The Financial Crisis Down Under

Hey all

I was just reading the online edition of my local newspaper back home in 'The Land Down Under', and I came across this article about a perhaps little considered impact of the financial crisis.

Forget financial markets in a tailspin and home mortgage foreclosures, one of the big impacts of the financial crisis in my home city of Sydney is apparently on the sex industry. According to the article, 'Financial Crisis Forces More Women Into Sex Industry', declining incomes and tough economic conditions are forcing more women to working in legal and illegal brothels.

But an additional effect of the financial crisis is also that declining fortunes in the financial services industry are leading to declining incomes for the regulated sex industry in general, as businessmen tend to substitute cheaper (illegal) services for the midrange ones they usually purchase (and they are also tending more towards organising their rendezvous at zero cost via the internet).

It is interesting that this reveals that consumers regard the purchase of sexual services as a necessity, rather than a luxury, service. The stylised fact that businessmen substitute cheaper for more expensive sexual services during times of declining income, rather than go back to their wives, would also support the contention from this JPE paper by Edlund and Korn (2002) that prostitutes offer men a different 'good' (nonreproductive sex) to that offered by their wives (reproductive sex).

In any case, my two cents as far as the 'theory of prostitution' a la Edlund and Korn (2002) goes is that it's a load of rubbish - yet another stupid attempt to apply Beckeresque rational actor models to areas where Economics should really just stay away from (although for saying this I will probably be exiled from Rigot, stoned, and burnt at the stake for being a heretic......). So what if they got it published in JPE anyway??

And of course it's terrible that increasing numbers of Australian women are being forced to supplement their incomes by selling their bodies - apparently this phenomenon is especially prevalent amongst the Australian student population.........something to think about when we whinge about our measly scholarships and TA salaries, I guess.

Cheers,
Cam.

A non-causative, but suggestive correlation

In a cross-section of 40 countries in 1995, religion (measured as the percentage of people attending religious service at least once a week, from World Value Survey) is positively correlated with corruption (measured from the index developed by Transparency International). There seem to be three clusters of countries within the scatterplot reported below: countries with low levels of religiosity and low levels of corruption (e.g., New Zealand); countries with intermediate levels of religiosity and medium-to-high levels of corruption (e.g., Brazil); godless and corrupt countries (e.g., China). One should remark that all very religious countries are also very corrupt. However, high levels of corruption are associated both with low and high religiosity, indicating that the impact of religion on corruption is fragile. One may think that in some of the countries in the NE region of the graph attendance of religious services is low because it was/is actively discouraged by the government (e.g., China, Russia). The results are however not different when I use a definition of religiosity based on personal beliefs rather than active behavior. In any case, the link disappears after controlling for GDP per capita.
In conclusion, I fail to add a statistical significant impact on corruption to the list of bads brought by religion, but it is quite safe to claim that the level of religiosity in a country does not incoculate it against high levels of corruption. Italy being a point in case.

Rich Cut Back on Payments to Mistresses

"You know times are tough when the rich start cutting costs on their mistresses. According to a new survey by Prince & Assoc., more than 80% of multimillionaires who had extra-marital lovers planned to cut back on their gifts and allowances. Still, only 12% of the multimillionaire cheaters said they plan to give up on their lovers altogether for financial reasons." read all

ht: Mankiw

The importance of stupidity in research

A friend forwarded this along, so I figured I'd spread some motivation around.

The Fiscal Stimulus comes to Brussels

The European Union proposes a Euro200bn stimulus to revert the current trend toward recession in 2009. This amounts to 1.5 % of European GDP. How can countries cope with the fiscal stimulus and the European fiscal apparatus, namely the Stability & Growth Pact?

This morning France and Germany called for a relaxation of the 3% deficit ceiling. today Almunia said this will likely be the case: since its reform, the SGP is meant to allow flexibility; although, the commissioner specified that any exception needs to be temporary (the usual bureacratic caveat). Where do the countries stand?

Just a quick look at the numbers from OECD for 2008:

	Deficit
Austria	-0.67
Belgium	-0.30
Germany	-0.45
Spain	0.68
Finland	4.44
France	-3.04
United Kingdom	-3.75
Greece	-2.09
Italy	-2.50
Netherlands	1.14
Portugal	-2.24

Under the SGP definition, France and the UK are above the ceiling. The current forecasts don't point to negative numbers when talking about GDP growth for 2009, but if the recession is going to be as the average recession in EMU (a GDP slowdown by less than -1.00), then this will imply an average increase in the fiscal deficit by 0.80 in percent of GDP only due to the working of automatic stabilizers (calculations are not reported, but available upon request from the author). This means Portugal, Italy, France and Greece will likely find themselves above the ceiling next year without any government action. I wonder how flexible is going to be the Commission when it comes to the implementation of the "discretionary" intervention, especially toward the more highly indebted countries. Will they suggest to do something timely, targeted and temporary?Or something else?

Direct flight or cheaper options?

New Rigotnomics working paper:
If you had to travel from Geneva to Montreal, you could fly directly for 1100 CHF or fly from Paris on a cheaper charter flight (800 CHF). If flying from Paris, you have to get there either by train (TGV for example) or plane (easyjet for example). Option (2) involves money saving, risks (loss of luggage, missed connections) and various hidden costs (time loss, stress, hassle, forgone cappuccinos) that depend on the individual. Turns out the actual price difference is exactly the average estimation of how much one would be ready to save to go through Paris!

Struggling bartenders in France

This is one interesting passage I read on this article published last Saturday on the New York Times:

In 1960, France had 200,000 cafes, said Bernard Quartier, president of the National Federation of Cafes, Brasseries and Discotheques. Now it has fewer than 41,500, with an average of two closing every day.

The article goes on, listing diverse grievances from bartenders on what to blame for their current lack of profitability. Some blame it on the current financial crisis, some others blame it on Sarkozy's stricter regulation against smokers and drunk drivers. Some others blame it on the cultural change in modern generations. Listen to this bartender from Paris:

“The bar-cafes? They’re finished. Twenty years ago, people would go in the morning before work for a coffee and a cigarette. And now, it’s over. Young people don’t drink during the day, and when they drink, they drink to get wasted. Smoking is forbidden and they eat en route, with coffee in a paper cup. They smoke and drink at home.”

The policy question is: should Sarkozy bailout bartenders together with or instead of car manufacturers? I think the answer depends on whether you believe or not in drinking at bars as a promoter of social capital. Apparently the answer is yes.

BBC video on "addiction" to aid in Africa

The sad truth of economic incentives when the power of distributing scarce resources is given to the wrong people:
http://news.bbc.co.uk/1/hi/programmes/panorama/7742426.stm

What is Tim Geithner like?

As you've probably heard, Tim Geithner has been nominated to be the next Treasury Secretary. As he was my boss for several years and I had the opportunity to brief him on a couple of occasions, here are my five cents.
The first impression is that he is an extremely smart person, with a very strong ability to absorb information, process it and ask pointed question. He also has a strong drive to figure out aspects that he is not familiar with. During briefings, his questions were tough not in a "here is what you did wrong" way, but in a "help me think about this" way. He was always trying to figure out where the unseen problems were that he had not yet notice.
What is needed for the Treasury at this stage is someone who can handle a complex issue, interact with his counterparts abroad, be flexible with a changing environment, and - last but not least - do not let his dealin with Wall Street make him forget that he works for the taxpayer. Tim Geithner scores well on all counts. The only tricky aspect I see is who is going to replace him in NY.

A new FTA for Canada

"L'entente prévoit de retirer les tarifs douaniers imposés à 98 pour cent des exportations canadiennes en Colombie, y compris pour le blé, l'orge, les lentilles, les pois, le boeuf, les produits de papier ainsi que la machinerie et l'équipement." ... read all

Does it have anything to do with trade or simply two conservative presidents getting along well?

Betting 130,000,000,000 Euros on Keynes ......

..at least this seems to be the number which the European Union wants to invest in a large scale (cross border) government program hoping Keynes is right. The number corresponds to a contribution of 1% of GDP of each nation (Hence, Germany burdens ca. 25bn of the overall package). A great experiment to witness (not only for economists) and analyze in the future!

I am just happy I pay my taxes in Switzerland.

Rigotnomics daily visits

Schumpeter on how to write a PhD thesis

"In every scientific venture the thing that comes first is Vision. That is to say, before embarking upon analytic work of any kind we must first single out the set of phenomena we wish to investigate, and acquire 'intuitively' a preliminary notion of how they hang together or, in other words, of what appear from our standpoint to be their fundamental properties. This should be obvious. If it is not, this is only owing to the fact that in practice we mostly do not start from a vision of our own but from the work of our predecessors or from ideas that float in the public mind"

This is why you need to read newspapers and blogs and not academic journals when in need of ideas for research.

ht: Wyplosz' office door!

This extract is from Schumpeter's History of Economic Analysis (1954)

Another Distraction From My Memoire Preliminaire - Super ObamaWorld

Hey,

for all those video game fans out there who are looking for a distraction from work, check out this link to a cool game called 'Super Obamaworld'.

So basically the idea is in this Super Mario style game (for those who remember the Mario video game franchise from Nintendo) is that you control Barack Obama as you run around ridding the world of pigs with lipsitck and bringing 'Change We Can Believe In'.

Enjoy!!

Cheers,
Cam.

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!

Coup de gueule

"Barack Obama, committed to uniting America, could defuse the nation’s culture wars by purchasing an alternative homeland for those of his countrymen who want more use of the death penalty, less gun control and no gay marriage. A slice of Saudia Arabia’s empty quarter would do nicely: there’s plenty of space and the new occupants would have lots in common with the locals".

Sometimes, The Economist has these sarcastic and radical articles I would call "coup de gueule". They are the best. Read this one completely, it's a classic.

Surf Economics

Hey all,

just when I thought that there are areas of life that Economics can't be applied to, I stumbled upon this super cool blog.

Called 'Surf Economics', it is run by a guy by the name of Chad Nelsen, who is pursuing his doctorate in Surf Economics @ UCLA (how cool is that!!!!).

Apart from the obvious - that the fieldwork involved in this subdiscipline must be great fun - what is Surf Economics all about? Well, according to the blog and another article I found, the field is all about estimating the economic value that surfing areas bring to the local economy. Think for example of the economic benefit that is brought to a local community when it becomes widely known that there are some smokin' waves to be ridden nearby. Surfers come from far and wide, shops open to service their needs, and more money gets pumped into the local community.

Interestingly, the idea behind promoting awareness of the economic value of surf beaches serves in the end a conservation purpose. The economic value of a surf beach is a critical variable that should enter the policymakers decision function for making adjudications concerning coastal developments which have the potential to alter coastal environments and affect beach breaks (and hence affect the potential for a local community to benefit economically from their surf beach). For a small local community with few diversification options in terms of its tourism income, coastal developments which alter beaches and don't take account of their value can potentially be economically disastrous.

Another instance of economists helping local communities and making real life impacts........now back to deriving the FOCs of my Hamiltonian......................

Cheers,

Cameron

Nothing To Do With Economics (But Entertaining Anyway)

Hey,

this post has nothing to do with Economics, but I just wanted to share with you all some Australian Winter Olympics glory (from 2002):




Given that Australia doesn't really excel in winter sports, this guy became an absolute overnight celebrity........and he did it with minimal effort as well!! It is also very inspiring, as it shows that we should never give up in anything that we do, the big payoff might be just around the corner!!

Cheers,
Cameron.

Japanese apples

Tadashi was telling me about this fascinating fact: Japan has been criticized by the US government for protecting its apple market from US apples. This has been a 30-year-battle at the WTO. The Japanese apple market was self-supplied by Japanese apple growers. But, now Japan has become a net exporter of apples and is increasing its export dramatically to its neighbouring countries (what happened in 2002???). I have heard that Japanese apple grower associations are spending a decent amount of money in R&D for the last couple of decades to improve its quality (apparently, these apples are way better than their New Zealand or Chinese counterparts). Is this protectionism work?

"1st Rigotnomics Prize 2009"

The Editors of Rigotnomics are pleased to announce the launch of the first "Rigotnomics 2009 Prize" for the Best Master's Thesis written by students at the Graduate Institute of International and Development Studies, in Geneva. As a reward, the best mémoir will be published as a special edition Rigotnomics Working Paper and, thanks to the generosity of our sponsors, will comprise of a Rigotnomics Mug and a T-shirt.

The prize is open to theses written in all economics disciplines. A scientific committee appointed by the Editors, composed of four Phd students specialized in both Micro and Macro at the Institute will be in charge of the selection.

The Committee this year will be composed of the following members:

Pascal Towbin, Macro
Sebastian Weber, Macro
Kornel Mahlstein, Trade
Cosimo Beverelli, Trade

The Prize will be awarded during the usual beginning of the year Barbecue in Rigot, in September 2009 (right next to the graduation ceremony).

The Editors
(approved by the Editor in Chief)

Better than CNN graphs!

Professor of Physics Mark Newman from the University of Michigan, produced some interesting graphics of latest US elections. This is the arch-famous CNN type of map:



This is the map which shows the degree of preference by regions (red are still republicans, blue democrats, but the shades of purple give percentages in between):



We still believe Obama was a better candidate, but this is enough to say that the concurrent economic crisis and a better electoral campaign, were also influential in determining Obama's victory.

If you want more maps click here.

Obama's economic team

Who would you like to see in Obama's economic team? I would like to see Krugman. Don't think that's gonna happen but still. There are many jobs involved! So who would you like to see in what job and why? I think Roland Fryer would be good for social inequalities, but what about health care, the financial crisis, international trade??? What would be an economic dream team?

Here's Mankiw telling Obama what (not) to do. Don't know if he would work for a Democrat though!

And if you feel like shopping, go here.

Brown Bag Lunch

Monday 10 Nov- 12h15 - R3

Vincenzo Cuciniello (EPFL)

Will present his paper

“International monetary policy cooperation revisited: conservatism and non-atomistic wage setting”

This paper presents a benchmark model of policy coordination in line with the New Open Economy Macroeconomics literature. I extend the analysis on non-cooperative toward cooperative solutions by incorporating non-atomistic wage setters and conservative central banks. It turns out that previous results on international monetary policy cooperation are modified such that cooperation is welfare improving. The finding in the model relies on unions' perceptions about affecting monetary policy. It is shown that under cooperation wage setters perceive a tighter monetary policy, thereby inducing stronger wage restraint.

The effect of the financial crisis on the popularity of Rigotnomics

Celtics vs Timberwolves

Some time ago, three superstars of the economics profession at the Minnesota FED, Chari, Christiano and Kehoe (CCK), claimed in a controversial paper that all the talk about the occurrence of a credit crunch in the US was misleading. With the help of available data, they "debunked" the following myths about the way the financial crisis is hitting the real economy:

1. Bank lending to nonfinancial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.

In a response paper, four Boston FED economists, Cohen-Cole, Duygan-Bump, Fillat, Montoriol-Garriga disprove CCK' s conclusions, claiming that one cannot assess those popular claims by simply looking at aggregate data. If one looks at the composition of financial aggregates one observes evidence of:

1. Decrease in "new lending": banks are in fact making heavy use of existing lines of credit, but are not renewing them at maturity or they are sometimes closing existing ones.
2. Interbank lending is indeed working unusually: large banks have in fact sharply increased their cash assets (cash hoarding) which entails high opportunity costs, indicating disfunctions;
3. Big, high quality (AA) non-financials corporations have not been hit by the crisis, but signs of strains are evident for lower quality non-financials corporations (A2/P2) who find it harder to obtain commercial paper funding (another piece of evidence of flight to quality).
4. Banks are still important: when problems arise in the commercial paper segment, banks have to fulfill credit expectations; furthermore, they are still important for ordinary consumers.
   

The question is then, will the banks be able and willing to provide these fundings? It seems like they are not..


Anyway, the conciliatory conclusions are for both papers that, indeed, we need more and better data to say anything meaningful...and the more general lesson for everybody is: don't draw too strong conclusions from aggregate data!

Democracy

-"What's more important for democracy, leadership or institutions?"
-"Leadership" I answer, without hesitation.
- "What's the name of the President of Switzerland?"
-You got me

Replace the word "democracy" with "growth" in the above for another contribution to economic theory.

What a gooood Morning!

This morning I woke up with this text: Obama :-) Finally some good news from the world!



Good luck Barack Obama!Let the change begin!

PS
Trivia-Barack Obama will be the first elected American President who has been endorsed by Rigotnomics...

What really caused the financial crisis

The answer in our new Rigotnomics working paper.

Get ready for the marathon..

Reminder: Indiana is the first toss-up state to close the polls. According to Real clear Politics so far Mccain is leading in this state, there should not be any surprise. Anyway, the first important indication may come from Virginia where polls close at 7pm (which approximately 1am in Europe). Ok also Florida is a toss up state that closes polls at 7pm, but I don't know how much of a surprise may come out of it, given last elections... AnywayPrepare your popcorn, coffee and stay tuned!

Adverse selection, twisted incentives and social inefficiency at the UN

In a new Rigotnomics Working paper, I compare the UN job market to the one for blood donations. Drawing parallels, I show how high salaries lead to an adverse selection of employees and to the destruction of good employees' true motives.

Will the global financial crisis hit ordinary Ugandans?

Dick explains why the answer is yes here.