Monday, March 31, 2008

Favourable Reviews

I realize the last few posts haven't exactly been full of trenchant economic analysis. I do apologize, but allow me some more self-indulgence.

My work has been brought to the attention of time series guru Jim Hamilton. Sadly, nothing related to economics.

Other favourable reviews have been levied on the Canadian economy. 0.6% GDP growth in January? I'll take it. That's a real string of positive news for Canada, though of course all statistics are lagging indicators to some degree.

Either way, there doesn't seem to be any need for Carney to follow Bernanke.

Sunday, March 30, 2008

Record Breaking

A seasonal ARIMA(1,1,3) model in STATA over a 33-year monthly time series requires the program to use more than 1000 variables in estimation.

Just so you know.

Kodak

I was in Rochester airport yesterday, suffering a very long wait, when I struck up a conversation with someone who used to work at Kodak, 34 years worth, who ended up in a fairly high position in the research department.

Anyway, the stories make you wonder at capitalism. Mainly they were about the poor decisions of upper management. Clearly I'm only getting one side of the story, but still pretty interesting. The tales of the CEO pushing disc film, something I've never heard of, despite assurances from engineers it wasn't that great. Mountains of the stuff was buried in a wasteland somewhere. The development of a magentic tape to replace silver halide film, which was promptly trashed on the words that silver halide would always rule the market. Could have made Kodak a leader in digital photography. The Polaroid lawsuits.

Makes one believe in Schumpeter, anyway.

Cleaning Out the Aggregator

So, I have several hundred articles accumulated in my RSS aggregator. I've taken the liberty of ranking the best economics-related ones. I do realize this is a complete cop-out on actual content, and I do apologize, but at least I don't do this on a regular basis, à la most every popular econ blog.

African religion and controlled economic experiments.

Too much coverage on the Zimbabwe election. But also many useful rumours. Mugabe fleeing to Mozambique?

Animated shorts of American GDP growth by state.

Obama's tax returns and Mankiw's machiavellian theories.

POSTSCRIPT: Why can't 'The Economist' get its RSS to work properly?

Saturday, March 29, 2008

Rochester Flyout, II

First off, one student, arguably two, told us not to come. I don't know if this is typical. None of the students could realistically be described as 'ecstatic'. Most were content. A lot of warnings about the difficulty of the courses.

Profs were definitely very available. Students said repeatedly that doors were always open, everyone was always around. This doesn't seem to be a show, either. Stories seemed very consistent about how you could talk to most any prof at any time.

Funding for graduate students is better than it used to be. Draw what conclusions you will. Apparently funding is, to some degree, competitive amongst students. e.g. if you need to retake one of the qualification exams, some of your funding might be moved to someone who didn't need a second try. The message we got was that had kinda-sorta changed. They don't admit people without funding anymore, they actually give funding for the fifth year, but be prepared to have your fellowship cut somewhat if you don't get good marks in all courses, pass all your exams the first try, etc. All the "fellowships" include TA duties from year 3 onward, 7 hours a week (I think that's the right number. Trying to extract more info about this.)

We did have a lot of chance to talk to faculty - I think most of us had about two hours of one-on-one with various profs. They acknowledged the turnover, said they're going to continue to hire young, accepting that the best are often going to leave. Better to have the best for awhile than mediocre ones who stay is a philosophy there, it seems.

Tuesday, March 25, 2008

Rochester Flyout

I'll be flying down to Rochester to scope the place out Thursday, and I don't anticipate posting anything tomorrow, or while I'm gone. Don't delete me from your feeds, I ought to be back on Sunday, posting on how the flyout went, and hopefully about economics as well.

Sunday, March 23, 2008

Economics of Space Exploration

Following the hubbub over the sale of some firms relevant to the Canadarm construction, I figured I'd chip in on something that's torn me for some time.

I think space exploration is important. In the very very very long run, it is crucial. I don't know if governments should be spending money on it. The private sector has by now clearly demonstrated the capability to move forward in this area, and has provided at least anecdotal evidence that a market might exist.

The basic reason why governments shouldn't spend on space is that the vast majority of their citizenry will never get a thing out of it, especially in Canada, where we could free-ride on the USA in large part, I would suspect. Certainly, researchers and engineers could keep pushing the boundaries of knowledge, but lots of disciplines do that without the need to send hugely expensive rockets into space. I'm sure there are lots of scientists who could point out many good reasons for actually building their projects, but economics is, after all, about the allocation of scarce resources.

Conversely, space exploration generates tons of positive externalities. There are a lot of technologies out there that were subsidized, or owe something to, NASA et al. Particularly NASA, I would suspect. (Though the military as well, among many other things.) And we all know the classical results about technology and the very long run - it's the only thing that matters.

Obviously, I have no idea whether the costs outweight the benefits: do we count nebulously-defined things like national pride? Either way, I find myself unable to take a strong position.

Saturday, March 22, 2008

Labour Mobility

One of the never-ending tasks at HRSDC was to try and quantify the economic impact of labour mobility. I still don't know what all intraprovincial barriers to trade "cost" the Canadian economy, but I have some new anecdotes.

The Fulbright Program is a purportedly prestigious scholarship program which offers (fairly large) scholarships to graduate students crossing borders. The major string attached is that after the completion of your graduate work, you are obliged to return to your home country for two years.

Well, what lots of people are starting to do (at least those seeking PhDs in economics), are to turn down the Fulbright, turn down the interview, or not even bother to apply. American schools want students who they can place at prestigious universities, and the Fulbright conditions generally prohibit that. Similarly, the students themselves don't want to be exiled back to their own (often small, less-developed) countries where they may not have the research and salary opportunities they could find elsewhere.

Solution: Turn down the fellowship program that has 37 Nobel Prize winners (10 of them in economics) as alumni.

NOTE: Yes, I do know the economics Nobel isn't a real Nobel.

Wednesday, March 19, 2008

Universities and the Business Cycle

There's recently been some discussion on various forums I frequent about the desirability of going back to school now, in anticipation of missing out on years of substandard earnings, and then coming back to the job market with new skills as soon as the economy gets going again.

This intuitively makes sense. Economic stagnation means lower or below-trend wages, the forgoing of which is the main cost of education.

Does this mean that universities are pro-cyclical institutions? Investing in education certainly decreases output, just as spending money to build a new factory depresses output now (relative to paying workers overtime, say) for increased output in the future.

Well, to a degree, but I doubt that anticipation about economic growth is the main driver in enrollment. Still, it's an interesting thought. Probably particularly prevalent in economics, where a lot of people who could consider graduate studies have very bonus-driven wages.

POSTSCRIPT: In at Queen's. $12k after tuition and applicable fees. That's all my decisions. 3/3 at MA level, 2/6 at the PhD level. Decision time!

Tuesday, March 18, 2008

75 More

It is indeed 75 more points. That brings the rate down to 2.25%. The bottom is rushing up quite rapidly - Bernanke et al better hope that further stimulus isn't required, because soon there won't be any points to cut.

Interestingly enough, there were two dissents. First time in awhile I've seen two. Both preferred less aggressive action.

Canadian inflation
was only 1.8%, but core actually accelerated, 1.4% to 1.5%. The monthly numbers were startling, too. 0.5% core increase month/month. That's, uh, very high, and would certainly put the brakes on further monetary stimulus, especially since car prices were down substantially on earlier-than-usual seasonal discounts.

At least, it's my opinion that it should certainly temper further rate cuts. I ought to get back to finishing off a full draft of my honours essay.

POSTSCRIPT: In at the doctoral stream MA at Toronto. Solid funding ($16k+tuition/fees), and the graduate coordinator advised me he had a degree of negotiating room. 280 hours of TA, 60 hours of RA. All told, about ten a week. Certainly a superior offer to UBC. Rochester is still leading, though. Now I'm only waiting on Queen's.

UPDATE: Had you listened to me yesterday and bought Canadian banks, you'd be ahead. TD is up 4.5%, BMO 7%.

Monday, March 17, 2008

Network Neutrality

If you aren't conversant with the heated debates surrounding network neutrality, that probably bodes well. I will inform you. Let's take the Wiki definition, for simplicity:
Precise definitions vary, but a broadband network free of restrictions on the kinds of equipment that may be attached, on the modes of communication allowed, that does not restrict content, sites, or platforms and where communication is not unreasonably degraded by other communication streams would be considered neutral by most observers.

I've butted heads with technologically-inclined friends over this on a number of occasions. Assuming this is a good thing (I'm not entirely convinced), is this cause for government intervention, or should we just let the market work?

Basically, it boils down to whether provision of internet services constitutes a natural monopoly. There is evidence for this - landline phone services are an oft-cited example of natural monopoly. However, even in the small town of St. John's, there are competing service providers. Presumably a stable equilibrium could evolve in a competitive market, where those valuing network neutrality pay higher rates than those who couldn't care less about it.

Not only can the market be efficient, it can protect 'rights'!

Of course, even if there isn't sufficient competition to achieve this doesn't mean the government should step in, even if we are agreed network neutrality is 'good'.

POSTSCRIPT: So, Bear Stearns, eh? I'm fairly tempted to buy some Canadian banks.

Thursday, March 13, 2008

"Infrastructure"

Something I stumbled across recently. Policy wonks out there know that for the last few years, though it has mostly subsided now, the public forum has witnessed a lot of talk about insufficient funding for municipalities to build infrastructure - roads, bridges, whatnot. Toronto has been particularly loud, and there was that bridge collapse in Quebec awhile back, if you remember.

Either way, infrastructure funding goes to some awful strange things. Like culture:
Building Canada funding in this category (Culture) will be directed towards projects that:

* Support arts and/or designated heritage facilities;

* Help communities express, preserve, develop and promote their culture and/or heritage within Canada.

Hrmm. Roads and such have a legitimate function as a public good. This study estimates the rate of return from public infrastructure investment at 20% - and that's only counting reductions in the costs of business, and not the savings on repair bills from the average citizen hitting potholes, among other things.

However, in my mind, art galleries are not a public good. Some argument can be mustered here, generally along multiplier impacts from tourism and whatnot, but I remain very unconvinced and philosophically opposed. Even if something does generate economic activity, that doesn't mean the government should levy growth-hampering taxes to finance it.

Practice to Theory

I know, usually it's the other way around. But Slate has been reviewing the new Sachs book "Common Wealth". Here's an excerpt from Sachs, followed by an excerpt from Slate:
Too many economists spend far too much time debating grand principles rather than facts and evidence.
...
I agree with you that economists' tendency to ask whether what works in practice also works in theory is incredibly irritating.

I have to think that this isn't necessarily a bad idea. Theory gives simple explanations for things. Life isn't simple. If we were to remove all theory from the discipline, economics would be much less grand, and much more often incorrect. We can observe this in other sciences. Simply because we can measure the result doesn't mean understanding the why of the result is irrelevant. Far from it.

This is especially true given that all effects of any given action are not equally observable. Let's take trade. Unpopular enough as is. However, in the absence of many economists pointing at books of theory, it would likely have proliferated to a much lesser extent than it has now. We can easily observe the costs of trade - layoffs in the rust belt or whatnot, but it's much more difficult to observe the benefits, such as increased product selection, lower prices, etc. Our theory of trade improves the situation. If David Ricardo had solely been an econometrician, we would collectively be worse off.

Besides, if there is a failure within the profession, and we're spending too much time with "grand principles" rather than "facts and evidence", why?

POSTSCRIPT: Bad industrial utilization news.

Wednesday, March 12, 2008

Alphabet Soup Intervention

Assiduous readers will recall that I pointed out a week ago that there was central banking sentiment to step into the ABCP/SIV/CDO/etc/etc mess by accepting that sort of nebulously-valued material in exchange for straight government debt. The big news yesterday was that there had been a concerted worldwide movement to do just that.

No word on just how the Fed, BoC, et al plan to value these 'securities'.

Regardless, the prevailing thought today was that this move was "treating the symptoms, not the problem", on the front page of today's Globe. Well, I think it certainly does a heck of a lot more than more monetary stimulus.

The question now is whether this liquidity plan is a substitute for interest rate cuts - I'm betting it is. Anyone else share a sentiment for only 25 basis points at the next Fed meeting?

Also, Princeton reject. This is not surprising. Ex-ante, I thought my profile was stronger than it was. Will be attending the Rochester flyout, though.

ADDENDUM: Why don't we observe more old people engaging in risky activities? Don't they have much less to lose, in terms of years of life? As I've aged, my preferences for running up the down escalator haven't diminished, but would my preferences for skydiving? Obviously many risky activities are physically-intense and bar participation from the elderly. Are there examples where physical capacity shouldn't be a factor and one could directly observe shifts in preferences? Is there something I'm missing?

Monday, March 10, 2008

Distributions of PhDs

Someone was kind enough to compile faculty listings for the top 25 US departments of economics. It contains about 80% of total faculty in these schools, and contains data on their CV - you can sort by articles published in top journals. Available here. Current as of last summer.

19 of them have Rochester PhDs. 28 from Minnesota - but that's in favour of Rochester, once you control for the number of students at each of those schools. I'm counting 5 from UBC, 3 from UWO, and 1 from Queen's. Toronto bats nil. That being said, I don't think my career goals include a position at a top school in the US, but more options are better than fewer.

There's also a listing of Columbia admits. The only Canadian let in is actually an Israeli - been talking to the guy. A poor year for Canucks seeking fancy degrees down south? UWO had someone place into Princeton last year straight out of undergrad, if I recall. You'd think Mundell would attract Canadians?

Oh, and admitted at UBC. MA with a TA position worth ~$6.5k after tuition. I remain stuck in a cost-benefit calculation about taking a master's and reapplying next year, but it's hard to turn down what I have now, and I don't know how much my chances would improve for a substantially better admit.

Friday, March 7, 2008

Decoupling Much?

Well, nationally, the labour market data looks just fine. A reasonable number of jobs added, split between public and private almost perfectly proportionately to those sectors share of total jobs. Wage growth continued to be excellent, and even the finance sector added jobs.

Meanwhile, the US economy
shed jobs, and there were negative revisions to the January and December data.

Strangely, the unemployment rate in Newfoundland jumped 0.9% in February, as the province dropped 1.9% of full time jobs over the month. This seems like a massive number, and merits some investigation over the weekend, stay tuned.

UPDATE: Can't find a single story. I concede the Newfoundland data are noisy, but still, seems like a ton - even if I am stupid enough to improperly read a table and report 1.9% instead of the correct 1.0%!

Wednesday, March 5, 2008

Really Bad Editorials

Let's add this one to a list, if someone's keeping track.

There are some pretty unpopular assertions here.
  • Belief in a long run sloped Phillips curve.
That alone should tell you how off-base this person is. Letting inflation free does not create jobs in the long run. Short run? Doubt it, but at least there's a chair to stand on. Ten years is not the short run. But it's really a comedy of errors.

I have yet to see evidence that NAFTA caused the loss of 220,000 high-paying industrial jobs and replaced them with low-paying ones, as asserted. I don't know why 'labour flexibility' is a bad thing. I'm unsure why rescuing the country from bankruptcy in the 1990s was so bad. I think the "gutting" of welfare in the 1990s did great things for work incentives and budgets. I have no idea why he thinks we should be stockpiling oil when we can sell what we don't need at market price.

Really, I could dissect this at considerable length, but it's too much effort for too little work. Either way, the Globe should have better standards on what it prints.

BoC to Shore Up ABCP Mess

Link.
The Bank of Canada is seeking comments from direct participants in the Large Value Transfer System (LVTS) and other interested parties on the proposed eligibility criteria for accepting asset-backed commercial paper (ABCP) as collateral for the Bank of Canada's Standing Liquidity Facility (SLF). Written comments are requested by 14 March 2008. The final terms and conditions for accepting ABCP as collateral for the SLF will be announced by 31 March 2008. Recognizing that the market for ABCP in Canada is still evolving, the Bank of Canada intends to review these criteria in a year's time and announce the results of that review by 30 June 2009.

Well, that would be an interesting turn of events. How much of this comes from Mr. Carney's time in the financial world? Is it a good idea? What are the cons?

Frankly, I don't know, but I'm looking forward to commentary on this move.

Tuesday, March 4, 2008

The Envelope Please...

50 beeps it is.

After yesterday's GDP numbers, is one really surprised? Although, of course, the statement characterizes the decision exclusively in terms of downside risks to inflation. I'm unsure to what extent inflation can be beaten into submission from a monetary standpoint in this era of record commodity prices except through currency adjustments. Canadian domestic demand isn't really at play in terms of global wheat/gas/steel/etc/etc/etc prices. The strong Canadian dollar is giving the Bank a lot of tightrope space, in comparison to Bernanke et al who are importing inflation to a much greater extent than we are.

I a priori wanted to call 'Carney put', but a half-point here isn't overly aggressive, and it's not like equity markets are reacting joyously to the news. Either way, 50 or 25 wouldn't have surprised anyone.

Maybe there's scope to move away from quarter-points, and head toward tenths? In a lot of recent decisions, many are seeing a certain level as too little, and the next as too much. There often needs to be some middle ground between disappointment and excitement. I had a post a long time ago wondering why China adjusted reserve requirements by 0.09, and why I might not understand that exact number, I can certainly see scope for smaller than 0.25.

UPDATE: Berkeley reject.

Monday, March 3, 2008

The Utility of 'Ceteris Paribus'

While throwing around Latin for the sake of throwing around Latin irritates me, I had an introductory micro prof who insisted firmly on the use of 'ceteris paribus' instead of 'all else equal'.

Anyway, there's an op-ed in today's Globe that's basically saying consumers won't change their behaviour because of a carbon tax because it's only a few pennies.

As evidence, the following is submitted:
History tells us they won't. The carbon tax rises to 7 per cent of current prices over four years. In the past five years, the average inflation-adjusted retail price of gasoline in Canada went up 40 per cent, and gasoline consumption rose in every province.

Aside from the fact that gasoline consumption is a long-run decision, since most aren't willing to buy a new car to save on gas (yet), as time passes, we get richer. The question to ask is: "if the real price of gasoline had stayed constant over the last five years, by how much more would gasoline consumption have risen?" I'm betting a lot.

If he wants to show that a carbon tax won't cut down emissions, it needs to be shown that as price increases, gasoline consumption increases or remains unchanged - holding income, the amount of urban sprawl, the differential in urban and rural real estate prices, and so forth - constant. Which, of course, is impossible. Econometrics will lead us towards there, but only a controlled experiment can bring us all the way.

I can now answer his head-scratcher:
As a believer in the economic concept of inverse price to demand elasticity, the resiliency of energy demand in face of big price increases has me scratching my head.

Well, if you look at the aforementioned econometrics literature that uses our flawed tools to help estimate the price elasticity of gasoline - holding those other bothersome factors constant - it, surprise! - comes out to be a negative number. Price goes up, we buy less gas, ceteris paribus. See, for example, here, here, or here. (Possible paywalls, depending on your degree of journal access.) He partially cops to this point, but only somewhat.

I won't pretend that there's consensus on the exact number, but the overwhelming majority of the literature suggests that gasoline is inelastic, yes, but certainly does obey the law of demand. As such, there's every reason to believe that a carbon tax will reduce gasoline consumption relative to the situation without a carbon tax.

Yes, I too would like total carbon emissions to fall. But if he advocates a different plan, it can't be because of a reason like 'a carbon tax won't work because it's only pennies and we can't make gas cost even more'. Unfortunately, when he starts to talk about reasonable alternatives to a flat carbon tax - nonlinear pricing and whatnot - all the blather beforehand ruins the message.

UPDATE: More evidence that people respond to gas prices at Environmental Economics.

UPDATE: Rejected at Brown. And here I was thinking it was a relative safety. Word on the street is that they're only looking to admit 10 for September.

GDP Review

Almost a week without a post. Time to snap that streak.

So, we had 2007Q4 GDP data today. Thoughts are mixed.

Firstly, we did manage 2.7% for the year - entirely respectable, and right around trend. More worringly, we did lose 0.7% in December alone. Statscan takes great pains to alleviate some concerns about that number, but extended holidays at auto plants might be more of a norm than an aberration going forward (not that that justifies a bailout).

Delving into the Canadian Economic Accounts Quarterly Review, we find the per-industry breakdown for December. Manufacturing? Output contracted 3.2%. 2.4% in industrial production. 2% among wholesalers. Heck, even services were down 0.2%. If we wanted other stereotypical bad indicators, there was substantive build-up in inventories in Q3 and Q4.

And yet, I still can't bring myself to pronounce the economic situation bad. Labour income had another great year, up 6.2%, including 1.8% in the Q4, matching the rise in Q4 personal expenditure. Prices are very tame.

I can understand some real concerns about trade at the moment, but I think it's blown out of proportion and we're witnessing a little overshooting - there are a lot of people out there who don't believe that parity, or near-parity, is going to stay with us, and are taking the dream vacation. But that's a one-time thing. Also, as import prices continue to come down, we'll see more Canadian middlemen get a piece - less need to drive to NYC, just stay in Toronto and purchase it.

Right now, I'd characterize myself as ambivalent about the state of the economy.