Alex Tabarok, Marginal Revolution) and here (Catherine Rampell, Economix). From Tabarrok:

Law #1: People will get jobs doing things that computers can’t do.

As Tabarrok points out, a lot of jobs in STEM sectors may eventually be replacable by computers. As Rampell Some Liberal Arts disciplines (and certain disciplines in Business) that emphasize problem solving and people skills may be better-positioned for high value-added jobs 20 years from now than purely quantitative disciplines. I think this partially bodes well for economics majors (except maybe for the people skills part).

Some links on teaching Principles of Economics

We're not out to get our students (Art Carden).

Property rights are probably the most important economic concept ignored by most principles courses. An interesting piece on property rights and karaoke (NPR).

Sometimes economists get principles of economics questions wrong (Tabarrok); sometimes economic researchers claiming that economists get principles of economics questions wrong write the question wrong (Cowen); sometimes there's more than one answer (Decker via Depken). Lesson: we have to be thoughtful about writing the questions we ask students.

Finally, a couple of unrelated random hits: Does the Current Account Still Matter? (Mehrling); some facts about Obama's first-term record - the right and left are both wrong (Sullivan).

Selection Bias Chart of the Day

Unobservable individual heterogeneity?

Unmanned Commercial Air?

From Freakonomics. I can explain why I don't like this idea in one sentence: I want the person flying and controlling my plane to have his ass to lose just as much as I have mine - it's called incentive compatibility.

Links

Favorite shows by political persuasion (Entertainment Weekly). A little surprised R's dislike South Park so. It's pretty strongly libertarian, but I guess Jesus trumps liberty.
Job market advice for academics from UW (Econbrowser).
Moneyball (Grantland). Maybe they shouldn't of published all their secrets.
Higher speed limits? Probably not (MR). The first comment is amusing, albeit not very aware of forensic economics.
The video game business (Economist). I suspect gaming has been profitable through the recession because it is an inferior good.
A couple of more serious links on political unrest, recessions and inequality (Economist), and the impacts of offshoring on inequality and education (VoxEU).

Higher Top Tax Rates = Higher Productivity?

From Piketty, Saez, and Stantcheva, via VoxEU:

...while standard economic models assume that pay reflects productivity, ...top earners might be able to partly set their own pay by bargaining harder or influencing compensation committees. Naturally, the incentives for such ‘rent-seeking’ are much stronger when top tax rates are low.... increases in top 1% incomes now come at the expense of the remaining 99%.
...there is no correlation between cuts in top tax rates and average annual real GDP-per-capita growth since the 1970s.

Of course, raising income taxes on the rich might lead to more income being diverted into stock options and capital gains, but would that be a bad thing? Wouldn't that increase total investment and strengthen incentives for managers?

NGDP Targeting, the "Volcker Moment", and Chuck Norris

Free Exchange points out that the tight-money policy of Paul Volcker in the early 1980s:

did not succeed by changing people’s expectations of inflation. It succeeded by crushing demand. As unemployment moved up the Phillips Curve, inflation plummeted. Only then did inflation expectations stabilize at a lower level.... The lesson of the Volcker disinflation is that changing expectations depends crucially on delivering on the target. Naming an inflation or money supply target is helpful, but insufficient unless the central bank demonstrates it is willing and able to achieve it. 

That statement reminded me of this post from Worthwhile Canadian Initiative:

Thesis. We teach the monetary policy transmission mechanism like this: the central bank pulls a lever, and that lever pulls other levers, which eventually move the target variable in the direction the central bank wants to move.
Antithesis. That's wrong. A credible central bank is exactly like Chuck Norris. It looks at the thing it wants to move, and the thing moves, and all the other levers fall into place where they should be. Causation runs backwards from the target variable. Credible central banks don't actually do anything. They just threaten to do things. But a credible central bank never needs to carry out its threats.
Synthesis. That's not quite right either.
1. Even Chuck Norris can't make the impossible happen. A credible central bank can move the economy just by saying that it wants the economy to move. But it must be a new equilibrium that it moves to. And maybe that new equilibrium won't be an equilibrium unless the central bank moves its lever. Chuck Norris can't clear the room if he is standing in the only doorway. He has to step aside to let people exit, even if he doesn't need to throw anyone out.
2. Chuck Norris wasn't always Chuck Norris. He had to earn his reputation. In the early days, or in unfamiliar territory, he actually had to carry out his threats. Till people learned the new regime.

Basically, in order for Chuck Norris to impact behavior, people have to think he'll kick their ass. The central bank (Fed) has to convince people that it's going to do what it says it intends to do when circumstances dictate. In other words, every now and then, Ben has to kick some ass. If you want higher NGDP, you can't make it happen by standing in the room looking tough. You have to actually break a few skulls.

Links on China and Trade

China's economy is slowing to a "mere" 9.1 percent growth, it's slowest in 20 years. Does this bode at all well for the US? Most theories of current accounts would say no. Also, although the nominal exchange rate with China is pretty level recently, the real value of the yen (after inflation) is rising. This suggests rebalancing, which is supported by the fact that China will soon have a trade deficit with the rest of the world (although probably not with the US). I wish politicians (and the public?) would pay more attention to these facts before forging ahead with proposed "retaliatory" (to what?) tariffs against China.

Lots of Global Macro in the News

China (more here)

India

Argentina

Australia

Ireland

Italy

Greece

Spain

More on Italy, Greece, Spain, and the ECB crisis here and here.

If, say, you were a student and had to write a country paper report, I would say there is a lot going on with a lot of economies around the world to find an interesting topic. Just sayin.

Some papers on immigration, remittances, and institutions

Do Workers' Remittances Promote Economic Growth? (Barajas, et al., 2009)

Eight Questions about Brian Drain (Gibson & McKenzie, 2011)

A Gravity Model of Workers' Remittances (Lueth and Ruiz-Arranz, 2006)

Business Cycles and Workers' Remittances (Sayan, 2006)

Seminar on Remittance Statistics (International Monetary Fund, 2007)

Determinants and Consequences of Workers' Remittances (Vargas-Silva, 2006)

How the Fed Came to Be (and Why it Must Remain Independent)

An interesting brief history of banking in the US, 1811-1913. More here.

Early efforts to reform the financial system were limited to the First and Second Banks of the United
States (1791-1811 and 1816-36, respectively). Both institutions were short-lived because of public misgivings
about concentrated economic power. A period of laissez-faire (or free-market) banking followed, rife with
flawed banking practices and instability. In 1863 and 1865, Congress enacted the National Banking Acts
to stabilize the financial system. Without a central bank, however, problems remained—financial crises and
banks failures continued to be frequent and severe. Two characteristics of the National Banking System (NBS),
created by the 1863 Act, exacerbated this volatility: (i) immobile bank reserves in a system lacking a lender
of last resort and (ii) an inflexible supply of currency. [Emphasis added.]

So, you might say, we should just put central banking under direct control of the government. How wonderful and democratic that would be! Do that, and I can almost guarantee higher rates of inflation as Congress has the incentive to use the money supply to "monetize" its deficits and debt.

The Best Description of the 2011 Nobel Laureates' Work so Far

From Alex Tabarrok at MR. On Sargent:

[In response to the Lucas Critique] Sargent’s (1973, 1976) early work showed how models incorporating rational expectations could be tested empirically. In many of these early models, Sargent showed that including rational expectations in a model could lead to invariance results, nominal shocks caused by changes in the money supply, for example, wouldn’t matter.

I was never comfortable with the simple RE approach (and hated being forced to study it in grad school), which is why I'm glad AT mentions some of Sargents more recent work:

What will people do when they don’t know the true model of the economy? How will they update their model of the economy based on observations? In these learning models the goal is to look for a self-confirming equilibrium. The interesting thing about a self-confirming equilibrium is that people’s expectations and learning can converge on a false model of the economy!

On Sims:

In response [to the Lucas Critique], he developed vector auto regressions. In its simplest form a VAR is just a regression of a variable on its past values and the past values of other related variables. It’s easy to run a VAR on unemployment, inflation and output, for example.... Sims, however, took the models a step further by showing that you could identify fundamental shocks in these models by making assumptions about the dynamics or ordering of the shocks. ... With identification in hand one can then use these models to plot impulse response functions. How does a shock to oil prices work its way through the economy? When does GDP begin to fall and by how much? How long does it take the economy to recover? What about a shock to monetary policy? Sims (1992), for example, looks at monetary shocks in five modern economies.

Some Links

Is religion happiness insurance? (VOX) Does Dr. Frey's self-plagiarized work railing against self-plagiarism discredit him?
A counter-cyclical asset?(WSJ)

...recent data show diaper sales are slowing and sales of diaper-rash ointment are rising.

Does Republican tax profligacy in the short run signal support for higher taxes in the long run (or worse - that they care more about their own electability than about the public)? The conservative Tyler Cowen says yes.

candidates are more worried about having to publicly endorse tax increases than they are about the tax increases themselves. If that’s true, it is all the more reason to watch out for our pocketbooks; it means that the candidates are protecting themselves rather than the taxpayers

Cowen dislikes the Keynesian IS-LM model; DeLong does. Big surprise. My two cents: It's easy to toss peanuts and point out flaws in economic models because every model has flaws - flaws that are well-known even  to the people who come up with them. They have flaws precisely because they are models: they are abstractions from the real world. Like George E. P. Box said, "All models are false, but some are useful."

Democracy and Performance

Does regime type affect development or does development affect regime type? I'm more in the latter camp. Democratizations that preceded the development of economic institutions and economic development in Eastern Europe since 1990 have been fragile.

Taxing Financial Transactions

Throughout the financial regulation debate, I've always thought that there is a better way to reduce the scope for high-frequency trades in exacerbating a crash than by regulating the frequency (or volume) of trades themselves. If you want to reduce something in the least discriminatory and most transparent way possible, a tax is the way to go. A sufficiently small tax on financial transactions should limit the extent to HFTs magnify crashes while imposing the least amount of distortion in the market in general. Some better discussion here and here.
I feel similarly about campaign finance reform.

Genomes and Medicine

Patients can pay $200 to get a portion of their genome sequenced to identify certain behaviors, aptitudes, and susceptibilities. Better things coming down the line:

Today, it costs just $16,000; in a few years, it will cost less than $1,000–a 100,000-factor decrease in costs in less than two decades!

The FDA and Personalized Medicine