Facebook in Canada

I just saw in Foreign Policy that about a third of canadians were on facebook! This is the highest proportion in the world! Furthermore, if you count out all those above 50 (about 35% of population) and those below 10 (10% of pop), the proportion jumps to about 3 out of 5. If you meet a canadian who's between 10 and 50 years old, most chances are he is on facebook!

This may be good news as "net interaction stimulates and improves the brain" and also, employers might be able to select who they hire better as "they thrawl facebook for lues about character and behaviour of potential employees"!

But why are we number 1 for facebook? Maybe this is because we are less resistant to change than other cultures, but why were we so slow to adopt cell phones then? I guess technology adoption is based on specific demands or need for pr$oducts that are closely related to culture. In other words, I would think that canadians adopted facebook becuz they needed it and it fits with their culture, whereas cell phones do not!

The decreasing returns to travelling

Jackie Lee is a traveller. While in Europe for his master’s degree, he flew to all easyjet destinations from Geneva. When in Bergen, enjoying the view of the amazing fjord and the UNESCO World Heritage city, he noted: “I don’t get impressed anymore by these things that are supposed to be gorgeous. I travelled too much”.
There are indeed decreasing returns to travelling, at least for some of us. Here's a way to grow old and keep on having fun travelling. It's all about technological progress in the pleasure production function.

Corruption survey

Of the economics students that took the survey (39 of them):

• 21% would prefer to work in a bank than a development agency;
• 73% favour relatively high wages for public officials;
• 94% would work for an International Organization;
• 23% think we should accept corruption as a fact of life.

Not surprisingly, people who prefer banks to development agencies are completely against high salaries in government.

People with lower grades tend to prefer banking and are more likely to tolerate corruption as they also come from more corrupt countries (according to Transparency International).

Finally, people from corrupt countries seem to tolerate corruption more, being more likely to accept it as a part of life. Furthermore, they would rather work in development agencies.

None of these results are significant.

The winner of the free lunch is Tadashi Ito.

Economics Departments Rankings

I made a new ranking based on where prolific researchers did their PhD, not where they teach now, and based on citations, not publications. The methodology is explained here and the data can be found here. The top 10 is:

MIT
Harvard
Chicago
Princeton
Yale
Stanford
Minnesota
Carnegie Mellon
Berkeley
LSE

Unilateral trade liberalization

This guy is an incredible blogger. He has 6 blogs, 3 on politics and economics and 3 non-political (farming, travel, and rotary). And he’s from Manila. He gives me here another good argument for a country to liberalize unilaterally. Here’s my favourite part:

“One wonders how much money have been paid by taxpayers from the countries concerned, first to pay for the salaries, travels, and perks of their country trade negotiators, including their pool of consultants and secretariat support, in all those years”.

Interested in US politics?

Can someone explain to me why the Japanese are more interested in the US presidential than the Americans themselves???

Sex at the Olympics

I was reading this article about how athletes at the Olympics have sex like crazy. Then came this interesting paragraph that reminded me of the speed dating paper, and reflects society in general:

"There is something about sporting success that makes a certain type of woman go crazy - smiling, flirting and sometimes even grabbing at the chaps who have done the business in the pool or on the track. An Olympic gold medal is not merely a route to fame and fortune; it is also a surefire ticket to writhe. But - and this is the thing - success does not work both ways. Gold-medal winning female athletes are not looked upon by male athletes with any more desire than those who flunked out in the first round. It is sometimes even considered a defect, as if there is something downright unfeminine about all that striving, fist pumping and incontinent sweating. Sport, in this respect, is a reflection of wider society, where male success is a universal desirable whereas female success is sexually ambiguous."

I guess this logic doesn't apply to beach volleyball girls!

MBAs and the business cycle

An MBA programme is a special type of animal in the jungle of post-graduate education. The typical student of an MBA programme is somebody with some working experience who drops out of the labour market for a couple of years, in order to get a hopefully better paid job later in his career. If in the same company or somewhere else often depends on circumstances.

When I have asked MBA students the question "Why did you do that?" the typical answers were:

1. "Because I am paid to do it";
   
2. "Because I want to start my own business";
3. "Because I was working too much, I needed a break";

Here is a chart taken from our favourite magazine which somehow gives a more economically sound argument.


The chart says that attending an MBA is more likely in times of economic downturns. Why? As the wage rate falls on the labour market, the opportunity cost of attending a post-graduate programme falls too. Thus, people hedge their loss in pecuniary assets investing in human capital. Here is the link to the original article.

By the way, if you want to know what they teach you at MBAs, I found this interesting book, reviewed always on our favourite magazine, which I have just ordered.

Good service: culture or competition

I was recently traveling in California and I was amazed at the quality of the service in restaurants and shops. No matter how you look, how you're dressed, you get a nice smile, suggestions and caring and on top of that a great selection. This led me to ask myself, is this amazing service the consequence of competition (restaurants want to offer the best experience to attract as many customers as possible), tips, or just culture?
In Geneva, I personnaly obtain the worst service that you can possibly imagine, to the point where I am scared to ask for too much when I am out, for example for a glass of water. Is this because of its protestant history or its lack of competition?So how about trying to identify the determinants of international differences in the quality of service in restaurants?
Some economists would be happy to prove the power of capitalism at work, others would be happy to show that only culture, or social capital explains service quality.I also came to wonder if waitresses were so nice to me beacuse they want a big tip (it can between 10 and 20% by law), or simply because they are nice people. If the former is the case, they surely are good actresses! I guess one way to find out would be to measure at what speed their smile dissapears from their face, the faster the faker.A good possible paper, I think.

An economy without cash

When I was taking the Macro 1 class I was convinced that monetary policy was a joke. How can these bankers really think they have any impact whatsoever on the real economy? My suggestion was then to keep the money supply fixed. “No!” I was told by my classmate, “money supply growth must equal GDP growth”.

So what would happen under a fixed money supply? Well, a 5% GDP growth should be accompanied by a 5% decrease in prices, automatically. In other words, shifting prices would ensure market clearing. Now imagine an oil price shock. As an oil importer, you let your currency depreciate (no inflation targeting whatsoever, which would make your currency appreciate instead). So the oil shock is offset by your exports boom.

So with this fixed money supply and shifting prices, you can say bye bye to the inflation monster, as you don’t care about prices that change constantly. Now the question is how can people adapt to this? My solution is to drop cash altogether. Only debit cards and mobile phones and voice signatures. Then prices can become any fraction of nay amount. With sustained GDP growth, a beer could become as cheap as 20 cents, while a phone call could be 0.0001 cent.

The Economist had already predicted the end of the cash era, but not the end of monetary policy.

Luxury lifestyle seekers

I was at this conference on the role of the WTO Secretariat and one of the panellists noted that the quality of the staff there was higher than ever, as PhDs were required for most jobs. Then a deputy to the director general made the comment that him and his work buddies had been selected by him among 80 other candidates, in a clear and transparent contest, and not by political appointment. Then it was mentioned that there was only 8 researchers at the WTO, and still it was able to produce high quality research (no puppets).

I don’t know if all of this is true. Living in Geneva for the last 3 years, almost not a day goes by without hearing someone complaining about the corruption and incompetence of the UN organizations staff, but also about the inefficiency and the uselessness of these offices. Crazy insider stories of the manipulation, the sexual abuse, the appointment of friends, the fake ads in The Economist etc… come out every day. Not so much about the WTO, but especially about the ILO, UNCTAD, WIPO and, worst of all, the Human Rights Council.

I am an internationalist. I don’t want to get rid of these organizations, but I would like them to be less of a waste. Many people talk about reform, but it is most of the time about very general things, like the mission an organization should have, how the security council should be enlarged, how a UN small army should be created. And what’s so funny about these articles is that they always mention how impossible it will be because of China and Russia, or because of conflicting neighbours. One very disappointing report of this kind is the one that came out this week in The Economist, “Who runs the world?”

But what about the inner workings of these organizations, like employment policies or employee benefits? Why don’t diplomats have to pay parking tickets? Get rid of that rule, right now. Isn’t it all about hiring the right employees and then getting their incentives right?

It is such a golden ticket to land a job at the UN in Geneva as you get a relatively higher salary then in the private sector with no taxes, an incredible retirement plan and a standard of living way above the local population. Just look at the jewels the UNCTAD ladies are wearing or the cars the ILO gangsters are driving. But who gets attracted by these organizations? Candid, educated and honest idealists, yes, but also these gangsters (or snakes), because they are interested in the lifestyle, and not in saving the world. And who ends up spending their career there? The snakes, because the good ones have either been fed up by this rotten system or have not gotten the job, which was instead given to a friend by a corrupt boss.

So, yes, first things first, abolish the privileges, abolish the tax free shop. Many snakes will opt for other careers. And no more life time contracts, just simple 4 year contracts, renewable twice. So snakes won’t eternalise there either and won’t be attracted that much anymore. One other way to get rid of the luxury lifestyle seekers was to move the UN Geneva office to Nigeria, as only idealists would move there. But then again, this may be the most corrupt country in the world, so corruption could infest the offices there too. But does the local level of corruption affect the level of corruption inside the office? Is the UN in New York less corrupt then the UN in Geneva? This is an interesting paper idea.

Coming back to the WTO, is the Doha round dead because countries can’t agree or because the WTO twists the incentives of the negotiators? Are the countries’ representatives at the WTO lifestyle seekers snakes completely disconnected with their country’s government trade objective? One panellist was saying that they were representatives of the WTO to their own country, like promoting the free trade global public good to your own national government. If only he wasn’t lying.

Know your CO2 footprints

As PL noted in a post a while ago, the debate over if and what to do about climate change is becoming increasingly more complicated. There is on one side the evidence of the Stern Report and on the other side the praise and criticism surrounding it. Both have generated a fair amount of confusion within the population as noted in the post. A always bigger proportion of people is becoming sceptical about climate change, both for good and bad reasons. The confusion is even more palpable since we are facing the problem of rising food prices: people are concerned that what and if we could do something about climate, is going to be ineffective or even damaging.

If we buy the argument that doing nothing is better because either global warming does not exist, or because if I consume more of fossil fuels today it will lead to automatically more investment tomorrow in alternative, seems plausible, but it is incorrect. The words of wisdom I heard about the whole topic is that, since we do not know what is causing climate change, it is good to take the minimum effort to tackle it. It is then sound and correct to increase the price of what we think is the likely cause of global warming (via the imposition of a tax), since we know it will correct a market failure (pollution).

The other problem I find with the argument is more philosophical. The benefits accruing to society from Climate Change discussion is exactly the impact on our lifestyle. The world has been living with the idea that everything man-made / man-based is fine. The main argument that policy makers should advance instead, is that we can do little to make a huge impact. Be environmentally concerned just reduces the excesses that we were used to, without this implying a drastic change in our lifestyle.

Here though, the problem is how to improve the quality of the debate. We have been rightly hitting so far at SUV as a monstruosity that makes no sense. People are starting to think that Air Travels may be a problem as the true statistics about their impact are starting to emerge. While renouncing to a SUV is cheered, for Air Travel things are thornier. I advance here another element: What about food? Does food pollute? Of course it does. Here is an example. This guy has calculated that a cheesburger produces 4.5 Kg of CO2. To make things comparable, this is the amount of emission produced by a 2003 Toyota Yaris in a 30 Km ride. Some people I know find Cars outrageous because are polluting and prefer biking (or skating) instead. They would though never renounce to a Cheesburger. What would happen if people were aware of the Carbon Footprints of the food they consume? Well, they would probably know that, in order to be Carbon Neutral, they should go to their favourite Burgers' store by bike instead of taking the tram. This simple exercise would not only lead to a lower emission, but also a healtier lifestyle. What if they get tired? Won't they eat two burgers? Yes, but the ride by car has been offset by the bike ride. If you don't like biking, fine, here is an alternative: take a drive on a less polluting car (or an electric bus) and eat one instead of two burgers. The total footprint would be probably the same in the two situations, but the attitude toward the world we live in, and our concerns about the actions have changed: because what we are doing is just being more responsible for what we do vs ourselves and vs our planet. Peace

Gross Domestic Product

This map comes from some cool trade guy. US states have been replaced by countries with a similar level of GDP. Uzbekistan is Wyoming!

Okay, his much talked about paper on how Chinese imports reduced inflation more for the poor than the rich in the US and hence reduced consumption (or real income) inequalities was a bit too conservative, as it omits the fact that if poor people consume different products (even though equivalent for economists) than the rich, it pisses them off.

Climate change economics

What (if anything) do you do now to fight global warming that you didn’t do two years ago?

Since I believe that global warming is largely natural, and not man made, I don’t do anything to “fight” global warming since that would be futile. But to the extent that we will need to eventually move away from carbon based fuels, I am helping to spur the investment in new energy technologies by consuming as much as possible today. Increased consumption builds wealth and that wealth will be needed to fund the R&D into alternative energy technologies. And the second thing I do? Encourage others to do the same.

It would be exceedingly difficult for me to go without: air conditioning in the summer, heating in the winter, a good filet of beef on occasion, gasoline to go wherever I want, and everything else that we use in life that requires energy … which, last I knew, includes everything. But since doing and using all of these things will encourage new investments in energy technology (see above), I’m happy to report that I don’t need to give up anything!

My question is is this argument valid? Should I reduce my carbon emissions or not, since, by consuming more of it, I increase its price and encourage others to reduce their consumption...

This answer is from Roy Spencer, author of Climate Confusion and the U.S. Science Team leader for the Advanced Microwave Scanning Radiometer flying on NASA’s Aqua satellite. It appears along otherpeople on freakonomics who tell us what they think of climate change.

Long-haul flights and price discrimination strategy at Ryanair

Airline companies are the textbook example of price discrimination, the practice to charge different prices to different customers for the same products (for reasons unrelated to their costs). The low-cost airlines have very well understood this concept and have thus made huge profits out of it. Now, Michael O'Leary, CEO of Ryanair, has announced that "the company is considering launching a separate airline that would fly long-haul between Europe and the United States around the turn of the decade". The strategy is to charge very low prices for the economy class (let's say 15 CHF) and very high prices for the Business class (whatever price). Perfect, but how to convince people to fly business class? Here it is the press conference where he explains how:

A preliminary analysis of the Euro results

The Euro UEFA Cup 2008 currently jointly hosted by Austria and Switzerland, has already emitted its first verdict. At the time of writing, one of the host countries, having lost both the first and the second game, is out of the tournament...I won't tell you which one, but the other will probably follow soon the same faith.

In terms of results from the first wave of games, they have also been in some cases surprising, confirming once again that the tournament is really competitive and unpredictable. Take the example of Italy (guess why??). The latest World Cup Champion, has badly lost against Netherlands with a striking 3-0: in one game, Italy has conceded more goals than the ones conceded in the whole World Cup in 2006! A little worried by this event, me and Cosimo had a look at the data of the results in the Euro cup since 1980, to answer the following question: does it matter if you lose the first game? Can you still pass the round? The answer is, yes and no. It does not matter overall, but it matters if you have lost badly, with a big margin of difference in goals. For those of you interested in the methodology and the exact results of the exercise, they are described here. It's quite intuitive to understand that a bad start may be psychologically costly, but, if you are able to score 4 points, it has never happened that a team did not pass the round. In this respect, even losing a second match does not matter. What about the probability of winning the tournament? Do those who qualify as first have more chances to win the cup? Well, apparently not. It does not give you better chances. It may sound strange, but actually, it gives you slightly more chances if you arrive second! How can you interpret this strange result? If you think harder, it is actually not so strange. Being as competitive as it is, there is really not so much of a difference between the winner of a group and the runner up of another. If you have poorly performed in your group, while the other teams have had supreme performance, the psychologic effect may work in reverse, favoring those who had a worse start. We are not giving advice on betting. The intention is not to forecast anything. We just wanted to see what has historically happened in the Euro so far. Then, let's wait and see what happens on the field, and enjoy this wonderful show!

P.S.
I just saw that Germany, one of the favourite team for the final victory quite unanimously across bookmakers has just thirty minutes ago incredibly lost against Croatia for 2-1. May my Germans friends be scaramantic as much as I am, but maybe they should not worry that much...

The inflation monster

Economics of Love Part III - Will you marry me?

This summer I am going to attend three weddings. Ok, this is not an interesting fact, I know. But this is the reason why I started writing these posts about what I called the Economics of Love. In the end, what motivates people to enter the market for partners is the final intention to get married sooner or later (more or less explicit for women, but I think also latent for men). Why, then, do people want to get married, I asked myself?
Economists started to think about the Economics of Marriage almost 40 years ago with the seminal contributions of Gary Becker with his JPE article, “A Theory of Marriage”. Whenever I speak to non-economists about this literature, they look at me as if economists were immoral nerds. This attitude is widespread and maybe reflects the simple scepticism about the idea that economics can explain any realm of life, as Lazear explained in Economic Imperialism.
To understand the main contribution of that paper and the literature that followed, one needs to know that, at the time of writing, in the 70’s, many women were still out of the labor force. Thinking about the family as a small firm producing non marketable goods, let’s say warm coffee brought to you in bed when you are still sleeping, assistance when you caught a flu and you’re down, Becker’s insight was that, if the man was the provider of financial resources while the woman was the provider of childbearing and domestic activities, a marriage could only mean one thing: gains from specialization. This would have entailed advantages for both partners. You can say this is not a romantic argument for marriage, but still, it’s economically sound.
Since then, societies have undergone enormous changes and transformations. The most important ones are the woman slow but continuous emancipation and increasing government intervention. By providing explicit insurance schemes, like pensions and health care, the governments have reduced the incentive to build a family, which was traditionally the informal provider of such services. Governments have thus also increased the opportunity cost of women to stay out of the labor force while raising their returns from investing in education. In concomitance, formal markets have started producing goods that have reduced the comparative disadvantage of men in doing domestic activities. The combined effect of these transformations has been a constant, declining relevance of legal marriages. Since there are fewer gains from specialization, there are as well reduced incentives from getting married under the economic viewpoint of Becker.
What is driving then my friends’ decision to get married? Paradoxically as it may sound, the argument advanced is that, by these very same changes, today, marriage can only be a spontaneous decision driven by pure, romantic love. As you commonly observe, people tend to hang out with people with more or less the same background: economists with economists, lawyers with lawyers, Brad with Angelina…In a couple, a man and a woman do not gain by sharing resources anymore; they gain by sharing common values, interests, ideas. In the economists ‘jargon, a couple is not a unit of production anymore but a unit of consumption. People “merge” because they like to consume the same goods, and they like to do it together. This is what is called “Hedonic Marriage”, which basically means, you enjoy a marriage since you think you really are “two of a kind”.
The final remark is the following: if marriage is becoming a “hedonic” institution, when will we observe a marriage happening? When will people decide to get married? It is clear that such a decision is not only influenced by pure “love”, but also by people’s attitudes toward this institution, which are somehow determined by their relative cultural background. Depending on the type of society you come from, you may still enjoy the “hedonic” aspect of sharing your life with someone else, without feeling the need to get “married” in a legal sense. Vice versa, you may be forced to marriage by a society where pressure to get married is higher, without feeling completely involved. We will see in Part IV that these factors have important implications for currently observed phenomena of delayed marriage, cohabitation, and declining divorce rates.

Commitment Contracts

If you really want to finish your paper before this week-end, and stop delaying it because you are too lazy (or making the rational decision, you can buy a "Commitment Contract" from Stickk.

Stickk, a company created by two Yale economists, Dean Karlan and Ian Ayres, forces its customers to think about their future selves by selling "Commitment Contracts," which require the completion of a specified task that you might otherwise put off (finishing a paper, quitting smoking, losing weight). When you sign the contract, you hand over a sum of money and get it back only if you keep your commitment by a particular date. So, rather than having a vague and distant motivation for finishing that dissertation, there's the much more immediate cost of seeing your $1,000 disappear. So is Stickk's business model to bet against our ability to resist procrastinating? Not quite. Stickk makes its money from advertising, not from its customers. If you fail to live up to the terms of your contract, your money goes to a randomly selected charity. Or, if you want some extra motivation, you can have your commitment payment go to an "anti-charity" of your choosing. They cater to all tastes—both Americans United for Life and the Pro-Choice America Foundation are possible recipients. This paragraph was taken from www.slate.com

The Economics of Love-Part 2: Courtship

In the last post we saw that differences in gender preferences over the partner confirm old, stylized cliché: women like wealthy men, while men like physically attractive woman. If we consider that, roughly speaking, beauty is inversely related to age, while wealth profile increases positively over years, these ex-ante preferences seem to lead to an equilibrium where, within the couple, the man is older than the woman.

In this nice chart from the UN (2000) you find all the relevant statistics and the indication that it is indeed a world pattern. The smallest difference in mean ages was 0.3 years in Belize (Central America) and the largest difference was 8.6 years Congo and Burkina Faso (Middle, Western Africa). In 2000 in the United States it was 2.3. In western Europe it is about 2.5 years, and in southern and eastern Europe about 3.5 years, similar to that of Japan. In India and the Middle East is between 4 and 5 years. In Central America and South America between 3 and 4 years. In African countries, this gap ranges between 5 and 10 years.

It was argued that this equilibrium is consistent with explanation from evolutionary psychology according to which a younger female, from a men’s point of view, corresponds to a higher likelihood of successful pregnancy, while an older man, from a woman’s point of view, signals a higher potential in providing financial resources to raise the offspring.

The market for partners is dominated by informational asymmetries and you don’t want anybody, you want the right one, the best one. How do we find though the matching equilibrium? Let’s say there are two types of partners, high quality males and females (HQm,f) and low quality ones (LQm,f), and within each group, there is a ranking of qualities from highest to lowest. In a perfect information world, a HQm type will match with a HQf type; as long as all the same quality HQm,f’s have matched with each other, then the LQm,f will start matching, until everybody has found a partner. What happens when you don’t know what is the quality of your partner?How can you tell the difference between a HQm vs LQm?

In a paper published on the Journal of Political Economy (see reference), Theodor Bergstrom and Mark Bagnoli provide an answer that has to do with the concept of signalling. In a world where a male is considered the “resource provider” within the couple, then information about his own capabilities may be revealed only after he has spent some time in the workforce. From a woman point of view, where her main capabilities are related to childbearing, there is little additional signal to convey as time goes by. Men who expect to prosper, will delay marriage until they are able to attract the best available partners. The most desirable females will instead marry relatively earlier. In the long run, unsuccessful men will marry earlier in life than successful men. As all women marry relatively early, the best ones will marry older men, while the less desirable ones will merry young males with lower earning potential.
The model can explain the observed stylized facts cited above: both the equilibrium age difference between men and women, but also the differences observed across countries. Where labor market opportunities for women are higher (developed countries), the age difference should be smaller: as women also compete for the best partners, as their role become more similar to that of the men, thus becoming less specialized in childbearing, their earning potential also becomes a signal to the partner. The age gap in the couple would still be higher in developing countries, where this proximity is genders’ roles is far from achieved.

This model has another clear empirical prediction: more successful men should get married later in life. As such, it has some important implications for all the graduate students of the world: studying may be interpreted as a rational choice also from a dating perspective, since it increases your marketability to attract better partners. Good news, aren’t they? Well, however, since also finishing your studies on time is also a signal of future successfulness, then it is also rational to wait until you are really done with them before dating anybody, otherwise your signal may not be credible...as any good economic choice, there is always a trade-off!

• Theodore C. Bergstrom and Mark Bagnoli , “Courtship as a Waiting Game”, The Journal of Political Economy, Vol. 101, No. 1, (Feb., 1993), pp. 185-202

Foreign Aid and remittances

Man, not only are remittances from the US to developing contries worth way more than official development assistance, they're also worth more than private capital flows! Makes it an intresting memoire topic!

Are Instrumental Variables useful for policy making?

A few weeks ago, Bernard Hoekman, a World Bank “expert”, presented a paper on trade in services and growth here at IHEID. He started with a critique of instrumentals variables (IVs) in the recent literature on institutions and growth, quoting a paper by Dixit. I thought that he had no idea what he was talking about, being a World Bank employee, and as this literature is much praised in the academic world. His critic was that instruments for institutions or openness, such as settler mortality, origin of the legal system, Protestantism, or geographic ones such as ruggedness, climate or distance to the equator, were not helpful for policy making, being things you cannot affect. That is definitely not the point of an IV I thought. He must be all wrong.

But then yesterday, Verdier was making the same comment in the PhD Micro Seminar, which lead to a unsatisfying class discussion. This must be a World Bank paradigm I thought. One important guy says something, everybody repeats it, without understanding, it gets distorted, and it spreads out of the World Bank into the entire economics world, as a new, but false, paradigm.

To test my hypothesis, I looked at the Dixit paper, called “Evaluating Recipes for Development Success”, published in the World Bank Research Observer, in 2007. His critic was that these IVs, even though they identify causality, do not tell you how to affect your instrumented variable. In the literature, the policy recommendation is to create good institutions, as they are the key to growth. However, IVs do not tell you how to change institutions. This is the point made by Dixit. But that is not due to IVs at all. If you want to affect something more precise than institutions, such as bureaucrats’ salaries, put that variable in your regression!

The IVs certainly don’t tell you to affect geography or settler mortality, nor that a country’s future is completely pre-determined. (see Jared Diamond for a geographic deterministic approach). “Of course, this is not the interpretation the researchers intend; they intend many of their history and even geography variables to have only indirect effects on economic outcomes through some other proximate determinant of success or to be mere econometric instruments used for identifying the direction of causation”, Dixt writes. Indeed, IVs are used only to extract the exogenous component of your explaining variables, so that you can econometrically evaluate the causation effect.

So the problem with this literature is that it doesn’t tell you how to enhance institutions or openness, it just tells you this is what you have to do. This critique, however, has nothing to do with IVs, it has to do with your choice of explaining variables. Dixit wasn’t clear and he was misinterpreted.

A letter from UBS

About a week ago, my father, worried about the financial trouble at UBS, ask me, his “economist” son, if he should take out the money he has there. “Yes”, I answered. Obviously, I was kidding. It’s all gonna turn out fine I thought.

Well, not so fast. We all received that letter from UBS’ Wealth Management & Business Banking to let us know that they had the situation under control. Are they fearing a serious bank run à la Northern Rock? If anything, this letter will make people even more worried, as Sebastian explained.

The rational behaviour, after receiving a letter like this, would be to go the bank, withdraw all your money, and put it in another bank. This would obviously be the non-cooperative outcome, leading to a series of unfortunate events. This letter is meant to achieve the optimal outcome, the cooperative one, where people leave there money there and it gradually becomes business as usual for UBS.

As Sebastian pointed out, this is Switzerland, not England or the US. I don’t see people running to the bank like crazy. People seem to trust their bank, or their government, who would take the situation under control so no one would be affected. Where else could I put my money anyway? Credit Suisse? Gimme a break!

The Economics of Love- Part 1: Dating

Finding the perfect mate is one of the crucial attainments in someone’s life. We look for a partner pulled by different motives. Depending on circumstances, we are sometimes egoistically driven by possessiveness and the quest for personal satisfaction; sometimes it is the altruistic need to give birth (or adopt) a child that leads us into the “business” of dating. As difficult as this process can be, people invest a lot of energy and effort in selecting his/her “best half”. Does the perfect match really exist? Some studies find that people often marry somebody from their same environment, like people with whom you have grown up, or people you have met at work. While still motivated by attraction and love, this piece of evidence contrasts the romantic view of unconditioned, unconstrained, unbounded love: it seems to point out instead that people select rationally those who fit better their priors about how a mate should be, and “hedonically” adapt to it. But what actually are these priors about preferred mate across gender? Are there some consistent differences between men and women? The answer to this question is problematic since it is always possible to find some “relevant attributes” that are compatible with the observed outcome. So if we look at the list of all married couples in the world to find out what are the most recurring attributes would ass little insight. The ideal setting would be one where people randomly met, have the opportunity to know his/her partner’s attributes and then finally express a preference. This is what you normally have during a speed dating night: you are confronted with a certain number of potential partners, have the opportunity to talk to them for a reasonable period of time to make an informed judgement and then decide whether or not you want his/her email address and meet again in the future. Some economists used this set up on a big sample, collected the results and gave the answer in a paper published on the Quarterly Journal of Economics: men value physical attractiveness while women value intelligence. Nothing really new on this ground. The next findings were that men don’t like women who are more intelligent or more ambitious than they are, while women like men who have grown up in wealthier neighbourhood. These findings are consistent with explanations taken from Evolutionary Psychology, according to which men select the partner according to women’s limited reproductive capacity, while women select men according to their ability to provide aid when it is time to raise their offspring. If these are the preferences, then in equilibrium, as earning potential increases linearly with age, we should expect to see women married to older men. This would be the outcome of a “rational” selection of the mate and, extremes aside, this is indeed the most common pattern found in modern societies. Is this outcome also the one bringing the level of highest individual well-being? Once your partner is chosen according to the above criteria, what you need is to find also empathy and coincidence in the level of sexual satisfaction. And here comes the problem: age gap of the above mentioned type entails a loss of intimate satisfaction. Why so? We will discuss the implications of this phenomenon in the next post, when analyzing the economics of lovemaking.

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R. Fisman, S. S. Iyengar, E. Kamenica, I. Simonson “Gender Differences in Mate Selection: Evidence from a Speed Dating Experiment”, Quarterly Journal of Economics, 2006, 121, 673-697

What life is all about

The Swissmakers

"We believe that the assimilation of a foreigner
happens when the subject has spent enough time in our country without having been noticed". This is one of the opening sentences of "The Swissmakers", an acute satire about integration/assimilation policies of foreign citizens in Switzerland.

After immigrants have made a formal request for citizenship, it is the duty of the agents from the "office for assimilation" to compile a report of "good candidacy" which, together with an interview with a commission of local citizens (mostly about Swiss history but also on other aspects of private life) determines whether or not the “Swiss wannabe” deserves his/her passport.

According to Rodmer, the strict, inflexible, super-efficient, thick-headed agent from the Zurich office and one of the main character of the movie, every decision of the commission is based on this report. This is the reason why his approach to the job is extremely rigid. “An agent has to pose precise questions to get precise answers: no empathy has to be established with the candidate otherwise the decision is fatally flawed”. The other agents of the office, Fischer, who is absent-minded, romantic and day-dreamer, has a different view. He thinks that sometimes “also instinct may provide a valuable judgement”.

The cases they have to examine are an Italian-communist pastry chef from Apulia, a dancer from Yugoslavia and a psychiatrist from Germany. "Everybody is welcome in Switzerland...the tourist as much as a worker...but things become different when somebody wants to become citizen..." are told the agents on their training. Their job is to constantly monitor how these people live: the conditions of their apartments, the amount of savings in the bank, the stability of their private life... They have to check this constantly and even randomly. If things are not clear, extra-work on Saturdays is needed to make an informed decision. Any single aspect of the candidates’ life has to match what somebody should expect from a Swiss citizen. No deviation from the norm is considered licit if anybody has serious intentions about citizenship. For example “curtains on the window are a symptom that you house is in order, you cannot live without any”, says a neighbour of the Yugoslavian dancer to Fischer, in one private conversation. As Rodmer puts it, even “happiness” is worthless: what counts is for people (foreigners) to learn how to integrate themselves.

The two guys work together, but then Fischer gets tired of the methods imposed by Rodmer. Being loyal to his role though, he “makes” a Swiss citizen, but in a different way…

The dialogues are highly enjoyable, while the direction is sometimes too pedantic. The movie was released in 1978, and apparently, it is one of the most successful Swiss movie ever made. It was blockbuster until 1997, when it was surpassed by Titanic..but honestly it’s way better than Di Caprio’s worst movie..

Economics Focus

Ethnic hatred, civil wars and genocides. There is much violence in the developing world, and this has been found to be one of the reasons for poverty and underdevelopment. However, the cause of such violence is not fully understood. Some blame it on hunger, others on religion, and some on deeper geographic reasons. One of them is Jared Diamond. As he explained in his awesome book, “Collapse”, it is how a society reacts to geographical constraints that determines its survival. Easter Island failed, Icelanders didn’t. But if the Rwanda genocide was due to a lack of food, does this mean any society would react the same way, killing each other?

It is impossible to know for sure, as they are so many event specific conditions that permitted this atrocity. But would Europeans react the same way in they were put in Rwanda, or are they relatively less violent? We could try this as a field experiment. We could send a group of Congolese on a small island with limited resources, and do the same with a group of French, a group of Chinese and a group of Paraguayans. We could then examine how the situations evolve and determine if, between these four cultures, some are more violent than others. All we need is four very similar isolated small islands, some sufficiently large and representative samples of people from these countries and wait 10 years.

Ted Miguel, from Berkeley, and his colleagues had a better idea, at least a less costly one. They found in the real world a “natural experiment” where many different cultures interplay in the same environment to examine if acts of violence can be explained by a society’s “culture”.

This natural experiment is offered by the presence of thousands of international soccer players in the European professional leagues. It offers acts of violence (think Zidane), for which data is gathered under the number of red and yellow cards, in a fixed setting: Europe. What the authors find is that a player’s home country’s history of violent civil conflict is strongly associated with violent behaviour on the soccer pitch. And this, of course, is when controlling for origin country characteristics (e.g., rule of law, per capita income), player characteristics (e.g., age, field position, quality, team). “The leading interpretation is that persistent national cultures of violence accompany these soccer players as they move to Europe.”

In a previous similar paper, also exploiting a natural experiment, they found that “corruption culture”, another impediment to development, was persistent. Diplomats from all around the world working at the UN in NYC had way more unpaid parking tickets if they were from more corrupt countries.

Reassuringly, they find no meaningful correlation between a player’s home country civil war history and his soccer performance!

References

• Edward Miguel, Sebastian Saiegh and Shanker Satyanath, "National Cultures and Soccer Violence", working paper
• Raymond Fisman and Edward Miguel, "Corruption, Norms, and Legal Enforcement: Evidence from Diplomatic Parking Tickets", Journal of Political Economy, December 2007, Vol. 115, No. 6: pp. 1020-1048
  
  
  

Humans are in essence evil

Michael Vick was a superstar. He was the rebel, the boy from the ghetto, who made it to the National Football League (NFL), as a quarterback for the Atlanta Falcons. But there was too much gangster left in him, or too much violent culture left in him, and even though he was making way enough money, he got into an illegal money-making activity. He organised dog fights and illegal gambling as you may have seen in Amorres perros (the best movie by Iñarritu, before he became a sell out), in his own millionaire-type residence. America, the home of the golden retriever family and animal rights activists, was shocked. It sent him to prison and ended his career. The Chinese, who eat dogs, must have thought this exaggerated.

Violence on animals and gambling on organised fights is widespread around the world. Coq fights are ubiquitous in Asia and Africa while the Spaniards brought with them the killing of the bull practise in most of its colonies, where the matador, the “bull killer”, is now praised. In the Philippines, in the remote villages of the southern island of Mindanao, they even have horse fights. They get them to fight the same way you get any animal to do it. You put two males near a horny female. I keep on wondering how the locals can applause and cheer such a violent, abusive and bloody contest, which would never happen without humans starting it.

In Nicaragua, the residents of Managua had the misfortune to host an exhibition of dying dogs, by a sick Costa Rican artist, Guillermo Vargas. His 'work of art' consisted in watching the agony and suffering of dogs who were tied to the gallery’s walls by a short rope and were left for days without food or water, until death.

It even gets sicker. Sexual tourism is not only human sexual tourism. Some go to Thailand to have sex with underage boys; others go to a prostitute village in Borneo, in Indonesia, to have sex with Pony. Pony is a chained and shaved orang-utan, lying on a mattress. Apparently, it took 35 policemen armed with AK-47s to rescue her form the villagers who were violently resisting giving away their source of income.

The westerners may care about animals more than the rest of the world, but it might still be a matter of culture, or survival (to earn a living income). Westerners poison rats and organise bull fights and rodeos. While Indians treat bulls and cows as gods, America and Argentina slaughter them massively. Japanese fishermen hunt whales while Canadians kill deer with bows and arrows and African poachers kill elephants. Should the West, or the UN, impose animal rights as they wish they could impose human rights, such as women’s right in the Middle-East? Is it a universal right or national culture? Why do I care so much about animals, if others don’t?

Without hesitation, I think humans are, in actual fact, evil, and not just when it comes to mistreating animals. For example, some UNHCR employees just want to go work on the field to rape refugees in camps. See this story from Vice.

Pollution

Man we humans are really disgusting. The ocean is so full of trash it makes me wanna cry. I was reading this article and man, we're doomed. Turns out all the ocean currents bring all the trash dumped all around the world in rivers and seas to what is called a Gyre in the middle of the Pacific ocean, where it all accumulates. Scientists who studied the composition of the waters "estimated the ratio of plastic to the regular components of seawater in what we were pulling up as 6 to 1. As we moved closer to the middle of the Gyre, the ratio got visibly higher, until we started pulling in samples that looked like they contained solely plastic". The problem with plastic is that it's not biodegradable. So we are altering the composition of the ocean, for good. Jellyfish become completely made out of plastic particles as they drift at the surface, dead. Then they get eaten by fish and then by bigger fish that we eat. And here comes the shit: the chemicals contained in these plastics were found to cause "an absurd suite of health problems including low sperm count, prostate cancer, hyperactivity, early-onset diabetes, breast cancer, undescended testicles, and sex reversal", on mice, in lab experiments.

So why do educated people still throw away trash on the street, or fail to recycle plastic bottles or even paper?

By the way, here's a video on this story. If you feel that you're being too brainwashed by The Economist sometimes, try this magazine, it's my second favourite. It also gives good fashion advice.

Only one "Champagne" will survive

The story is, you have a region in France that produces one of the most popular wine in the world, wiht outstanding reputation as "the" wine for celebrations. Then you have a little town in the Vaud Region in Switzerland, that happens to have the same name. Since 1974 the town has been ordered by the WTO to cease using the word "Champagne" for the wine produced there (non-sparkling). More you can read here. The villagers have decided to go on with the fight, as they claim, their first production started already in 1657. Banning the use of the same name for "competing" products may be plausible, but what's wrong with these bakery products which are very popular in Switzerland?Why should they also change their name?

Economic Gangsters

Now here's a book I am so looking forward to read:

Economic Gangsters
Corruption, Violence, and the Poverty of Nations
by Raymond Fisman and Edward Miguel

From the intro on the book's website I'm sure I'll just love it:

"Meet the economic gangster. He’s the United Nations diplomat who double-parks his Mercedes on New York streets at rush hour because the cops can’t touch him—he has diplomatic immunity. He’s the Chinese smuggler who dodges tariffs by magically transforming frozen chickens into frozen turkeys. The dictator, the warlord, the crooked bureaucrat who bilks the developing world of billions in aid. The calculating crook who views stealing and murder as just another part of his business strategy. And, in the wrong set of circumstances, he just might be you."

Here's what Levitt, coauthor of Freakonomics, thinks of it:

“Economic Gangsters is a fascinating exploration into the dark side of economic development. Two of the world's most creative young economists use their remarkable talents for economic sleuthing to study violence, corruption, and poverty in the most unexpected ways. Subjected to their genius, seemingly inconsequential events (like New York City parking tickets and Suharto catching a cold) become potent tools in understanding how the world really works. Rarely has a book on economics been this fun and this important. ”

I'm adding it to my list after "The logic of life" by Tim Harford. By the way, here's another super interesting paper by Miguel on National Cultures and Soccer Violence . And one by Fisman, Gender Differences in Mate Selection: Evidence from a Speed Dating Experiment.

Am I the only one here interested in that kind of stuff? I mean, behavioral economics and development?

Be kind, rewind

A few words about a light and enjoyable movie (written and directd by Michel Gondry)I saw last night.

When the nostalgic owner of a VHS renting shop (Danny Glover) goes away for a week to spy on the competitor’s DVD shops, he tells his adoptive son (Mos Def) to take care of the shop. But he has a clumsy friend (Jack Black), who, when trying to sabotage a power station, becomes magnetized. So when he enters the video club, he erases all the tapes just by being there.

So when the shop’s best client wants to rent “Ghostbusters”, they quickly realize that the only way to have a VHS copy of the movie is to film a remake themselves. It turns out to be very crappy, but with a lot of heart, so the best client’s son and friends find it fascinating.

When asked what the hell is going on, Jack Black answers that the movie has been sweded. “That’s not a verb, that’s a country”, the young gangster reacts. “Exactly” retorts Jack Black, “that’s why it’s expensive”!

Turns out they start making more of this hilarious and “feel good” sweded versions, including 2001, a space odyssey, Rush Hour 2, the Lion King and Driving Miss Daisy. But just as they’re starting to make enough money to save the building from being destroyed by urban developers, the copyright lawyers come and destroy all their sweded versions.

They conclude by filming a documentary on Fats Waller, the jazzman who supposedly lived in that same house where the video club is today and the idol of the shop owner. When they project it the night of the building destruction in the video shop, the entire neighbourhood has gathered to enjoy the craziness and human feeling of their filmmaking.

Anyway, this is a crazy movie about how people care about social assets such as friends and neighbourhood culture in Passaic, New Jersey. The point is not that change or progress is a bad thing; the point is that the best things in life are the ones from the heart.

Some intresting correlations

Corruption is the most annoying thing anyone has to live with. Not only is it the most important impediment to growth, it makes people completely unhappy. But it is not only because of corrupt socities in poor countries, it is also because of rich countries's companies bribe payers. So Transparency International, a think tank specialized on corruption, has this bribe payers index, to determine where these evil people are from. Here's my point, these people are just not educated. If you were educated, you wouldn't act in such a stupid way. Here's my correlation graph that, of course, doesn't mean anything. But it is not hopeless yet. It is still possible to be happy in this corrupt world. We just need the magic bullet:

Unhappy seeds

I did not know that Bulgarians were big consumers of sunflower seeds. I came to know this by chance the other day, while discussing over breakfast with my classmate's girlfriend the other day. So I went on Internet and checked some data. Here is table of the top world producers.

The data are from wikipedia. I came to know that production originated along the Mississippi river, and were brought to Europe by the Spanish conquistadores. Ok, what's special about the seeds? Well, apparently there is some problem associated with their production.




From the graph there seems to be a quite strong association between the percentage of people reporting unhappiness according to the World Value Survey, and the per capita production of Sunflower Seeds. Why do we find such a correlation? I thought about some possible explanations.

1. Psychological: the first person that comes to my mind when I think about sunflower is the supreme genius of Vincent Van Gogh, who managed to create masterpieces out of this flower. As we know, Van Gogh was not extremely happy, and suffered from lot of hardships in his life. But is it that unhappy people love sunflowers, or the reverse is true?
2. Botanical: any type of crop requires one period for plantation, one period for harvesting. In the period in between people may very well get bored, and if someone from the World Value Survey (WVS) asks the peasants "are you happy?" what do you expect the answer will be? "Let's wait for the f** harvests and see if I am happy!!" But this of course, implies we should find unhappiness also for other type of crops (corn, soybean..)
3. Nutritional: sunflower seeds are extremely healthy, because they have many different vitamins, linoleic acids, fibers..but they are also extremely caloric: 576 calories per 100 grams, and 50% fats. So you start eating and enjoying them, then you finish a whole pack while watching a movie, you realize that you have eaten 800 calories, you are still hungry, your boyfriend, girlfriend, husband, wive complains you are getting fat then the guy from the WVS comes and asks you "are you happy?" and imagine what the answer will be...
4. Globalization: sunflower seeds do not have the same consideration everywhere. What I also learnt from my flatmate is in fact that, when english people go to Bulgaria and see they eat sunflower seeds they start laughing: "Oh, do you that? For us, that is bird-food!" How would you then feel if somebody from another part of the world starts laughing about your own favourite food?Maybe it's a reason to be pissed, but if the guy from the WVS asks you "are you happy?" then you say "no I am pissed!" then he says "no, you have to tell me if you are happy" "no I am not, I am pissed!" and then you are classified as unhappy...is unhappiness a good proxy for being pissed anyway?
   

What can we say to sum up the discussion? I don't know...my favourite explanation would be,that this is just a statistical fluke. But if you find my arguments convincing, or have some other theory...we can share some sunflower seeds together!

Easterly on development

William Easterly has two new accessible articles. One in the American Economic Review, on institutions and economic development, and another one on what should a perfect aid agency be, in the refreshing Journal of Economic Perspectives. I have to admit I really enjoy reading the latter journal. As its website mention, it “attempts to fill a gap between the general interest press and most other academic economics journals”. It does this by offering “readers an accessible source for state-of-the-art economic thinking” that is easy to read.

Anyway, back to development. Institutions, as many instrumental variables have proved, cause growth and development. In other words, fix your institutions and you’ll grow. But how do you impose good institutions? Bottom-up or from the top-down? This is what Easterly tries to address (not answer, of course) in his AER paper. He concludes, as expected, that no clear answer exists. The imposition of a new set of laws by top-down shock therapy? Think of Russia and forget about it. It can indeed have nasty, destructive effects. So what about a bottom-up process, such as giving subsistence farmers land titles, as suggested by De Soto? Well, as Easterly explains, it didn’t really work in Africa, and that’s because these are of no use when there’s no rule of law. So doesn’t this mean we should start with imposing the rule of law, from the top? Oh no, I forgot, that doesn’t work.

In his other paper he complains about the poor quality data on foreign aid and about the fact that so much money goes to corrupt countries. He also complain that “aid tying, the use of food aid-in-kind, and the heavy use of technical assistance persist in many aid agencies, despite decades of complaints about these channels being ineffective”. As for which are the best agencies, he writes that “development banks tend to be closest to best practices for aid, the UN agencies perform worst along each dimension, and the bilaterals are spread out all along in between”. To me, the UN development agencies do look incompetent. He explains why by writing mockingly: "UN announces new agency to combat excessive bureaucracy in foreign aid"

What I've been saying for a while

if guys are better in math and geography, girls are definetly better at languages. Here's a study that confirms it.

Politics this week

The economist now makes a video version of Politics this week. You know the little paragraphs that explain everthing that happened everywhere in the World. You can view them at http://audiovideo.economist.com/. It's like an "english lesson" video! Weird but cool...

Movies and Economics

I read on Paul Krugman's blog about this initiative from the Dallas Fed for high school students. Here is a suggestion from the "No county for old men", just reviewed.

This is an example of decision-making under uncertainty. The theory says that if there are two coin toss lotteries, let's say A, and B, which have both known probabilities (50-50) and known pay-offs, a person will choose to participate in the lottery which has the highest expected utility-which is the payoffs coming from head or tails times their respective probabilities.
If you are offered to participate in a lottery in which the probabilities are known but the payoffs are not, you may decide to participate according to your degree of risk aversion: the lower it is, the smaller the payoff increase needs to be to induce you to participate.

In the scene that follows, the shop owner is "offered" to take part in a lottery whose outcome is based on a coin toss. Initially he does not want to bet, because he does not know the payoffs, but then....well, let's see how this works in practice...

The Oscar goes to...

The latest Cohen bros.' movie, "No country for old men", is exceedingly brilliant and it fully deserved the 4 academy awards it received last night. It is the movie of maturity for the two brothers since it eloquently combines features already seen in some of their previous works. As in the Big Lebowski, we are introduced to the local events of an American region (this time it's Texas), through the external narration of the local sheriff , Tom Bell (a superb Tommy Lee Jones). As in Fargo, a modest person and Vietnam veteran with a passion for hunting, Llewelyn Moss (Josh Brolin), is trying to change his life forever, until his masterplan becomes too complicated for him to handle. Unlike in Fargo, this time the character is accidentally induced to a change in his life. He happens to find a suitcase full of money during a hunting session, which is the leftover of an unsuccessful drug deal involving some brutally killed mexicans (we are right on the border). As he finds the money, he announces to his wife that their life is gonna change. But then, he commits a mistake. Pulled by mercy for a wounded drug dealer he saw on the crime scene, he goes back there at night to bring him some water (remember the guy is a veteran from 'Nam). He is then almost caught by the criminals and from then on he himself becomes paradoxically the pitiful prey of some obnoxious criminals: not only the mexican drug-dealers, but also another, more dangerous person.

The movie then starts to be centred mainly on the complex personality of this serial killer hired to lead the big man-hunt: Anton Chigarh (Javier Bardem), whose name sounds like "sugar" with Texas accent, but who is everything but sweet. Like a modern Cerberus, he decides the destiny of his own victims, either by his own grand-scheme or, more sadically, by a simple toss of a coin. He brutalizes his victims with a sort of weird gun used to kill animals. But before doing that, he engages them in uncomfortable dialogues, which are supposed to find inconsistency in attitudes and motivations behind their lives' choices. For example, when facing another man-hunter , Carson Wells (Woody Harrelson), just before finalizing his execution, he asks him the following question: "If the rule you followed brought you to this, what good is the rule?".

No country for old men explicitely adopts a violent filming language, but this is a necessity given the content of the movie. It anyhow soon departs from it, moving on a higher narrative record when it starts to give preponderance in the last part to the thoughts and actions of the Sheriff. He suddenly ceases to be the narrator, as he himself is a fundamental part of the tragedy which is happening. We come to know that he is frustrated by the increasing amount violence which is shaking his community, and thus he had planned to retire. The more violence happens, the more he tries to bring order into town, but what we see is just him constantly missing the targets of his investigation plans. Like an inescapable consequence of his decision, we come to understand why what we see is "No country for old men". The movie engages with an end which is appropriately metaphysical, but, intentionally, it does not leave any precise message, which I guess it's the reason why, although breath-taking but sometimes too harsh, the Cohen brothers' movies are so highly enjoyable! A must-see!!

Some advice from Gandhi to the school's administration

“A Customer is the most important visitor on our premises. He is not dependent on us. We are dependent on him. He is not an interruption in our work. He is the purpose of it. He is not an outsider in our business. He is a part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.”

The Quarterly Journal of Economics

I am surprised at the direction taken by economics these days. Obama is asking behavioural economists policy advice, development is only studied through randomized experiments, and happiness is becoming more important than GDP! If you look at what was published in the Quarterly Journal of Economics in the last years you might indeed be surprised.

According to its website, “The Quarterly Journal of Economics is the oldest professional journal of economics in the English language. Edited at Harvard University's Department of Economics, it covers all aspects of the field—from the journal's traditional emphasis on microtheory, to both empirical and theoretical macroeconomics. QJE is invaluable to professional and academic economists and students around the world”.

While there are still articles about inflation and exchange rates, most are really different from the public’s perception of economics. For example, they look at how Preschool Television Viewing affects Adolescent Test Scores, at how Fox News affects Voting, at how Large are the Effects from Changes in Family Environment (by studying Korean American Adoptees), at how hard it is to obtain a Driver's License in India, at how beliefs are formed, at the effect of Birth Weight on Adult Outcome, at how Friendships Form, at The Political Economy of Hatred , at how to explain sexual behaviour and at the Gender Differences in Mate Selection in a Speed Dating Experiment.

I wonder if it’s the same thing in the leading journal of the profession, the American Economic Review. Probably, with articles like "Fatal Attraction: Salience, Naïveté, and Sophistication in Experimental “Hide-and-Seek” Games"!

Translatantic lessons from Mr. Obama

What the super exciting and always interesting election for the Presidency of the United states and the always boring and pathetic n-th election (for another short-lived legislature) in Italy have in common is the following fact: the age distance between the two contenders for the presidency on both sides of the Atlantic is at least 20 years (wow!).
John Mccain, (71), I heard on BBC today, could be the oldest president ever elected. His contender (fingers crossed) Barack Obama, being 46, if elected, would not be that far from Kennedy's record (43 when he was elected). In Italy, Mr Berlusconi is 71, while is contender, Mr. Veltroni is 52. This generational gaps are a timid signal that political campaigns may in the future become more polarized.

I read here that Obama's investment on the votes of the <=25 has been intense. This is good news since it seems to me a major break with the past. The conventional wisdom is that betting on young people's vote is a political disaster. This is a wisdom that assumes young people do not participate, do not vote, do not care... Of course this is a flawed conjecture, I would say a typical example of self-fulfilling prophecy: young people do not vote because they have never found somebody willingto represent them politically. Why would young people invest their time in politics if nobody is listening to them?Actually, that young people are not involved in politics is also dismissed by anecdotal evidence: just look at how strong has been their support to the no-global movement. The way politicians have neglected the youths in the past has produced a terrible side effect: a generation of frustrated voters animated (correctly) by anti-politics rhetoric.

Somebody may see this development as a sort of recurring cycle. The resurgent interest in politics from the young people we see today may in fact come as a response to the terrible political mistake of the Iraq war (just as the 68's movement was with the Vietnam war). If you accept this parallel (and the paradigm that history comes in circle then), somebody has to bear the responsibility to improve on it (remember Kundera?). It seems like Obama, the man of Change, is the man. He is making a coreageous bet, something that may be politically costly, but to which he must be given enormous credit. Reconciling young people with politics is a valueless legacy for every society, and I am sure the US will benefit from it (especially so if Obama gets elected, fingers crossed!!).
I see that somebody in my country (Mr. Veltroni), is trying to learn from Obama's lesson. Unfortunately, he seems to be timedely doing it, but still...

Who cares about inflation?

Ignorant pseudo-academics who proclaimed themselves to be leftist, alter-globalists and "in touch with people's real problems" often dismiss economists for saying that it is more important to fight inflation than unemployment. In reality, no economists like price stability for the sake of it, and unemployment is the real thing that everybody wants to fight. If Central Banks around the World have decided to focus their monetary policy on controlling inflation, it is because it is the best tool to avoid the serious problems of the economy: recessions, people coming out of universities looking for jobs for 5 years before deciding to shift vocations, people not having enough money to buy basic necessities, criminality, homelessness, closing of theatres, cinemas, libraries covered with dust, trees cut down, people hating each other, war.

To correct this misinformation, the European Central Bank (ECB) has designed this "information kit" for young teenagers and teachers in all the official languages of the European Union. According to one of Geneva's leading macroeconomists who prefered to remain anonymous, this is one of the best propaganda ever. Entitled "Price stability: why is it important for you?", it consists of "of an eight-minute animated film, leaflets for pupils and a teachers' booklet. The film features two secondary school pupils, Anna and Alex, finding out about price stability. The leaflets provide an easy-to-understand overview of the topic, whereas the booklet covers it in greater detail."

I had a look at the pupil's leaflet. Unfortunately, I don't imagine it could convince people that "price stability promotes economic growth and employment by making it eaiser to compare prices and by reducing the cost of borrowing money". This is how bad economists can be when trying to influence people. Some are a bit better. When I took my undergrad class in monetary economics with this guy, I was convinced inflation had to be beaten.

All in all, controlling inflation is super important and most people don't get why. This is economists's fault.

What your policy Barack?

On the eve of Super Tuesday, while 4 people are still in the race, I am still wondering how different Hillary’s policies are from Obama’s so I went on the New York Times website and here is what’s important:

On Iraq, while Barack was the only one against from the start, both Democrats want a phased withdrawal to start soon while both Republicans are in favour of troop increase.

On healthcare, Hillary wants compulsory insurance for everyone, a.k.a. universal coverage. Obama wants a bit more flexibility while the Republicans are for more free markets.

On abortion, the Republicans are, well, crazy (against it all together). Obama is even more liberal than Hillary on this.

On Climate Change, the Democrats want compulsory cap and trade and so does McCain. Romney wants a global program (or is this an excuse?)

On immigration, the Republicans disagree. McCain, as both Democrats, supports a path to legalization that includes learning English while Romney wants none of this; he wants to build a more efficient fence. What’s crazy is that they all voted for the fence along the Mexican border.

On Iran, none of them put the war option off the table. Barack is the only one that would engage in direct diplomacy while Romney is the only one that would invade without asking Congress. They all want sanctions.

On "the economy", the Republicans want the Bush tax cuts to become permanent while the Democrats want none of that for the riches (250 000$ a year) but tax relief for the poorer to stabilize the economy.

On free trade, Hillary is now a hardcore protectionist. She wants “smart, pro-American trade because NAFTA has hurt workers”. She’s against CAFTA and wants more American agriculture exports!!! McCain and Romney are pro-free trade, in a good way. Obama is also protectionist: he wants labor & environmental standards in trade agreements and affirms that people don't want cheaper T-shirts if it costs their job. He also wants to reinvest in communities that are burdened by globalization, as most economists suggest.

All in all, this in no way helps in choosing one. Watching them talk on TV helps much more.

Obama for President!

Who says ordinary americans don't like Obama? Hulk Hogan just endorsed him!!!


But I'm still wondering which economist is for whom...Krugman seems to be for Hillary, Paul Volcker endorsed Obama, Glaeser of Harvard endorsed McCain, Mankiw seems to agree...I think most American economists are Republican cuz it's more market oriented...But I'll check that more carefully...

A new Kid on the block

His name is Fu-Long, the first panda born in Captivity in Europe (after 25 years). You can meet him at Vienna Zoo.

Fighting the slowdown in the US

Once again the FED has cut the interest rate by 50 basis points. This was not unexpected after the gloomy figure about GDP growth in 2007. So the FED is just doing what every macroeconomist would suggest to do when a slowdown is hitting the economy. But, the US government is preparing another plan to stimulate the economy, which contemplates the US of fiscal policy.
The so-called fiscal stimulus has not been well acclaimed by many respected economists, as PL has shown in the last post. The reason is that Fiscal Policy is not considered today the best instrument for short-term stabilization. There are two problems associated with fiscal policy as a macroeconomic tool: first, it is hard to conceive (because of the many distortions that it can provoke); second, it takes time to assess its impact.
Coming to the US package, among the main arguments the critics have advanced, I endorse the words of our Master of Thought Paul Krugman, who claims the package is ill conceived because it is targeted to the people who needed it less. In short, these are the people who probably do not suffer for a temporary lack of liquidity (not the people highly indebted, not the poorest).
When and if the policy will start to appear as ineffective, the US government will be probably forced to propose another plan, but it will take some time to realize this, which may be probably be too much, given the magnitude of the problems the US economy is facing. The risks are two. One is that, when expectations start to come at play, a slowdown may turn into a recession; if no sign of recovery appears, the FED will have to keep on sustaining the economy by a further tax cut, but here comes the second problem: monetary policy ceases to be effective when the interest rate reaches very low rate. Mr Bernanke will never try to reach the neighborhood of zero for any reason, but his room for manouvre is shrinking after today's cut. So if the fiscal package is not effective, the problems for Mr. Bernanke will become bigger. There is of course another path to follow. What the Us government can and should do, is probably listen to Mr Summers' suggestion to strengthen the financial sector. After the recent mess, this is something that needs to be done. The road to reform is a painful one, but it probably avoids the problem associated with the expectations channels: it signals the intention to fight a recession at every cost, plus providing long term beneficial effects.