Book review: Discover your Inner Economist

Though a devoted fan of economics blogs, I do not get marginal revolution, Tyler Cowen’s blog. It is hard to get his point. But I just finished reading his “Discover Your Inner Economist” book and wow, this is just full of interesting stuff and it might make me more inclined to read his blog. This guy is a “bon vivant” that enjoys travelling, ethnic dining and buying paintings. This is basically a book about his passion for life, not really about economics applied to life. The economic principles he tries to address are incentives, scarcity and signalling but that’s about it. Furthermore, he most of the time says to avoid using economics in everyday life…this is confusing, reminiscent of marginal revolution.

In fact, I didn’t learn anything about how to better make use of incentives in life. The advices to skip pages and read books in any order or to switch movies frequently at the cinema don’t make much sense to me. I would waste my time by doing that, better focus on what I like most and not try to maximise my time with bite size feelings that are not complete. His advices on how to find the best restaurants are too obvious to be enlightening.

I did like his comment on why food is better in emerging and unequal economies than advanced egalitarian ones. You need the wealthy to enjoy the tasty meals and the cheap labour to produce it. This confirms my theory of why luxury in Switzerland is nothing compared to the one in Mexico or Indonesia, for example. He insists that Western Europe is losing hits historic role of culinary leader because of its high labour costs. Agree totally.

The best chapter is definitely the “markets in everything” section, where he mentions the imaginary girlfriends services, the boyfriend’s arm pillows, the $10,000 class for top executives to learn how to cope with life in prison, the kidnapping insurance business in Columbia, the Russian alibi providers, the $7.99 pre-sexual agreement forms, the Indian firms renting wedding guests or the Chilean coffin alarms, in case you are buried alive by mistake…markets in everything indeed.

An interesting book no doubt about it. But now he’s got a new one: “Create your own economy” which “explains why the coming world of Web 3.0 is good for us; why social networking sites such as Facebook are so necessary; what’s so great about “Tweeting” and texting; how education will get better; and why politics, literature, and philosophy will become richer. This is a revolutionary guide to life in the new world.”

A crash as a negative demand shock

I have been buying Geneva-Montréal plane tickets for a while now, going through Amsterdam, Paris, London, Frankfurt or Zurich. The price difference between these options has always been minimal…hence I was selecting my favorite airline and airport. Now one option is way cheaper than the others…and it’s Air France through Paris. I guess their share of the demand has gone down with what happened, and now they have to lower prices to fill up their planes…

Check out the price difference (from orbitz.com today)

Northwest $1273
Air Canada $1120
Swiss $1221
British Airways $1259
Lufthansa $1229
Alitalia $1331
United $1436
Air France $825

Fighting Inflation Russian Style

Central banks beware - Russia's Vladimir Putin has found a new way to fight inflation. According to this article, we don't need monetary policy anymore - the Prime Minister just has to go to the local supermarket and order that prices be lowered!!

Granted, it probably only works in states completely dominated by the cult of personality.....maybe then Berlusconi can help contain Italian inflation??

Redistribution

This is from this paper: Social Interactions and Trade Outcomes, by Silvio Hong Tiing Tai, University of Geneva

Will Japan be the first country to abolish cash?

Many countries will need to fight deflation and, as suggested by Buiter, this can be done by introducing negative interest rates and abolishing currency.

Why would Japan be the testing ground? "Richard Jerram, a senior economist with Macquarie bank, told investors that “the proposal has become practical with the broad penetration of electronic money and credit cards in Japan”...Japanese could easily make the leap into a cashless world. The country has six main competing cashless payment systems, many of them embedded into mobile phones. Including Oyster-type cards issued by public transport companies, industry sources estimate that there are about 120 million cashless payment chips sitting in Japan’s wallets and handbags, waiting to be swiped."

Is the end of the cash era still pure fiction? I would like to see it happen, but I'm still wondering...wouldn't all money flow out of the country, where interest rates are still zero or above?

The unintelligibility (bullshit) of economists

"Charles Sykes, in his book ProfScam, reports how an actor was hired to pose as an eminent economist and present a lecture on "game theory" [...] The actor did not know any game theory, or any economics for that matter, but was able to bluff his way through with a seemingly formidable technical presentation. No one in the audience figured out the ruse. Afterward the evaluations praised the speaker for his clarity and intelligence."

this is from this book

We are ranked!

Our school made it to this ranking. We are 113th. Pas mal! This is an indicator of our professors' research impact outreach.

Name and Shame: Trade Protectionist Measures in one Click

What has started with a short policy note co-authored by one of us has taken on a big scale. Under the lead of Simon Evenett, various institutions got together to create a real time database which names all countries which have implemented trade protectionist measures and even provides information which trading partners will be affected. The Global Trade Alert seems a great idea since

"it goes beyond the WTO and World Bank's monitoring initiatives by identifying those trading partners likely to be harmed by state measures. Its website allows policy-makers, exporters, the media, and analysts to search the posted government measures by implementing country, by trading partners harmed, and by sector. Third parties will be able to report suspicious state measures and governments will be given the right to reply to any of their measures listed on the website."

For those interested in the topic Chad Bown, who some may know due to his recent visit to the WTO, has gathered together with the help of lots of research assistants another amazing dataset which collects over time Global Antidumping Data.

Europe finally running entirely on clean energy, thanks to the desert

Green energy in the desert and enough of it to supply the whole old continent. An utopia? What has long been an idea which was hindered by technological complications and the implied high costs of realization is now being embraced on by a consortium of German companies headed by the world´s biggest reinsurance company. The 400 billion euro project is supposed to be initiated in the African desert on an area equal to the size of 130 by 130 km.

The tricky part about this project which appears “morally” long overdue, is the implied cost of transportation and transformation of the costless and abundant energy in the desert into electricity usable in European (and other) households. While a study by Greenpeace considers it rentable in the long run, the topic is hotly debated. But once we accept that other energies are essentially provided at a too low cost compared to their social cost (remember the stuff which comes out of al these big towers in France and gets just dumped under the surface) the project appears viable to me.

Apart form the more relevant concern regarding the cost efficiency, the debate has brought forward some more comments which I just cite here since they speak for themselves:

Frank Asbeck, the boss of the biggest German Solar company Solarworld, criticized the project for its choice of the location: "Building the power plants in politically instable countries, puts oneself in the same type of dependence as it is the case for oil".

Thomas Hüsken, University of Bayreuth: "No North Africa state has an interest in solving Europe's energy problem"

Evidence on flat tax

The case for a flat tax (the same tax rate for everybody, no matter how much income you earn) has been based on two main ideas: the first, is the increase in economic efficiency obtained by reducing the deadweight loss from taxes; the second and more sophisticated argument, is that by reducing tax rates, one would increase production incentives for high income people, thus increasing productivity, growth and revenues.

The Flat Tax has been implemented in many transition countries after the fall of the communist regime, from small states like the Baltic countries to Russia. The latter, has been the object of a study by economists Yuriy Gorodnichenko (University of California, Berkeley), Jorge Martinez-Vazquez and Klara Sabirianova Peter (both of Georgia State University). In an article published this month in the Journal or Political Economy they show that a flat tax reduces tax evasion but that its impact is insignificant on productivity. The estimates on tax evasion are hard to get, but the atuhors, by looking at the gap between reported consumption and income through survey data, create a reasonable framework for such analysis.

The policy conclusion are quite straightforward: tax evasion is reduced by this type of taxes (so confirming the first type of argument) but real income is not affected. The next question is: does the benefit from lower tax evasion (more compliance) compensate the effect of a hypoethetical tax cut on high income earners?

Frankel on trade and the environment

CTEI is helping us think ahead on international trade, this time by inviting Jeffrey Frankel in Geneva to talk about trade and the environment. It's happening tomorrow (18 June) in AJF at 6.30PM! I found the slides on his website. Don't miss it! Register at ctei@graduateinstitute.ch.

Surfing Liberia

We at rigotnomics already know about the economic potential of surf tourism, from the money it pours into local communities to its nature conservation effect, from California to Japan. Now here's the good news for Liberia: Robertsport, a sleepy town 2 hours from Monrovia, is seeing surf lodges opening. Are we getting some funding for some fieldwork there anytime soon? Check out the slideshow here.

More Behavioral Finance, please!

Apparently this is what is happening in the CFA curriculum. For those of you who never heard about the CFA, it is a global association that "sets the standard" in terms of ethics, education and excellence in the finance profession, providing a certification as Chartered Financial Analyst to those who pass all three required six-hours exams (and who have also cumulated 48 months of working experience before taking them). As far as I know, all people who work in the city have to take it, and your company pays for it. It is very stressful but somehow mostly a refresher for a person with a good bachelor in finance.

The first time I met Behavioural Finance in my life was when a friend of mine, when I was doing my bachelor studies, exploited in his thesis the idea of using the formula one races to analyze movements in the stock market prices of car companies. I thought the idea was interesting indeed and fun, but people (some stubborn economists) were laughing at him. Ok, maybe his results were a bit shaky, but still the implications for an investment decision were more clear cut to me, than a look at the present value of expected future stream of dividends....There is something true in both views I think, and it's somehow telling how these professionals are ready to meet "demand among clients to talk about behavioral finance now”. Anyway, this is to say ideas are good, while the dominance of a paradigm is necessarily bad, and that if you have a fun idea like my friend had, times are ripe to get a phd out of it...

Krugman quotes

"Most work in macroeconomics in the past 30 years has been useless at best and harmful at worst"

"The big lesson from past bubbles is that recovery is export-led, which is not helpful unless we can find another planet to export to”

Well, we may not have a planet to export to but at least the economic theory for it is ready.

The quotes are from this article.

Kenyan official state cars: an example for others

If the proposal will be put in place it is not only in the spirit of the taxpayer but also benefits the environment. Why do we actually sponsor our politicians to drive the least ecological cars? This list gives you and idea which politician drives what in your country. The best is Swaziland (only in German). The king drives a Maybach which is worth more than 100 times the income per capita of the country, which in any case has only 1mio inhabitants! Amazingly, Romanian's president appears to be the one who drives at most occasions the kind of car that all politicians should use as an official car, despite Romania being considered one of the most corrupt countries in Europe.

Aid did not bring development, therefore it has failed

Lant Pritchett explains on Aid Watch why development and assistance are not the same thing and why USAID, or any other development agency, should maybe focus on the former. "Being an agency for international development implies more than that the agency provides assistance to improve the well-being of individuals in countries that are not developed, but that the central goal of the organization is to promote development."

He then subtilly criticizes those who say aid works and also "lab development economics": "One reaction to the critics of aid effectiveness who point to failures in development despite historically high and sustained levels of foreign assistance is to circle the wagons by arguing the goal of aid is just assistance, full stop. In this case the debate is only about whether aid is assistance: “Did this aid support an activity that has some positive benefit to human well-being?” This makes the question easy to address with available methods, likely to often produce a positive answer, and almost certainly irrelevant to development.

As he points out, development is what happened in 19th century Europe, and then in Japan, then in South Korea, and now in India and China.

This figure is from the new Acemoglu book on economic growth.

On China, the dollar and a good reason (for brazilians) to celebrate

I found quite interesting that Brazil and China are planning to use their own currencies in trade transactions between the two countries rather than the US dollar - something that, if turned into reality, will mean a lot for Brazil which has China as its main trading partner since the beginning of 2009. I am curious to know what the US would say about that, specially if China starts doing the same deal with other countries. On the other hand, China also loses with the depreciation of the dollar, so it probably won't do it extensively - let's see!

And in another aggressive move, the Brazilian CB unexpectedly cut its interest by a full point: for the first time in our history we have interest rates of 1 digit only!

Oil in Africa

When a poor country (or even Brazil) discovers oil, economists shiver. The resource curse is alive and well. But there is always this glimmer of hope that resources will make a country rich (diamonds in Botswana, oil in Norway). Our school is organizing a lecture on the topic. Oil: A chance for Africa will take place tomorrow at AJF at 6.30PM. It brings together a western academic, an African civil servant and an oil company spokesperson.

OK I don't expect much out of it. We already know the importance of transparency and strong institutions in making a blessing out of resources. But this is why it might be interesting. Ghana, Africa's new hope, has discovered oil and has invited the Norwegians to help them manage their revenues. Will it work or wreck the country?

And there is another good reason to attend. I heard Shell is a great employer for economists (the undercover economist worked there). That would be a challenging, international, non-bullshit job.

The European Election Debacle

I am a convinced European citizen and I did not vote in this week-end´s elections for the European parliament.[1] Given the recent numbers on election participation, I am sure I am not alone with this statement (You find all statistics here).

I do not believe that the nation states governments are surprised by the drop in election participation and the move to critical and even anti-EU parties. It is pretty simple: why should I bother thinking about which party/politician to vote into the EU parliament if I think of the parliament as a dead-letter organization and the politicians as people who are just out for the high salaries and benefits which - given their responsibility – are entirely unjustified.

Don’t get me wrong. I do not say that we should just take the whole thing and throw it in the basket. My point is that unless you give the parliament a true competence and legislative power, unless you run truly European elections with European topics rather than national themes, unless you let decisions be made by European-wide elected politicians and not national ministers, unless Europe is not seen as the one to blame for limits on national policies and unless the movement of people is facilitated for all European Union members equally, no one will truly put enough value in the European Union and the Parliament in particular.

Make the parliament a true one and I will go and vote and I am sure many others too.

---

[1] I am aware that my residence of choice does seem to be in contradiction with this statement. However this is not the case. I will not comment on the implausible and useless discussion of Switzerland joining the EU.

The foreign aid debate

Seems like The Economist wants to host the debate. So far, 68% of readers believe that entrepreneurs and charities can do more for the poor than official aid. What I'm wondering is why did they choose the Swiss flag to promote a foreign aid debate!

Injecting moral hazard in the illegal drug market

The damage done by cocaine, cannabis and heroine in poor countries, from Mexico to Guinea-Bissau and Afghanistan, is a sad story. Gangsters get so powerful that states fail. Fighting the supply side ends up in bloodshed. Legalization would help but rich countries are afraid (unjustifiably) of more public health problems and opposed by stubborn conservatives who just don't get it...

Here is a new idea. Markets fail when moral hazard is too much of a problem. So to make the illegal drug market fail, just inject moral hazard in it. And how do you do that? By increasing the share of impure drug. Indeed, the seller can covertly dilute (“cut”) the product, and this dilution is largely unobservable to buyers until after they consume. This asymmetric information problem may be risen up to a point of market collapse and a victory in the war on drugs!

So how can policymakers increase the share of impure drug? They could induce sellers to dilute more through a policy of reducing the sentences of sellers who “cheat” and sell low-purity drugs. "While the strategy of shortening sentences for “high diluters” looks a little like decriminalization, it is the kind of decriminalization that conservatives might find more acceptable, because it would undermine the drug trade." As conservatives need to understand, "the dichotomy between the war on drugs and decriminalization may indeed be a false one".

If this works, it would make studying economics relevant.

Rigotnomics in Japanese

Here

Analysis of the six first rounds

During a break, one of the pugilists, Bill "The Watchdog", gave his summary of the match against "Smiling Face" Jeff (the special rounds with Dambisa "One Million Kwachas Baby" are not analyzed):

Huffington Post	Sensational attack	Defense against previous round of attack	Valid point
Sachs 5/24: Aid Ironies	E got aid himself but opposes it for dying babies	None	Immunization works
Easterly 5/25: Why Critics are Better for Foreign Aid than Apologists	S as bad as Cheney intimidating opponents with smears	S previously quoted E accurately as in favor of what S now says E is against	Aid needs critics to make sure it reaches poor people
Sachs 5/27: Moyo’s Confused Attack on Aid for Africa	Aid critics don’t understand geography of Africa	S: Don’t worry, I’m smearing Moyo too	Malaria is bad
Easterly 5/29: Geography Lessons: Correcting Sachs on African Economic Development	Convoluted S geography theory uses a lot of Ifs, Buts and Excepts to fit Africa, ignores bad government	E: Bad government is more important than bad geography to explain Africa’s poverty	Aid should not go to bad governments
Sachs 6/1: No Need to Oversimplify Poverty	E has “pre-scientific” mono-causal, bad government explanation for poverty	S admits Zimbabwe has a bad government; geography theory data mining is justified in “complex systems”	Poverty is complicated
Easterly 6/2: Astrology, Despotism, and Africa	S doesn’t understand data mining, which makes geography analysis = astrology; S calls despotisms besides Zim “potentially well governed”	E: All science tests one thing at a time, such as bad government, not equivalent to believing only one thing matters	People adapt to geography thru trade & technology (like bed nets from S!) & migration

Economics museums

"If you think an economics museum would be boring, you've probably never lived in Mexico". This is what Hawley writes in today's USA Today, presenting the Museum of Economics in Mexico City. The same applies to Argentina, I guess, as I remember visiting the foreign debt museum there in 2005.

But the one in Mexico looks even more interesting as it is designed for kids. You can play with giant coins, make your own Visa credit cards, design and print your own money or dress up as a trader in a mock stock exchange learning to buy and sell everything from apples to spaceships.

It also seem to offer the right micro-macro balance: in one game "visitors barter for fish and houses as survivors on a desert island. In another game, they are mayors of small Mexican towns, figuring out how to spend city money." "A lesson on production costs is delivered through telephones shaped like sneakers, teddy bears, bananas and a glass of milk."

The museum was founded by the Bank of Mexico to "create a society that makes better decisions". Maybe it should target bankers instead of kids!

ht: Bridge

Book Preview: Africa: Altered States, Ordinary Miracles

After having read this book which draws a pretty gloomy picture of Africa and its political development, I was keen on getting some more insights into the politics and social aspects of countries on the African continent. So once the paper back version of this book was out I immediately got it (logically like every book at the moment from the UK).

The book promises to be a brilliant read. It starts already with some lucid remarks:

“Aid and development agencies from the smallest NGO to the United Nations behemoths, have little interest in understanding African difference, how Africa work. But aid agencies, Western celebrities, rock stars and politicians cannot save Africa. Only Africans can develop Africa. [..] The policies the aid and development agencies have for Africa are not always bad – they often represent the highest aspirations and idealism of the rest of the world –but they take no account of the realities on the ground."

Arguing that the media draws a simplified one dimensional picture of the African continent he goes on and writes:

“.. journalists are not the only one to blame. The aid industry too has an interest in maintaining the image of Africans as hopeless victims of endless wars and persistent famines. However well intentioned their motives may once have been, aid agencies have helped create the single, distressing image of Africa. They and journalists feed off each other. The deal, mostly unspoken but well understood, is that aid workers tell journalists where the disaster is breaking. The aid agencies provide plane tickets, a place to stay, vehicles a driver maybe a translator – and a story. In return journalists give the aid agencies publicity, describing how they are saving Africans and using images of distress and helplessness to raise money. This deal excludes efforts of the local people to help themselves. It is easier – and more lucrative – to portray them as victims dependent on Western charity. In the early 1990s several aid agencies appointed attractive young woman to act as press officers in disaster zones to appear on TV and raise income. A decade later, they went further and invited celebrities to visit these places, bringing the media along to follow rock singers and film stars wandering through refugee camps hugging starving children and pleading for more aid.”

And finally:

“Though he had paid only a fleeting official visit to the continet, Blair proclaimed a “passion for Africa”. He referred to it as a “scar on the conscience of the world”, deeply offending many Africans"

Maybe not the most unbiased view on the whole story, but certainly worth reading.