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

Some links on rationality, choice, and institutions

Economics in the next ten years? (Economic Principals) Some highlights that I found interesting:
Sometimes more choice makes people freak out and thus less choice is sometimes better. What is the Right Amount of Choice? (Gruber)
Understanding institutions and culture will be increasingly important. (Acemoglu and Alesina; more here by Barro and McCleary)
Sometimes people and institutions make bad choices even when they're fully informed and are trying to make good choices. Why? (Cutler)
An interesting book on conflict, I'm thinking of adding to my wish list. (Garfinkel and Skaperdas)
Relatedly, an interesting piece on conflict and class. (Economix)

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.

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 percentage
   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 guess
   of the
   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.