Book review: False Economy

After reading Easterly's review of False Economy, I was really looking forward to reading it and get surprised by the true reasons behind economic outcomes. It turned out to be disappointing. It lacks the anecdotal precision of A splendid exchange, the convincing force of Bad Samaritans, and the economic wit of The undercover economist. I end up merely entertained...Easterly's review is better than the book itself.

It's kind of a non-academic literature review of economic papers that are very famous and everybody knows. Maybe it's a good book that was just not written for economic students. So, if you are unfamiliar with the topics he approaches, the book might be adequate. It's easier to read than any other similar book I've read.

Rythm: You got it or you don't

A little entertainment for the week end!

Some Wisdom on Development Economics

While at this conference, I saw some quite interesting presentations on the recent developments in protectionist measures. However, one of the most striking statements I heard was only indirectly related to the conference’s topic. The argument was roughly the following:

Development agencies have to be risk averse when conducting their business since they use taxpayers’ money. Hence, developing countries which receive the donations form these agencies are subject to very stringent rules in the way they make use of the money. But if developing countries are not allowed to make mistakes throughout their development process the whole idea of development is put ad absurdum. It is only through trial and error and learning that countries can find their particular way to develop.

Now this seems like a well informed critique about the whole way that development aid is organized in most Western countries. But it comes even better: The argument was made by Pierre Jacquet, director and chief economist of the French Development Agency!

Maybe I should have asked him to give his money to the RDB!

Solving for Love and Hate

I read an interesting article today on the New York Times from Steven Strogatz a guest blogger for the Times and also Professor of Applied Mathematics at Cornell University. He basically simplifies the dynamic of Love and Hate in a couple with the help of two "simple" differential equations. Suppose there are Romeo and Juliet. Suppose that their love for each other develops according to the following dynamics:

Romeo's Love (dR/dT)= Theta * Juliet's current love (J)
Juliet's Love (dJ/dT)= -Gamma * Romeo's current love (R)

The article explains vary well what are the assumptions, but let me repeat them in common words: when Romeo is an assh*** Juliet finds him attractive, while Romeo loves Juliet when she cooks for him...

So given this description of their love, how does their love evolve through time? The answer is in the article, but here is the graphical answer:

Note the oscillation are the same by assumptions, just to be politically correct...

They both love each other one quarter of the time, all the rest is spent mumbling and thinking about...but this is just the prediction of a theoretical model. The world is different from that, but the model can be augmented to make it more realistic, as described in the article. But it's striking how the law of maths come appropriate even when talking about love and hate. As Einstein told us, the puzzle remains "How can it be that mathematics, being after all a product of human thought which is independent of experience, is so admirably appropriate to the objects of reality?"

Nuhu Ribadu

Nuhu Ribadu, former head of the Economic and Financial Crimes Commission of Nigeria, imperiled himself by charging a powerful state governor with corruption. Now in exile in the U.S., he talks about the misuse of authority and the continued need for foreign aid in Africa Read the interview.

And Bill counterattacks...

... now Bill displays his best artillery, with a series of blows straight to Jeff's face... keep tune for more action and don't forget that the road to hell is paved with good intentions.

GENEVA FORUM ON SOCIAL CHANGE

The University of Geneva’s International Organizations MBA (IOMBA) program is organizing a forum on social change that will include documentary films and panels on conflicts and trade policy etc… It takes place on 5-6 June. Register now for all movies and panels…it’s free! For myself I will go see this movie and this one too, and try to get a picture with this guy.

Sachs vs Easterly: No K.O.

The boxing match between Sachs and Easterly seems to have no end, and nobody wants to throw in the towel . Sachs gave the last uppercut, but the opponent is ready to counterattack...

And now we have Dambisa Moyo as the new one million dollar baby in the ring!

Few debates in economics are as hot (and get as personal) as this one.

Interesting statistics

“Goldman Sachs gives out more in annual bonuses to its workers than the entire rich world gives to the Global Fund each year to help save the lives of poor children”.

Jeffrey Sachs, here

"Bangladesh and Cambodia pay average tariffs of over 15% because their exports are concentrated in apparel. In dollar terms, they pay as much in tariffs as do France and the UK on a fifteen-fold larger value of imports. Indeed, the $850 million in import duties that these countries jointly paid to the US in 2006 dwarfs the $120 million that they received in foreign aid."

Kimberlery Ann Elliott, here

Economic indicators

"To this day, in the ornate room in the Bank of England where the institution's governing body meets is a dial affixed high on the wall and connected to a windvane on the roof. In the early 19th century, the direction of the wind was used to set monetary policy. If the breeze was blowing up the Thames and ships were able to come into port, the Bank would need to extend more credit to enable merchants to buy the arriving goods."

This is from False Economy, which I am currently reading.

Land deals

The Economist seems wary of land deals, i.e. the purchase or lease of millions of acres in poor countries to grow staple crops or biofuels to ship home by more developed countries. It was indeed one of them, by the South Koreans, that caused the overthrow of the government in Madagascar. Most people seem against it, calling them “land grabs”, “neocolonialist” rip-offs, different from 19th-century colonialism only because they involve different land-grabbers and enrich different local elites.

I cannot help but wonder why no parralel is done with the oil industry. Is it not advocated that oil rich countries with no expertise should let experienced foreign companies run their business, with proper contracts? Isn’t is what is advocated to Venezuela or Nigeria, for example? Why would the same principle not be applied to agricultural ressources?

And why would this be more colonialist than Paul Romer’s new development strategy, by which developing countries could invite experienced governments such as Canada or Finland to “own” and manage some of their cities. Over time, as with Hong Kong, the new cities are turned over to the host country.

Land deals, as diamonds, foreign aid or oil, can be a blessing as much as a curse.

The RDB video - Watch it in HD!

Special thanks to Volodymyr and Amprofi!

When do governments car about welfare?

Marcelo has a new NBER paper, jointly with Gawande and Krishna, on "What governments maximize and why: the view form trade". The idea is that tariffs, set in political-economic equilibrium, depend on import demand elasticities and output-to-import ratios in each sector. The Grossman-Helpman (1994) setting provides an explicit relationship between tariffs and these measurable variables that is used to estimate the relative weight that a government places on welfare versus contributions.

So, they first calculate this trade-off parameter and then regress it on a bunch of political and society indicators and find that checks and balances embedded in the decision making process cause more welfare minded governments and so do more informed voters, as measured by literacy and the degree of urbanization. More interstingly, the more ideologically attached are voters to parties and the greater the productivity of the media in influencing uninformed voters, the less weight governments put on social welfare when making trade policy.

JD is skeptical and explains why here. I still find it intersting that the Spearman rank correlation between Transparency International Corruption Perception Index and an index built from import demand elasticities and output-to-import ratios is 0.67!

Good News for Expats

The Economist features an article citing the work of Adam Galinsky and William Maddux who show that living abroad makes people more creative and innovative. Now that is good news for us foreigners. Just too bad for the Swiss....

Debate on the state of (Macro)economics

The crisis is in the economic theory seen as a chance to "clean" the economy. The malinvestnment is wiped out, only fit firms survive, boom follows, and everyone lives happily ever after (or till the next crisis hits). This crisis is different. This crisis is not only affecting the economy, but also the economic theory itself.

Let’s start with the easier stuff. There is a good article by Gregory Clark. Dismal scientists: how the crash is reshaping economics

I myself was so confident of the consensus of the end of the business cycle that I persuaded by wife after the collapse of Lehman Brothers to invest all her retirement savings in the stock market, confident that the Fed would soon make things right and we could profit from the panic of a gullible public. The line "Where is my money, idiot?" is her's.

Don't think needs any comment.

The debate about the bank bailout, and the stimulus package, has all revolved around issues that are entirely at the level of Econ 1. What is the multiplier from government spending? Does government spending crowd out private spending? How quickly can you increase government spending? If you got a A in college in Econ 1 you are an expert in this debate: fully an equal of Summers and Geithner.

I don't think he is right on this one. Show me an Econ 1 course where bank bailouts are discussed. In general I would say there is a consensus that bailing out a private company is wrong, or at least the way it was done. The debate "to bail out or not to bail out" is a political rather than economical one. Nothing has CHANGEd about politicians. 
I actually thing, that unlike during the Great Depression times, now there is a consensus (with the exception of few lunatics at the Mises Institute) that rates need to be cut, and public spending increased (both temporarily). That is already some progress.
The debate is then on far more sophisticated topics than Clark claims. I went to a lecture by L. Smaghi (Member of Executive board of the ECB) last month where he gave an overview of unconventional monetary policy (all that he talked about ECB implemented few weeks later). Actually we've gone a long way just from cutting the interest rates.
To conclude, if the debate seemed too simple it was because it was a political rather than an economical debate. Trust me, your 1st year BA student, even if he had an A++ in an Econ 1 class, would be lost during the lecture on unconventional monetary policy.

Then there is a great article by DeLong Progress in Macroeconomics? He is summarizing arguments for and against the idea that macroeconomics did make a progress. Blanchard is the optimist whereas Krugman, Clark, Akerlof, Shiller, Quiggin, and DeLong are the pessimists.

Akerlof, Schiller :

The economics of the textbooks seeks to minimize as much as possible departures from pure economic motivation and from rationality.... [E]ach of us has spent a good portion of his life writing in this tradition. The [self-interest and rational foresight-based] economics of Adam Smith is well understood. Explanations in terms of small deviations from Smith’s ideal system are thus clear because they are posed within a framework that is already very well understood. But that does not mean that these small deviations from Smith’s system describe how the economy actually works.... In our view, economic theory should be derived not from the minimal deviations from the system of Adam Smith but rather from the deviations [from competitive markets, self-interested motivation, and rational foresight] that actually do occur...

I am sure a lot of the "after crisis" research is going to be unconventional from today's point of view. Probably a lot of it in the direction Akerlof and Schiller suggest. So if you are in the right age and considering a PhD in Econ I think the period shortly after the crisis will be a great time. "The old theory has flaws let's come up with something new..." Your thesis supervisor is more likely listen to your ideas about "rewriting economics".

Then there is an older article by Paul Krugman: A Dark Age of macroeconomics (wonkish) .
I think his analysis is right. The conclusion (or maybe explanation rather than conclusion) is a bit hysterical. He is saying (as the title "hints") that we are living in a dark age of macroeconomics.

The answer, I think, is that we’re living in a Dark Age of macroeconomics. Remember, what defined the Dark Ages wasn’t the fact that they were primitive — the Bronze Age was primitive, too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed.

I wouldn't say that we are living in a dark age of macroeconomics, just because two guys argued (with bad arguments) against fiscal expansion. The "old" knowledge might be partially forgotten, but unlike in the dark ages books (and people - macroeconomists with different opinions) are not being burned. I think Krugman is obsessed with fiscal policy in a same way that Fama and Cochrane are obsessed with minimal government (small government is great, but not in the time of crisis). Obsession is dangerous, especially in the crisis times. There was a good article on vox by Keiichiro Kobayashi criticizing the "fiscal policy obsession" Fiscal policy again? A rebuttal to Mr Krugman.

Finally there is Eichengren's piece. The Last Temptation of Risk.

One interpretation, understandably popular given our current plight, is that the basic economic theory informing the actions of central bankers and regulators was fatally flawed. The only course left is to throw it out and start over. But another view, considerably closer to the truth, is that the problem lay not so much with the poverty of the underlying theory as with selective reading of it—a selective reading shaped by the social milieu. That social milieu encouraged financial decision makers to cherry-pick the theories that supported excessive risk taking.

the belief that risk and return could be reduced to a set of equations specified by an MBA and solved by a machine.

I like Eichengreen's article. I think it's well balanced and he is not overly critical of the profession (Very critical of MBA's though :-) )

...The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. Equally reprehensibly, the producers of that theory, benefiting in ways both pecuniary and psychic, showed disturbingly little tendency to object...

So it's not a dark age after all.

A network view of economic development

Growing is all about not being stuck in the middle of nowhere and all about being in the dense part of the forest. This is how I understood Ricardo Hausman's presentation today. In his words, capabilities are like monkeys that can jump from tree to tree, or from products to products, and that produce babies along the way. But it is only possible to jump to close trees, unless your monkeys are on steroids. Hence he has no choice but to suggest poor countries should make strategic development bets.

However, jumping from tree to tree is not about concentrating vertically and adding value to your product, its about spreading horizontally. He warns against the case of Chile, which would be in trouble if its salmon export markets collapsed. He gives the example of Nokia to explain how it came from the horizontal spreading of capabilities. Funny thing is that these are the two examples of Ha-Joon Chang. He must have read that book! He also gave the example of aspargus in Peru...he must have been reading False Economy...he also gave the example of MYC4...he must have been reading Rigotnomics...

Shadow committee on US trade policy

I have recently heard complaints that the Obama administration lacks a trade policy. Well that may change soon; Gordon Hanson has just set up a shadow committee on US trade policy and it includes most heavyweight trade economists in the US. The list includes Rigotnomics' favourite Shang-Jin Wei and also Bagwell and Staiger, Grossman, Matt Slaughter...

On an online forum they are discussing trade policy questions and getting their hands dirty by making specific policy recommendations. Rodrik, for example suggested that the US could only gain from further liberalization in agriculture and on visa restirctions of high-skilled foreigners. Ann Harrison went as far as saying that a wise policy for the US government would be to encourage offshoring in wealthy countries (which raises US manufacturing employment) and to discourage offshoring in low income countries! James Harrigan didn't agree at all. Gene Grossman wants free trade and to focus on home policies such as a social safety net for displaced workers.

This is how economic policy should be done.

Ambassador stages coup at the UN, Issues long list of non-binding resolutions

Ambassador Stages Coup At UN, Issues Long List of Non-Binding Resolutions

And the winner is ....

...to my big surprise "credit crunch".
Other words which have been voted for "Economic Word of the Semester" and came second with one vote less are "Ponzi Schemes" and "Quantitative Easing"

Legally blondes against corruption

According to a bunch or international law girls, international law could be the right tool to fight diversion of foreign aid into African presidents' bank acccounts. An exmaple is Omar Bongo, President of Gabon since 1967 who owns 39 properties, 70 bank accounts, and nearly 1.5 million euros worth of luxury vehicles. In January Bongo, the world's longest-serving ruler, was publicly criticized by members of the U.S. Congress for having arrested and otherwise harassed members of civil society who campaign against public corruption. (They give other fascinating examples)

Here is how it would work for France, for example. The french government gives aid money to Gabon. Bongo takes his share and so do French foreign aid workers. But international lawyers (working for the french government) want their share too so they start investigating the case but will want more rents so will always have an interest in foreign aid corruption. The business of aid continues, everybody gets his share, except African entrepreneurs. Perfect!

Giving foreign aid to corrupt government is a bad idea, end of story.

ht: BV

Negative interest rates: go for it

After a reminder by Mankiw that negative interest rates were possible (and after a rate of -2% suggested by Rigotnomics' favourite Taylor rule), Buiter is pushing Central Banks to go forward with the policy. He concludes:

"There are at least three ways to remove the zero lower bound that are feasible: abolish currency, tax currency and ensure that currency is not the numéraire. Taxing currency may be awkward and intrusive, but abolishing currency is not just easy (just do it) but also has considerable advantages as a blow against criminality and terrorism [and was suggested by Rigotnomics a while ago]. Unbundling currency and numéraire is something that can be done over the weekend.

I really don’t understand why central banks are not aggressively pursuing options for removing the zero lower bound. It is that they love the seigniorage so much? But they retain seigniorage revenue from currency issuance in the rallod economy. Is it hidebound conservatism and lack of imagination. Quite possibly. But if so, this is a costly mistake. Central banks should act to remove the zero lower bound on nominal interest rates now."

And to foreigners in developing countries and emerging markets with high-inflation-prone monetary systems, for whom the disappearance of the $US notes and the euro notes could be a setback, as these provide welcome stores of value when domestic inflation rages., he says:

"I feel your pain, but this is the time to replace exit with voice. Go and create a polity that will support a government that does not abuse the printing presses"!

The world's most influential economists

Rigotnomics was happy to find out that the four economists that made TIME's 100 most influential people list are among its favorite:

Roland Fryer (by Michelle Rhee) (on Rigotnomics here and by Levitt here)
Dambisa Moyo (by Wolfowitz) (on Rigotnomics here)
Nouriel Roubini (by Krugman) (on Rigotnomics here)
Paul Krugman (by Mark Zandi) (on Rigotnomics here)

What the hell are we studying?

During my undergraduate studies I use to love my economics classes mostly because I did not understand what economics was but I was starting to understand it was not only the study of “the economy”, i.e. central banking, exchange rates, taxes and stock markets, as most people saw it; it was anything that economists felt like studying. It's not the view of the general public. Indeed, Freakonomics is seen as sociology by the general public, but as economics by economists. And non-economists did not understand when I was telling them I was doing my master’s thesis on corruption, as they saw it as law or sociology, not economics.

Well I just found a new paper in the JEP that retraces the history of the definition of economics by Roger E. Backhouse and Steven G. Medema.

Here are a few definitions of economics (in chronological order):

Jean-Baptiste Say (1803): the science that treats the production, distribution, and consumption of wealth.

John Stuart Mill (1844): the science which traces the laws of such of the phenomena of society as arise from the combined operations of mankind for the production of wealth, in so far as those phenomena are not modified by the pursuit of any other object.

I guess following that definition the pursuit of altruism or fairness motives could not be studied in economics…unless you make them appear as a long-run income maximisation strategy.

Alfred Marshall (1890): a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. . . . Thus it is on the one side a study of wealth; and on the other, and more important side, a part of the study of man.

Lionel Robbins (1932): “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”

Milton Friedman (1940’s): the science of how a particular society solves its economic problems, where an economic problem exists whenever scarce means are used to satisfy alternative ends”

Campbell McConnell (1960): the social science concerned with the problem of using or administering scarce resources (the means of producing) so as to attain the greatest or maximum fulfilment of our unlimited wants (the goal of producing).

Gary Becker (1976): the combined assumptions of maximizing behaviour, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach as I see it.

Ronald Coase (1977) the study of the social institutions that bind together the economic system which includes firms, input and output markets, and the banking system

(David Colander, 2006): the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society.

As the authors write, “at a time when economists are tackling subjects as diverse as growth, auctions, crime, and religion with a methodological toolkit that includes real analysis, econometrics, laboratory experiments, and historical case studies, and when they are debating the explanatory roles of rationality and behavioural norms, any concise definition of economics is likely to be inadequate.”

As far as I am concerned I believe that “most of economics can be summarized in four words: "People respond to incentives." The rest is commentary.” (Steven Landsburg, the armchair economist)

On prosocial behaviour and foreign education

I just found a new AER paper that agrees with my view (highly debated by Ugo) that salaries should not be high at the UN. In Doing Good or Doing Well: Image Motivation and Monetary Incentives in Behaving Prosocially (which I haven't read), the authors look at how image motivation—the desire to be liked and well‐regarded by others—drives prosocial behavior (doing good), and asks whether extrinsic monetary incentives (doing well) have a detrimental effect on prosocial behavior due to crowding out of image motivation. They find that that image motivation is crowded out by monetary incentives; meaning that monetary incentives are more likely to be counterproductive for public prosocial activities than for private ones. I can't believe I had missed their paper when it made the Economics Focus.

I admit it, I was browsing the AER. I also found another interesting paper, Democracy and Foreign Education, that shows that foreign-educated individuals promote democracy in their home country, but only if the foreign education is acquired in democratic countries. I had always wondered if all these people that go get brainwashed in the US embraced the US mentality or if it had the opposite effect of frustration and complete rejection. Seems like it works a bit.

The week ahead - International trade

Plenty of (international trade economics) stuff to do in this week. Starts with sandwiches on Tuesday at the WTO trade and development seminar when Frédéric Robert-Nicoud will present "The ‘emulator effect’ of the Uruguay round on US regionalism". It continues the following day with Ana Cristina presenting her draft on “The determinants of trade duration” at the Rigotnomics Brown bag Lunch and Ha-Joon Chang’s CTEI conference on his book, Bad Samaritans, which I have reviewed here.

On Thursday we have a special class on spatial econometrics given by Peter Egger and finally on Friday we have a conference on regionalism, which will last all day and include lunch, and will bring together most of the big names in the field to our school.

But it even spills over to next week when Kyle Bagwell will give a special class on subsidies and trade in imperfectly competitive markets at the WTO. We are spoiled.

When it comes to studying international trade economics, Geneva seems like the right place.

Crime in Geneva

When will the Geneva authorities acknowledge that there is a problem in this city and start tackling it? I've been here almost 4 years now and in none of the places I have lived before (which include Cameroon and Mexico) have so many of my friends been robed or attacked by pickpockets or violent scums. I have lost track of who got robbed and when. For myself, I got a bike stolen once and my backpack once disapeared from our picknick spot by the lake. Very recent stories; a friend of a friend got attacked while withdrawing at an ATM, he lost 500 CHF; a friend got her bag stolen while biking by the lake at night.

Enough with this shit. It is easy to tackle. Patrol the lake walk, patrol the train station. The Geneva police seems to me like the most incompetent in the world.