Tuesday, December 1, 2009


I received a particularly irritating advertisement in the mail over the weekend: the offer to pay $25 a week for 78 weeks in exchange for this laptop.

25*78 = 1950. That's a really high implied interest rate. In fact, a 91% yearly interest rate would be consistent with exactly *half* the monthly payment on the mortgage of the purchase price from the link above, as computed here.

And people think payday loans are robbery (I'm not conversant on the literature, but my impression seems to be they don't deserve all the bad rap they get).
I cannot accept any calibration over discount or interest rates in which this becomes a rational move for anyone and sincerely hope that they don't actually do business on these machines, but the flyer had a whole page dedicated to this 78-month rent-to-own plans.

Wednesday, November 25, 2009

Elements of Success

When asked to rate different skills and abilities that contribute to success of graduate students in economics, 51% of grad students at top-15 programs said knowledge of the actual economy was "unimportant".

HT: Economic Logic.

Friday, November 6, 2009


Economists are currently running an experiment that dwarfs the LHC. Well, we're at least observing as the effects of stimulus to play out over the world. Of course, when the LHC gets running, a lot of physicists will update their beliefs about the nature and structure of the world. Five years from now, economists who believed large stimulus was an appropriate response will still mostly believe the same, and the economists who advocated no/little stimulus will still think it's the right move. But doesn't this prevent us from calling economics a science?

Not really. 'Is fiscal policy effective?' is a hypothesis in the same ballpark as 'Is the Standard Model right?', and if I understand correctly that question can't be completely answered by the LHC either, and we don't have anywhere near the controls the physicists do.

I concede we're making progress. For example, I think we at least generally agree now as a profession that there's a fairly significant welfare cost to business cycles because of heterogeneity, but don't hold me too strongly to this - I'm just coming off the tail end of H1N1.

POSTSCRIPT: At least I resisted the temptation to write a 'state of macro' post.

Saturday, October 24, 2009


Dynare is an add-on to MATLAB or Octave that permits the solving and analysis of general equilibrium models in an extremely simple fashion - it takes as inputs the first-order conditions and spits out impulse-response functions, correlations and autocorrelations, business cycle volatilities, etc. I use it often as a shortcut instead of having to code the value function iteration/interpolation myself, but it doesn't really let one off the hook from the economics, because one still needs to solve for the Euler equation, the labour-leisure tradeoff, etc.

Just trying to advertise, it should be more well-known than it is.

Backs of Envelopes

Hey, I haven't done this for awhile.

The NYT has a story today (HT: Free Exchange) on how some people (none of whom are economists) think that supply and demand curves are moot because the world is going to crash and burn in the near future without a systemic focus on moving away oil and while we're at it, we need to rewrite all our macro models because "Neoclassical economics is inconsistent with the laws of thermodynamics." Not quite sure what that means.

Disclosure: Global warming is pretty obviously real and scary. The chemistry/phyiscs are complicated in that nailing down precise numbers is hard, but signing the effect is simple. Period. But that's not this post.

There are a lot of related points made in the article. The main thrust is, I gather, because oil is becoming increasingly costly to extract in terms of the energy required, the effective cost of providing energy for other uses will skyrocket, and when this starts to happen, bad things happen to society, and that modern economic theory doesn't account for this. (Yes, the modern neoclassical model predicts indefinite growth based on continually improving productivity. Do many economists spend their days figuring out what growth will look like in 200 years? No. Are models designed to talk about this sort of very-long-run behaviour? No. Can I write down such a model? Sure. Would anyone, particularly a journal, care? No.)

I am somewhat personally distressed by these predictions, because my future livelihood will probably depend on there being large quantities of undergrads paying to learn about supply and demand curves, which probably won't realize if society collapses. Further, this is not something I've ever talked about in economics courses (another point calling for rewriting the models, according to proponents of this 'biophysical economics'.) Can I explain this rationally? Maybe.

According to wikipedia, (the links all seem good and this is only a blog, not the AER) world energy consumption is 15 terawatts (15 x 10^12 W). The physicists and chemists just cringed, yes. It's easier to work in watts than joules, even though one can't really convert between them properly.

Consider Exxon-Mobil. Following links I again got on wikipedia to the company's financial statement, I find that they produce less than two percent of the world's energy at a cost of $289 billion dollars. That's their cost, not their revenues. Let's assume that the cost profile of world energy production is approximately similar to the cost profile of energy produced by Exxon, which is a conservative assumption - I bet Exxon makes more profit than average, and does so less renewably than lots of other sources.

Next. Google 'solar panels'. Home Depot will provide 200W for $1,179.99$. Let's round this up to $6000 per 1000 watts. These have a 25 year warranty, too. In order to be safe, let's bump the required world energy supply from 15 TW to 40 TW - solar panels aren't going to work at night, clouds, etc. Now, algebra.

Total world expenditure on providing energy is fifty times what it costs Exxon-Mobil to produce 2%: 50*289 billion = 14.5 trillion.

Cost of providing the entire world energy supply with solar power from Home Depot solar panels: (40 x 10^12 / 1000)*($6000) = 40 billion * 6000 = 240 trillion. (This number of solar cells would cover somewhat less than 50,000 square kilometres, judging by the specs on the website, approximately 1/6 of Nevada.)

Annual payment on 240 trillion amortized over 25 years at the current 30 year mortgage rate of about 5.25% = 17.3 trillion.

The difference between 17.3 and 14.4 trillion is huge in magnitude but not that large in percentage, and I think I've made conservative assumptions at most every turn - Exxon can issue debt at less than 5.25%, let alone governments, 40 terawatts is a lot more than 15, etc, etc.

Yes, there are a lot of issues you can take here, keep reading. The point remains: the cost of extracting and using nonrenewables for energy is rapidly approaching the point where we might as well just do everything in a renewable fashion - and yet the cost of supporting such renewable power hasn't caused any societal catacylsms. So why expect one?

POSTSCRIPT: List of assumptions and bias on the gap between 17.3 and 14.4.
1. World energy consumption. If more than 15 TW, increase.
2. Solar capacity versus throughput. If the world needs more than 40TW installed solar capacity to meet the flow demand for power, increase the gap.
3. Exxon produces < 2% in actuality. Decrease the gap.
4. Exxon more (less) costly than world average. Decrease (increase). [Saudia Arabia is probably considerably cheaper than Exxon, but most other oil majors/current renewables projects are probably more expensive. Actual bias could go either way.]
5. Cost of panels increases would increase gap. Actual bias is probably negative: I bet Home Depot would cut you a deal if you wanted to buy several trillion worth. Plus solar technology would improve.
6. Interest rate increases. Would increase gap.

Other issues:
1. Replacing oil-based infrastructure and methods (see: cars) will not be cheap, but cars don't last forever and it doesn't have to happen in one day. The transition will be costly, but we can certainly sustain the steady-state.
2. If it's close, why haven't we seen a change? The gap is still $2.9 billion, which is big money, uncertainty over future GHG regulation, no incentive to take the lead.
3 ???.
4. Me possibly screwing up the algebra by an order of magnitude somewhere.

POST-POSTSCRIPT: Anyone want to calculate the carbon tax that equalizes the cost of renewables and the cost of current world energy production?

Tuesday, September 8, 2009

Second-year courses

In the past some people have come here for information about the Rochester Ph.D. program, which I am generally happy to provide. In that spirit, let me list of the fields the department is offering this year. One is required to pass two fields of specialization, which typically consist of two courses and a comprehensive exam taken in the summer. This year, the options are:

Theory I -- William Thomson's two courses
Theory II -- Pick two of Paulo Barelli, Gabor Virag, and John Duggan
International -- Ron Jones, Mark Aguiar (1/2), Alan Stockman (1/2)
Macro -- Jay Hong, William Hawkins (1/2), Yongsung Chang (1/2)
Econometrics -- Sanjog Misra (Simon School), Bin Chen
Labor -- Josh Kinsler, Cateno
Political Economy -- John Duggan, Mark Fey
IO -- Minjae Song (Simon School), Gabor Virag

I'm signed up for Macro/International. I may take IO this semester as well. I will also likely be participating in the Bils/Chang macro reading seminar, which isn't a part of any field.

No midterms at all, but I am on the hook for five or six presentations in the range of 45 minutes per, so there's lots of chances to come hear me speak if you're so inclined. :P

Tuesday, May 19, 2009

Optimization problems not appearing in AER

I was walking from Union Station to the University of Toronto about 8pm this evening, which is apparently when the homeless start settling down for the night on Bay street. I found this very surprising my first time in Toronto a couple of years ago, I wasn't expecting such a visible homeless presence.

However, what I found particularly strange today was that the people who had set up a sleeping spot had uniformly chosen highly visible spots, typically the middle of the sidewalk in front of a major building. It seems to be it would be preferable to find a more secluded spot on a number of fronts: noise, chance of being dislodged by a policeman, but perhaps it reduces the chance of being robbed while sleeping? A form of silent protest?

What variables enter into this optimization problem? Given the repeated nature of the game, it seems unlikely that these people are away from their maxima. Can anyone think of more compelling reasons to sleep directly outside of the TD building instead of in a park?

Friday, May 8, 2009


Leading off, solid labour force news. Can I be one of the cool bloggers and say "green shoots" as well?

Freakonomics asks how to optimally divide the rent of a shared house and proposes some rather uneconomic methods, when a Rochester student already figured out this problem for his job market paper. Paper here. (He went to Texas A&M.)

EnvEcon reiterates the point that debating carbon tax versus cap-and-trade isn't that important relative to implementing either over a much-less-desirable policy. I had a New Years' resolution not to nitpick at the differences.

Rats more rational than humans. What you wouldn't expect is that William Easterly starts from there to segue into a warning about the dangers of data mining. I, for one, cannot explain why there should not be a standard algorithm for tackling any econometric problem.

Thursday, May 7, 2009


Okay, because I can talk about this subject with a degree of legitimacy now.

I remember reading some sort of 'guide to graduate study in economics' a year or so ago, written by some people in the UC system. I don't really remember much, except one line. "In grad school, you are judged by the fruit, not the sweat, of your labours." Okay, I'm paraphrasing a little, but that's pretty close. Ir's incredibly true.

Don't stay up until 5am trying to fix your code so the robust standard errors on your weird model match up with the textbook's to the fourth decimal place when the first two already match. It's just not feasible to do everything and remain sane, so setting priorities becomes extremely important. You don't want to become the person who lives out of their office working 90-hour weeks. Memorizing the proof to show that the set of essential finite games under the sup metric is residual is just not worth it.

In particular, a crucial lesson I'm still working on learning is being able to put a wall between economics and leisure. I remain terrible at resolving to take the morning off and put in a decent rest of the day. Often I will just blankly click around the internet until lunch while fretting about what work I have to do, at which point I start an internal debate on whether I've taken any time off. This is not a good way to spend time.

Okay, math. The importance of mathematical preparation decays throughout the first year. There were very few new mathematical techniques introduced in the second semester. (Though the first micro II class was a little freaky when the prof claimed the Riesz representation theorem was "standard off-the-shelf" stuff we should know.) The first term, preparation helps you a lot. Math for economics, mathematical statistics, Bellmann programming. If you've seen them before, it makes a big difference. I can show you my <50% on the mathematical econ midterm early last October for proof.

What is much more important than being exposed to lots of high-level techniques is 'mathematical sophistication'. This gets thrown around a lot and it's hard to define. Conditional on being told "use a second-order expansion here to derive blah blah blah", it's not difficult to mechanically go ahead and solve. But staring at a problem you've never seen before under severe time constraints, the real skill is to recognize that a Taylor expansion is the preferred method of attack. (And since any problem on a final exam has probably not been seen before...)

Yes, this is correlated with exposure to high-level materials, but not perfectly. I don't know how to acquire this talent, and it's not something I'm particularly great at, but it's crucial. Being really comfortable with the material at the level of Rudin is a lot more important than having been in a course that worked through a lot of weird results in functional analysis.

After this, everything else I could talk about becomes a lot less important and/or obvious, if what I said already wasn't. Stay as healthy as possible. Spend as little time thinking about money as possible. Don't be a moron in social situations with your classmates. Try to remember why you're doing it all in the first place.

Why does the NHL prefer Phoenix to Hamilton?

Dunno. The court filings say because it "unreasonably restrains competition in violation of the antitrust laws".

Can't say I buy that. Moving a team from a monopoly position in Phoenix to compete with the Leafs hardly sounds anticompetitive. In fact, I have no idea how antitrust laws even come into play here, because it's all the same league. Do the Leafs have that much sway in the overall league?

Presumably the NHL has got to like the fact that a team in Hamilton probably wouldn't lose the $20 million the Coyotes lose. The only thing that I can think of is a continued effort to grow the game south of the border would be helped by the Coyotes staying put. Am I missing something?

Monday, May 4, 2009

Back in the fray

Whee, blogging. I haven't done this in awhile. Anyway, I'm finished exams. Summer vacation stretches forward, I have a serious playoff beard, and it would probably kill my grandmother to observe the state of my apartment. Will do some roundup posts of the first year in the near future and get back to econoblogging.

Wednesday, April 22, 2009

Immigration and Inequality

David Card, perhaps the preeminent practicing academic economist holding a Canadian passport, was here today to give the annual McKenzie lecture, titled, well, "Immigration and Inequality". Fairly interesting. Basically, it argues that high school dropouts and high school grads with no postsecondary are perfect substitutes to employers, and grouping these categories together makes the education profile of immigrants match up with the education profile of Americans. So you do some econometrics and as that hypothesis suggests, American wage inequality is basically unchanged relative to the counterfactual of no immigration. Ungated working paper here.

However, as the guy sitting to my right with a zillion AERs kept gossiping to me about during the speech, the identification strategy wasn't being bought into all that much. Basically, it revolved around using the past history of immigrants to migrate to ethnic enclaves to IV for the supplies of different skill levels of labour with wages on the left hand side, since presumably immigration responds to economic opportunity, i.e. wages.

Anyway, it was nice to get to a seminar. Hausman gave a talk last Friday that I slipped into as well, extremely authoritative in front of an audience. I hear he's vicious from the audience. Next year should bring a lot more of these things, I'll probably be at all the macro bits. I'll talk about courses for next fall post-exams, which start Monday and end the next Monday.

POSTSCRIPT: No disrespect to David Card, but the most memorable part of the presentation was watching two 20-something graduate students muck with the control panel for the lights unsuccessfully, prompting 90-year-old Lionel McKenzie to come down to the floor and set the lights perfectly in approximately two seconds. Pretty good.

Wednesday, April 15, 2009

Terrible think tank reports, a neverending series

Stumbled across a story this morning on the "substantial benefits" Canadians derive from their tax-funded public services. Tracked down the report hoping to get some chuckles out of the cost-benefit methodology. But no, it wasn't that simple. It's also probably a bad sign when the lead author's biography mentions their construction of the "gas gouge meter", something on which I have blogged previously, instead of any professional or educational qualifications, but I digress.

You can look at it if you like, but let me distill it for you: "redistribution is awesome!"

Sure, you can think that the Canadian income distribution is not "fair", whatever that means. However, that's an entirely personal and subjective opinion. The authors probably realized that at some point and figured out that maybe it would be better if they had some numbers to argue their point, e.g. consider the title: "Canada's Quiet Bargain: The benefits of public spending".

Reading that, you'd think the authors would argue that government spending has some benefits, right? This seems like a logical implication. But you'd be wrong. To quote:
[W]e are following the convention in public accounting of valuing public services at their cost. To the extent that public programs are supported by a cost-benefit analysis, our implicit assumption is that the net benefit from public services is zero[.]

Yes, we are starting a study to demonstrate the benefits of public services by assuming that the benefit of public services are zero.

As such, the entire study is nice graphs illustrating that households with lower incomes derive more benefits from public services than the taxes they pay, because in our progressive taxation scheme, the rich pay a disproportionate share of the taxes to fund said services. As such, a majority of Canadians derive (their number is 80%) net benefits from governmental tax-and-spend.

Factually, they're right. But I can do one better. If we collectively decide there's one person nobody really likes, we can drag them out back, lynch them, and redistribute their assets to everyone else. By my calculations, 33,617,546 of 33,617,547 Canadians - that's a whopping 99.999997% - will be better off! Clearly, what a great policy.

The point I'm trying to make here is when economists talk about 'net benefits', they mean 'a potential Pareto improvement', that is after the implementation of policy X, there exists a potential redistribution such that everyone is better off than before the policy. In the report and in my ad absurdium, no such possibility exists, so economists are typically not comfortable using the term 'benefits' to describe the effects of redistribution.

Further, I'm not trying to argue that progressive taxation is a bad thing (I don't think it is at all) or that there aren't lots of legitimate public goods the government should provide (there are), but arguing that we're collectively somehow better off by reallocating the pie is both wrong and short-sighted. Remember, redistribution has costs - see any introductory microeconomic textbook for a primer on the deadweight loss that occurs when taxation distorts incentives, nor are taxes free to collect. So under the assumption that government services are valued at cost, then taxation unambiguously makes us collectively worse off, not better.

Population clock here. Lynching that one guy is probably an even better deal now!

Monday, April 13, 2009


Wrote Geanakoplos: “Who can remember the interest rate that Shylock charged Antonio? But everybody remembers the pound of flesh that Shylock and Antonio agreed upon as collateral."

The post is overall somewhat ignorant on just how much literature there had been out there on the importance of collateral and leverage in real economic effects, one canonical piece that comes to mind is Kiyotaki-Moore (1997) JPE "Credit Cycles", predating anything mentioned in the article. The Kocherlakota piece I mentioned the other day also generates bubbles through collateral-based effects.

Macroeconomists do generate a lot of good ideas, however it's often difficult to tell that they are good until after something blows up. Correct me if I'm wrong (I probably am), but if we accept the housing price bubble was a major contributor to this whole mess (as opposed to the notion that the weird-acronym-finance-jazz would've spontaneously combusted anyway), I'm hard pressed to think of other postwar macro events in developed countries where asset prices and household debt played a large role.

POSTSCRIPT: It's the Merchant of Venice, in case you were wondering.

Saturday, April 11, 2009


Given that there are only three micro classes left before finals, even I can calculate that blogging has negative expected value. I want to put a post up at Macleans about some of the fraternity hijinks I've seen with the nice weather breaking out, particularly a bunch of drunken guys hitting tennis balls off beer bottles with sand wedges. Security didn't let that go for long, to be fair.

Lost the basketball match to the profs 17-11 in a forty-minute game. Yes, we're collectively that bad - and it's a heck of a lot easier to play defense than offense. Hoping for revenge in volleyball on Tuesday.

Had to read a 2009 working paper for macro, feels good to be that current. Returning to MWG to finish micro, feels like easy street. Metrics remains the letdown, but I'll supplement that with the Wooldridge/Imbens summer course in Toronto before the CEA conference. Just have to grind out three weeks and it's all over. Not that I have anything to do over summer. Not that that's a bad thing.