Environmental consequences of a gentle touch...

Toilet paper is notoriously by now a luxury good (ah?). There are several brands which compete on a specific attribute: "softness". Those people who want to be pleased in every second of their life, end up spending lot of money on this product. It's the market baby! But wait a minute...isn't toilet paper made from forest? Does it make a difference by how much I want to increse my daily intake of self-inflicted gratitutde? Apparently, the answer is: Yes, a lot!!

Allen Hershkowitz, at the Natural Resources Defence Council, a US based environmental action group, has launched a campaign against the American obsession of extra-softness in toilet paper use. For those out there who go for a soft/gentle touch, Hershkowitz said "This is a product that we use for less than three seconds and the ecological consequences of manufacturing it from trees is enormous". Greenpeace this week launched a cut-out-and-keep ecological ranking of toilet paper products. The full story is here.

Dambisa Moyo and the Rigotnomics Development Bank

Wow! Look at this chick! A native of Zambia with advanced degrees in public policy and economics from Harvard and Oxford about to publish an attack on Western aid to Africa (Dead Aid)

Interviewed by the New York Times, she was asked "What do you think has held back Africans? " She answers "I believe it’s largely aid. You get the corruption — historically, leaders have stolen the money without penalty — and you get the dependency, which kills entrepreneurship. You also disenfranchise African citizens, because the government is beholden to foreign donors and not accountable to its people" (Is there any empirical paper showing more aid reduces entrepreneurship? Sounds like a great paper!)

She also mentions Kiva, where you can make a loan directly to an African entrepreneur. This has lead me to creating the Rigotnomics Development Bank (RDB) and lend directly to entrepreneurs (thorugh Kiva). Anyone with a deposit in the RDB (minimum 5$) has a vote in which projects get financing and returns are shared proportionally to deposits. For those interested, let me know and I'll organise a meeting so we can discuss how we want to run this thing. We could definetely borrow a lot of money for HEID students, and it's a safe depoist, not aid! and I will make it 100% transparent, on a kick ass website)

She also as some non-academic credibility. She was working for Goldman Sachs in London in the capital markets, helping mostly emerging countries (Israel, Turkey and South Africa) to issue bonds. Asked why she didn’t get a bond issue going in her native Zambia or other African countries, she answers that "issuing a bond would require that the president and the cabinet ministers go out and market their country. Why would they do that when they can just call up the World Bank and say, “Can I please have some money?”

David Roodman (the xtabond2 guy) is skeptical about her ideas, though he glamors her as the anti-Bono!

Now let's set up the RDB.

The Inconveniences of Being a Geneva Citizen

- Part I : Public Transportation -

Geneva is a lovely place to live. It provides, for a town of so small size, tremendously many interesting job opportunities, a pretty decent night and cultural life. It is placed in a very handy location attached to an awesome lake and nearby mountains that invite to plenty summer and winter outdoor activities. Even flight and train connections are pretty well. However, the beautiful panorama across lake Geneva, despite the jet d’eau, is topped by the one in Lausanne and Montreux. Nevertheless, I agree with the rankings that put Geneva as one of the towns with the highest quality of life.

The only thing that makes me go crazy about this place is the way in which politics has failed in so many ways to make this a truly perfect place. Sometimes, I get the impression that wherever the state intervened it caused more harm than good. Here, I am thinking of potentially everything the state of Geneva is involved in: from public and individual transportation over housing to opening hours.

For today let me start with a rather harmless issue: Public Transportation within the city.

The first point regards the ticket machines. Often you arrive at the tram when it is about to leave and have no more time to take a ticket. A serious dilemma for the honest beneath us. Why can ticket machines not exist in trams? It would even lead to savings rather than extra costs, since the town would just need to remove the (useless) second machine that exists at most tram stops and save people time and hence money.

The second point regards the fact that using a bicycle brings you faster form A to B compared to the public means (and according to PL also using a skateboard). This has two reasons, The first is difficult to tackle: Tram Stops tend to be too close to each other. The second is easier to tackle: Public transportation should have a higher priority before ordinary cars, making public transportation faster and hence more preferable.

I am not even going to discuss the fact that ticket machines give no change (the ridiculous solution that was implemented recently is even more of a joke).

Pareto-optimal exchange equilibria vs. inequality (incentives vs. kalashnikovs)

An intesresting note from Brad this morning:

"The standard mode of discourse in economics is positive-sum win-win Pareto-optimality. You provide people with the right incentives through property rights to invest and accumulate and they do so—and the benefits of their investment and accumulation spill over and produce higher incomes for everybody else as well [...]

But a look back at human history suggests that this focus is perhaps misplaced. Much of human economic and political history looks as though it is made up of thugs with spears (or kalishnikovs) taking stuff; or those who can for some reason command the services of thugs with spears taking stuff; or those who can for some reason command the services of thugs with spears threatening others so inducing them to enter into contracts on unfavorable terms. Slavery. Serfdom. Debt peonage. Latifundia. Land barons. Cattle barons. Capital barons. Perhaps economics should focus not on Pareto-optimal exchange equilibria and economic growth but instead on distribution: perhaps economics should be not a hymn to the win-win bounties of the division of labor but instead a discourse on the origins (and maintenance) of inequality."

Zedillo's weird proposal

I am a bit puzzled by Ernesto Zedillo's proposal. Tonite at the CTEI conference he suggested countries should legally retaliate against each other right now in order to avoid a future trade war! He said this would be horrible but effective as only then countries would understand the dangers of their actions. But retaliating for free trade sounds like bombing for peace, or f*&$ing for virginity...I still think free trade, as democracy, is best taught by example, not by war! And carrots always work better than sticks...

He's still an inspiration for us...after his PhD in economics at Yale, he went on to become President of Mexico (1994-2000) and set his country on the democracy and growth path...

The Mouse's Tale

Last week, while examining the cameo of the Rigotnomics patron mascot in The Economist, I was struck by an odd sense of familiarity. Not only did the mouse in the picture look familiar, but so did all the other animals and the little girl sitting around it. That's when it struck me. It's a picture from my favorite book: Alice's Adventures in Wonderland by Lewis Carroll! The Rigotnomics mouse was born back in 1865 when he was drawn by Sir John Tenniel for the first publication of the book (Tenniel died in 1907, meaning that the illustrations came out of copyright in 1964)!

So who is the mouse? Most people might not recognize him since his scenes never made it into the Disney version of the story. But, he is passionate, a leader, speaks french, and you can discover him for yourself here (he appears at the end of Chapter 2 and throughout Chapter 3).

Cheap Chow

Does it matter for your wallet in which super market you do your shopping?

You may be excused to answer yes to this question even if you are an economist. Admittedly, this is a bit stretching the argument. But in Germany the discounter market (which hit the news recently with rather negative news) is such that no matter where you go shopping the difference in the overall cost of a basket of so called “Eckartikel” (brand products with low prices that are bought with high frequency: e.g. milk, shampoo or coffee) is around 1%.

Does this imply that the German discount market is highly competitive?

Again you my be excused to answer yes to this question unless you are German. Well compared to the Swiss market it seems competitive. How can it be that prices are identical and probably the lowest in Europe and still the market structure is not competitive. Tricky question. My best guess is that it is due to the big market leader and price setter ALDI (founded and still owned by two of Germany’s richest and media shyest brothers). For ALDI to be in the position of setting the price, it must have some monopsony power in buying the products for resale, which is certainly true for ALDI.

But why does ALDI then not set prices such that others have to exit the market. I guess it has to do with location and the transaction cost of driving/walking to the next closest ALDI. But then again ALDI could try to locate better. Hence, there must be some reason to keep “competitors”.

If you are keen on shopping cheap and do not mind the hassle of going to different stores and you life in Germany, here is where you can find the currently cheapest products: Preszeiger (only avaiable in German).

How the US is destroying Mexico

News from CNN:
Drug violence spins Mexico toward 'civil war'

• Story Highlights
• Drug-related conflicts bring waves of violence, death that some liken to a civil war
• U.S. helps fuel violence with market for illegal drugs, weapons supply for drug gangs
• "The drug gangs are better equipped than the army," expert says
• Pervasive corruption among public officials also at center of drug cartels' success

The US has to stop fighting this war with arms and border controls. Any economic paper explaining this conflict?

Rigotnomics in The Economist

Notice anything special about the picture on page 83 of today's economist? Indeed people can learn from social animals!

Structural models vs. IV

A new NBER paper on why structural methods are better than IVs. They write that "different valid instruments answer different questions. The sign of the IV estimator can be different from that of the true causal effect."
But can anybody explain to me how do structural models help you get rid of the omitted variable bias? Is it just a matter of interpretation?

Foreign aid

Easterly has made a nice summary of the conference he organized on foreign aid here. Among the presentations, Duflo and Easterly made interesting slides, but my favourite comment is this one, by June Arunga: "Aid money is diverting African skilled professionals away from private enterprise to writing proposals for NGOs.”

Reminds me how the UN money here is diverting skilled students away from private enterprise to orgnaizing conferences in Rio de Jaineiro.

A vote of confidence

With almost 60% of yes, the Swiss people voted for the renewal and extension of the bilateral agreements with the EU. This vote is a glimmer of hope because it reveals that, in a moment of crisis, people can still vote rationally, defeating the scaremongering images of cruel ravens, proposed by the pathetic and clueless Swiss People's Party.

Below it's a summary of past results from other ballots on EU issues in Switzerland since 1992.


Switzerland is definitely aiming at stable, fruitful relationships with other EU members.

Oil against graft and the economics of corruption

If I understand well, this graph shows how corruption (in red) follows the price of oil in Russia. The crisis and its lower oil prices are hence a blessing for some...the whole article is here (via doing business, obviously)

In other corruption news, I liked this short and incredibly to the point article on the perverse effects of corruption in developing countries, here Kenya (from The Economist).

"How was it that the building lacked the fire-safety features required by law? For many Kenyans, the answers lie in the way that regulations are often waived for bribes [...] But it is doubtful whether the government is strong enough to stamp out the petty bribes that foster the carnage, especially when the culture of corruption includes so many higher up."

Who's gonna rebuild trust?

A while ago we claimed very boldly and blatantly that the reason behind the current financial crisis was erosion of trust in the US, combined with financial deregulation. Surprisingly or not, from then on, the world trust is appearing repeatedly in the speach of economists, be they commentators, bloggers, academics. One of our favourite Economist, Willem Buiter, makes the clear case here that thinking about the effectiveness of fiscal stimulus is not that relevant if we forget in what state of the world are governments acting today. Making a parallel of UK and US today, with emerging market economies, he thinks a fiscal expansion may not work because people today have lost trust in governments. The US, with a new administration, is on this regard surely better prepared, but still, Obama has to keep up his promises. Buiter's point is an awesome one, because it reminds us as economists that we still live in a system where is not by shifting the magnitude of some key parameters that you achieve a new equilibrium. The effects of policy goes through the channel of people's beliefs and trust in the actions of governments.

So where is trust in governments today standing?I found an interesting study conducted every year on a sample composed only of college-educated people. So it's not representative of the entire population, but mainly of the elites across the globe. It shows that in the major Western European economies three out of four people believe that the governments have to step in to prevent future financial crisis. In the United States, not even half (49%) agrees with that.
This nothwitstanding the evidence that governments have had a share of responsibility for the current mess. As Buiter says, history tells us that:

There was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place. Truth-telling and trust became increasingly scarce commodities in politics and in business life. The choice between telling the truth (the whole truth and nothing but the truth) and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument.

I wonder how well "educated" and "informed" are the elites in Europe then...

The create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift

Mankiw describes his preferred fiscal stimulus:

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

He should get a job in the Obama administration.

And Everybody Pays - The International

Certainly very timely one of Germany’s best movie makers, Tom Tykwer (“Run Lola Run”), is bringing out his latest movie at the Berlinale Film Festival these days. “The International” is about “one of the world’s most powerful banks” and its “illegal activities”. Certainly, no realistic link to current world events but a promising watch….”They control your money. They control your government. They control your life. And everybody pays.”

Enough with development economics

Economists who study the process of economic development (or mostly lack thereof) should study politics instead.

At the micro level, they study which design works in foreign aided project. This is not realistic. Foreign aid didn’t work because of gangsters in power, not because the projects were badly designed. For projects to be replicated and sustainable they need to be adopted on a bigger scale and there political gangsters will ruin everything again.

At the macro level, some show that countries do not have the correct trade policy, the correct exchange rate policy, the right monetary and fiscal policies, the right amount of education spending, not the right institutional framework etc…that all countries that managed to grow had good institutions and the right policies…No shit! And then some other economists reply that this is not true as some countries adopted the right policies and it didn’t work and hence policies should be country specific. No shit!

When it comes to poor countries, all of these bad policies reflect only one thing, gangsters in power. Adding this omitted variable in all growth regression would possibly make all the policy and institutional variables insignificant.

Therefore, development economists should focus on how to establish a good government. A good government will adopt the right country specific policies and most foreign aided projects will work, even when compared to the strictest counterfactuals! 

By the way, here is required reading for those interested in development economics, from Angus Deaton. who prefers development experimentation towards the evaluation of theoretical mechanisms instaed of towards the evaluation of projects. 

Trade and the diffusion of the industrial revolution

Robert E. Lucas Jr. has a new paper in the new AEJ Macro journal called “Trade and the diffusion of the industrial revolution". I didn’t read it but I looked at the graphs and they are very aesthetic! One of his ideas seems to be that protectionist policies are responsible for poor economic performance. He writes: 

“These culturally similar societies had similar income levels in 1950. Since 1950, the southern Europeans have joined in, and contributed to, the prosperity of the European Union. With the exception of Chile, the South Americans have continued to follow the protectionist policies of the interwar years. The two groups have steadily diverged (and Chile is now the richest of the four Americans). The figure is only suggestive, but it is surely plausible that, as is the case with Eastern Europe, the poor economic performance of Latin America is a policy-induced failure to reach economic potential”

By the way, I find all the articles in the issue interesting. This is surprising as it is all macro.

Buy American?

Well it seems that protectionism is not an unlikely answer to the crisis. Should Americans Buy American? Krugman says...YES! Others say, hell no! .... a debate that definitely challenge the bases of International Economics

Who created the Economist style for graphs in Stata? This is pure fun

Trade diasporas

Here's an interesting article (in french) on trade diasporas in Le Temps today.

Academic Reading

For DSGE Freaks
For those of you who have received a rejection letter

The Biology of Switzerland

Political campaign managers in Switzerland are attracted by the world’s diverse flora and fauna. During the last national election campaign the right wing Swiss People’s Party (SVP) black sheep ad got a lot of attention . There was also billy-goat Zottel, hero in the online game “Zottel saves Switzerland”. Zottel was facing a tough task: he did not have to stop climate change or even improve Swiss penalty skills. He had to make sure that no one unworthy got the Swiss pass port, Green party members did not install to many speed limits, and, of course, make sure no black sheep entered Switzerland. Zottel has fought bravely and the SVP has won its highest share of votes ever.

Next week-end we will have a referendum on the bilateral treaties with the European Union.* The “no”-committee sees a new danger looming. An evil wizard has transformed the black sheep, that have been kicked so successfully out of Switzerland, into black crows, hungry for Swiss cheese. The “yes”-campaign has responded with a plant. An apple tree carries the fruits of the bilateral treaties. There is now another online game, where you have to protect an apple tree from black crows.

Is that a bit confusing for you? It's actually very simple. Four legs bad, two legs bad, and voting “yes” will preserve a tree of knowledge in the Swiss paradise.

*More precisely, it’s about the free movement of labor treaty and its extension to Bulgaria and Romania. Because of the “clause guillotine” a “no” would also cancel the other bilateral treaties. And sheep don’t like guillotines.

On the Philosophy of Economics during Financial Crises

A year ago I was costumer of two private banks. Today, I am costumer of two state banks and it would be a lie to say I am unhappy about this. Since, I did not transfer myself to China, it is a reasonable question to ask how this came about and more interesting even what is likely to follow.

Governments in the Western world have started a big shopping tour. The idea of a small state has been thrown overboard and government intervention is top on the priority list not only of politicians but of academics and managers alike. There are good reasons to be in favor of state intervention when markets fail. The problem is the cost and incentives this creates. And in the end we need to weigh cost against benefit to evaluate the attractiveness of such a policy.

Unless it generates an incredible high multiplier effect, the intervention will lead to a transfer of wealth from future taxpayers (including me) to the current ones (including all the people who make the current decisions). Besides this annoying fact, there is an even more troubling dimension about the management of the current crisis.

A simple implication of the crisis management, may state that it is optimal to have state control under distress and leave the market to rule in good times (nothing new for Keynes). There is one technical flaw in this line of reasoning and one deeper flaw. The technical one is the following: “Who declares when we have a crisis? And what are the criteria?”. Presuming this non-trival problem had a solution, we would get to the more severe problem. If then state control becomes predictable will the market still be efficient in good times or lead to an increase in moral hazard. These are not new ideas. But if you carry the reasoning one step further, you are likely to conclude that if crises are more frequent (and here I am not necessarily thinking of western countries) and “temporary” state interventions lead the private sector to behave excessively risk taking in good times, it might be less inefficient to let the state run the whole thing form the beginning on (presuming it is a “good” state)..

I guess the fact that the world has converged to the capitalist system is a proof of the fact that we consider the costs of rare negative events to be outweighed strongly by the benefits in good times compared to the permanent inefficiency of state control (With the exception of Cuba and Bhutan). To keep this wisdom alive government intervention policies must ensure that the right people pay the cost. And I haven’t figured out yet what my contribution to the recent crisis was. Any ideas…