Tuesday, December 23, 2008

Modelling Resource Competition

I hacked through the NEP-IPR (intellectual property rights papers) and the NEP-TID (technology and industrial papers) accumulation today, but nothing blogworthy accumulated in five months, so I'll have to talk about something else.

An idea that's been preoccupying me recently is how to model a process where multiple agents have the option to invest in a safe activity or in an activity that follows a typical Bellman problem, e.g. a fishery where the return in any given period decreases with total effort and the stock depletes over time depending upon the time path of effort.

I assume the game theory literature has already considered this situation extensively, but I'm ill-equipped to read it (and I originally conceived it macroeconomically as a pair of nation-states). Presumably the result depends extensively on whether their utility functions are interdependent and if enforcement/punishment mechanisms exist.

POSTSCRIPT: Sometimes I feel guilty that I have basically no scope to comment on current affairs.

Monday, December 22, 2008

Memorial Makes Slashdot

A short synopsis of the nanocar effort on slashdot. The wheels to said car come in large part from Memorial chemistry. Can't remember the guy's name.

NEP-GTH: Climate Agreements and Game Theory

Okay, time to clean out the inbox of the thousands of New Economics Papers that have piled up over term.

Going through game theory first, as the title indicates. I have never been exposed formally to an ounce of game theory (wait for next term), so I can't understand most of the abstracts. The only particularly interesting thing that cropped up was a series of papers on international climate negotiations. Highlights, but I don't suggest you actually follow the links, I only skimmed the papers.

1. The presence of ancillary country-specific benefits from tackling climate change will have a tendency to lead towards more overall climate action, though less international cooperation. By ancillary benefits, I mean things like reduced air pollution, energy independence and rural employment. Unfortunately, there is little to no consensus on the magnitude of these benefits, so I can't tell you how much we should care about a post-Kyoto international deal.

2. The EU doesn't have much collective bargaining power at climate negotiations. If they unilaterally committed to a 20% reduction, other countries would not significantly free-ride off their efforts. Further, if they proposed 20%, but would do 30% if other countries managed a 20% reduction, this would not induce significant additional participation in climate accords. The authors spend a lot of time talking about how 'certain allocations of carbon credits/permits/etc could induce participation', but that would simply be bribery on a massive scale, which isn't a surprising result.

3. Tackling climate change without developing countries is very inefficient and very difficult. If we bribe them by letting them sell reductions from the "business-as-usual" case, they start cutting CO2.

Reading this literature, it's really easy to condense: Countries are not going to cut their emissions much unless they're bribed to do so. This sentiment is prevalent in all of these papers, and covered up with superb language, for example:
Our estimate of the additional cost imposed by delayed NA1[developing]-country participation [in a climate deal] is between 10 and 25 trillion USD. This negative effect wanes when non-participatory 18 countries are allowed to trade emission reductions from their BaU [business-as-usual] emissions.

Translation: If we give other countries lots of money for doing nothing, since BAU already includes population and economic growth, but nothing in the way of improvements of energy efficiency - consider the incandescent lightbulbs of today versus those of a century ago - this implies countries will almost always beat BAU. The proposal would let them sell these "emissions reductions" on the international market to developed countries who have committed to binding targets. So it's just a transfer from rich to poorer, albeit one that makes the world as a whole considerably better off under a cost-benefit criterion (as opposed to a utility criterion). This may concur with your distributional agenda for the world as a whole, but it's still just a bribe.

Note also that the people who write papers on this subject are also environmentalists and thus tend to use upper estimates of the costs of inaction. Full disclosure: I believe wholeheartedly that anthropogenic climate change is occuring.

POSTSCRIPT: These are all typed in MSWord or similiar, and it really bothers me. Looks so poor.

Project Sundaram

Given just how rusty I was at the start of term, I've begun writing a set of solutions to Sundaram's book, A First Course in Optimization Theory, in order to stave off rust over Christmas. It's a book I particularly like and could be taught at the advanced undergraduate level. Here at Rochester, we covered it in about two months. The link to the book and to solutions for the second chapter (.pdf and .tex) I tackled are on the sidebar. I've also linked some other books I like.

Expect frequent blogging, your correspondent had his flight cancelled yesterday evening and will be spending a couple of boring days here in Rochester.

UPDATE: On the subject of books, this looks interesting, but it seems it's at a decidedly undergraduate level.

Saturday, December 20, 2008

Corporations Versus Individuals and AbitibiBowater

So I was reading the comments on the Globe's story about the mill. (Reading the comments on Globe articles is a bad idea, brain-dead isn't the word.)

For those of you resident outside Newfoundland, here's the summary: following the closure of a paper mill in rural Newfoundland that has been operated by AbitibiBowater for over a century, the government has passed a bill to expropriate all the assets of the company related to the mill and was promptly sued. Whether the case has merit is arguable - the agreement was signed with the country of Newfoundland and may well only grant the rights to the firm as long as they employ in the area. Since the document is apparently hardcopy only and hence several thousand kilometres away from my current location, I'll leave it there.

Anyway, the comments are full of vitriol directed at evil corporations. I've never understood the hatred so many people have for a firm once it passes a certain number of employees or begins to operate in multiple countries. I mean, if a firm and its workers are facing the correct incentives - i.e. no free dumping of toxic waste in the river - isn't the existence of a firm a good thing?

These sort of workers-versus-firm arguments in this world are only an argument about rent sharing. If the firm is making negative profits (in some structural sense), it closes down. If it's making positive profits, the owners of capital and the suppliers of labour have to decide how to split it somehow. Why the animosity?

Okay, sure, I understand people getting mad over supposedly unfair splits of the rent. But how come people are happy a company is packing up and leaving? There are a ridiculous number of people expressing their joy that AbitibiBowater is getting hurt.

From the Comments: Multipliers

I had a request to clarify this:
I am a skeptic. I believe the one-year multiplier is about one. Four years forward, insignificant from zero.

The fiscal multiplier is the increase in GDP per marginal dollar of government spending. The time element involved in this is not often mentioned. The idea of how a dollar of goverment spending can increase production by more than a dollar is basically that someone gets the dollar the government spends and spends it again, and this cycle repeats.

When I refer to a one-year multiplier of one, I mean "if the government spends $1 today, GDP will be $1 higher this time next year". The four year multiplier of x similarly means "if the government spends $1 today, GDP will be $x higher in four years". My numbers are lower than those chosen by many people who endorse substantial fiscal policy, hence I am a skeptic.

Here's a canonical blogosphere post on multipliers.

Friday, December 19, 2008

Chortle

Received an email from the graduate students union saying something to the effect of 'So far we've only managed to spend about 25% of the money we collect from you in dues (more coming next term) because you're all too busy working instead of attending our bowling nights. We are urgently seeking ideas for projects to finance.' Shifting to quotation: "This is your money, you should have access to it."

I suspect an email suggesting reducing the mandatory fees might not be taken well.

Thursday, December 18, 2008

The Macroeconomy

This was going to be a series, but I've lost some of my ambition. I've tried to present these in order of increasing fuzziness, I make no claims of expertise in anything except the optimal planting/trading/etc of coconuts. Business cycles are next term.

1. Fiscal stimulus.
I am a skeptic. I believe the one-year multiplier is about one. Four years forward, insignificant from zero. There are sufficently many studies out there to justify any numbers out there that you want to believe, but people that believe that any large amount of stimulus can be 2 or greater I classify as pie-in-the-skiers. At that point, you're getting to the exact opposite of the far end of the Laffer curve - the tax revenue generated by fiscal stimulus is sufficient to pay for the fiscal stimulus. Given that even Krugman has yet to make this argument, I suspect we're all in agreement that it's not that high - and yet that's what the mathematics and marginal tax rates imply.

Secondly, I have yet to hear a convincing explanation for two things. One, if as Krugman says, we're turning Japanese, why did the history of Japanese fiscal stimulus (and bailouts of financial institutions?) fail so miserably? The one thing we've done differently from the Japanese is that we've been more aggressive monetarily, but nobody seems to think that monetary policy is worth squat anymore; they may well be right. The other recent participant in massive rounds of fiscal stimulus - Germany sending money from West to East - has declined to participate in fiscal stimulus in recent weeks. Both of these endeavours were substantially larger than even the trillion that's been bandied around as the cost of Obama's plan, and have only left a bad taste in mouths. Why is it different on this continent right now? I can't see why it would be.

Third, government is the wrong engine to implement stimulus. Government works on a scale of months; markets move on a scale of hours or even minutes. There is a fundamental problem here.

2. Deflation
I am also not sure why we're so scared of deflation. One of the arguments I've heard is that deflation will result people in hoarding cash, waiting for prices to fall. I find this particularly hard to believe. There are tens of millions of people in the United States who have no problem financing purchases on credit cards and paying the associated interest charges month after month after month at rates that are much, much higher than any realistic degree of deflation. I find it difficult to believe that people will substantially adjust their behaviour if the economy moves from 2% inflation to 2% deflation. Computers have deflated more quickly than anything else on the planet over the last decades, but people hardly waited to buy them. I admit the argument for firms is somewhat more compelling.

3. Irrationality of asset markets.
A lot of people look at the headline DJIA number to form their opinion on the state of the economy. Notwithstanding just how archaic the methodology behind this index is, or how small a snapshot of the economy that number is, I can't figure out how the markets can move so much. Neither can anyone else, really. See the Worthwhile Canadian Initiative for details. Given that one of the main goals (the main goal) of policy efforts designed to get things moving is to raise stock values, I think I'm safe in being skeptical of efforts to raise stock prices when we don't have a sweet clue how they're formed. This also extends to recessions in general, albeit less so.

4. Expectations.
Each time we have a recession, I think there's an ingrained belief that we have to go at least as far as we did last time. Fighting off an equally sized demand shock will take more work each time we have to do it. If this is at all true, it spells big trouble - especially next time. In general, this is an argument for more laissez-faire with respect to stabilization policy. Just like traders are confident that they're better than most everyone else in the marketplace, so too are economists overconfident in their prescriptions. This has a partial tie in with moral hazard, which has been discussed to death, only reaching the consensus that there is no consensus on how big a deal it is.

5. Does anyone really believe that even if GDP growth gets back to trend and house prices start going up again, that people will want to buy all these assets at anywhere near their prior prices?

Wednesday, December 17, 2008

Market News

Finished exams. No grades yet. I'd predict decent on math and macro (though the professor for the former underestimated the class severely based on the midterm results, the median was apparently over 80%), and not so great on metrics and micro. Still, it's over. Given the choice, I'd certainly do it again in a heartbeat.

A micro guy we have here on the job market has an interview with Northwestern to top his list of prospects, someone else has WUSTL. Admittedly, still a long, long ways away from offers, but I will take these as positive signals.

Expect some posts on macro in the near future.

Thursday, December 11, 2008

Confessions

Perhaps, being a PhD student in economics, I should know the answer to this question. But I don't.

In a Y=C+I economy, suppose a negative shock creates an output gap, i.e. the economy produces less than it could, i.e. a recession. How does the economy return to potential? Unfortunately, I do not own any intro macro texts. And I have an exam tomorrow. So if someone could provide...

Also, a particularly interesting map.

Wednesday, December 10, 2008

Newfoundland Budget Update

There were headlines a couple of weeks ago about how the province of Newfoundland was estimating to run a surplus of $1.28 billion or so for the fiscal year, on revenues of about $7 billion or so.

I have predicting budgetary difficulties for the province, so I was wondering what sort of adjustments had been made to the numbers due to the recent slide in oil prices. Surprisingly, the forecast for the remainder of the fiscal year is for oil to trade at $40. The government manages to post excellent numbers given that oil had averaged $105 over the first eight months of the fiscal year.

I suspect a full year at $40 would eliminate the surplus, more or less. Still, we're probably one of the brightest economic spots in the world right now. Disposable income growth of 5.8% this year, housing starts showing double-digit increases, etc.

Report is here. Off to my last class of the first term.

POSTSCRIPT: Simon was nice enough to leave a good comment which I missed:
Based upon what we understand today, if oil prices continue at below US$60 per barrel, we could be facing a deficit of several hundred million dollars next year, and could potentially be facing deficits in the years to come.

Monday, December 8, 2008

Free Disposal

I remarked the other day that I was worried about the role of free disposal in many important proofs in microeconomic theory, because it may well be that things like pollution or other 'noxious goods' may not be disposed of simply.

However, gentle reader, worry not. Simply include these nuisances as inputs to the problem! For example, if your factory produces carbon dioxide as part of the production process, include carbon dioxide permits as an input. Yes, the price may well be zero. In general it seems for any undesirable effect of production that needs to be disposed, one can include its disposal and price of disposal as an input - and the proofs go through. Rejoice.

POSTSCRIPT: A prayer service for the auto industry, courtesy of The Unbroken Window - the other Rochester-based econoblogger. I don't think he knows me, though, even though we work in the same building. To be fair, I don't know him, either.

Saturday, December 6, 2008

From the Comments: Import Tariffs and Tobin Taxes

I recieved two comments from presumably different posters (tying the all time record) on why I thought Rodrik's musings (to be fair, he never actually said it should be done) about the benefits of hiking import tariffs or instituting a Tobin tax as means to get out of the slump are dumb. Here are a couple reasons that come to mind:

1. The United States economy is a sufficently large that the worldwide efficiency loss means something to the US itself.

2. 1.8 is a substantial overestimate of the fiscal multiplier. Econbrowser/OECD say 1.1 after one year, 0.2 after four, and I subjectively think even that would be generous. Getting to 2.8 (as a result of these policies) is not in the cards.

3. The United States is not going to run a budgetary surplus anytime soon. Neither are the citizenry avid savers. Thus, internally financing the budget deficit (as a consequence of the Tobin tax) forces higher interest rates and increases the cost of the fiscal stimulus.

4. Further declines in asset prices as large numbers of buyers (i.e. foreigners) are removed from the market. Existing investments might also be sold off - e.g. if your business model is based on assembly overseas and retail in the US, now your US retail operation is rather pointless.

5. US industry does not have the capacity to produce many things. When was the last time you saw a television made in the US? The development of this capacity would almost certainly last longer than the recession - and constitute a huge loss when trade was reopened.

6. Other countries would do the same, depriving the United States of export markets.

7. Financial market panic. Anyone who uses American-denominated assets as a part of an investment strategy is suddenly ashore. Dollarized foreign economies are also in big trouble. Conversely, American firms who, say, use the yen or the swiss mark to hedge are also in big trouble.

Etc, etc, etc. It's just not a good idea. See Smoot-Hawley if you're still not convinced. If you want non-economic reasons, Obama/Clinton would have a real rough time trying to conduct foreign policy, for example.

Friday, December 5, 2008

The McKenzie Lecture, II - Inside Rochester



A couple of pictures were taken at the aforementioned lecture given by Lionel McKenzie. I thought this one was particularly good; that's also my shoulder at the centre-right. Click to expand.

Another tidbit from his talk that I recall. The idea of 'free disposal' is that it's costless for firms to throw away extra output if they can't sell it. It hadn't occured to me but seems obvious in retrospect this doesn't hold. Pollution or "noxious goods", to use his language, are not something that can be disposed of at whim. Flipping through my general equilibrium notes, it's suddenly hard not to wonder how easy it would be to create more palatable assumptions to reprove some of these theorems.

Things I Cannot Say Enough Bad Things About

Now suppose that we had a way to raise the multiplier by more than half, from 1.8 to 2.8. The same fiscal stimulus would now produce an increase in GDP of $2.8 trillion--quite a difference. Nice deal if you can get it.

In fact you can. It is pretty easy to increase the multiplier; just raise import tariffs by enough so that the marginal propensity to import out of income is reduced substantially (to zero if you want the multiplier to go all the way to 2.8). Yes, yes, import protection is inefficient and not a very neighborly thing to do--but should we really care if the alternative is significantly lower growth and higher unemployment?

That's Dani Rodrik talking, words for which he's earned an immediate demotion from the relevant links section. Presumably I don't need to tall you how stupid that is. If you read the rest of the article, he suggests some other policies - e.g. a large Tobin tax - that are first-order equivalent.

Also check out A Stitch in Haste on a recent tax initiative in New York City.

Thursday, December 4, 2008

The McKenzie Lecture

For those of you who don't know, Lionel McKenzie founded the Ph.D. program in economics. He was one of the founders of general equilibrium theory and constructed the first proof for existence of a competitive equilibria.

He gave the lecture in microeconomics today.

It was pretty remarkable. He's 89 now, but still managed to get up to the blackboard and draw some pretty impressive diagrams. It wasn't a particularly technical lecture - he admits that he can't follow the details of all his papers anymore - but neither can I. You could tell that he still has a firm grip on all of the ideas. I wish it was recorded. Some anecdotes from the talk:

  • When presented with Nash's paper on equilibrium, von Neumann dismissed it as trivial.
  • Before either the McKenzie or the Arrow/Debreu papers on existence of equilibrium were published, McKenzie had asked Debreu what his current project was. Debreu refused to answer. Indeed, McKenzie presented his paper for the first time at a conference where Debreu had presented for the first time that morning and found out about that paper when Debreu stood to ask if his paper implied McKenzie's. McKenzie replied that maybe it was the opposite. (Neither imply the other.)
  • First-year students here at Rochester were formerly required to read Walras' Elements.
  • When told in 1954 that Debreu's Theory of Value was published, McKenzie replied that it meant he had another year to finish his book. It was not until 2002 that his book was published.
  • Four-hour lectures were not uncommon before the advent of duplicating technology, when he had no other way to pass on class notes.

It's remarkable to hear things like "upper semicontinuous correspondence" roll off the lips of someone of almost ninety years. Though given he was the first to publish an economics article using Kakutani's fixed point theorem, he would be the one.

Despite this, it was hard not to find it depressing. On being introduced as the first person to construct an existence proof, he interjected with "I exist too long". I can only imagine how frustrating it is to dedicate a life to an academic field, find that age has robbed one of the ability to contribute or even comprehend, but yet with more time than ever on one's hands.

Tuesday, December 2, 2008

Pick: Stupidity or Dishonesty

"Mr. Rendell said the states had $136 billion of transportation and public works projects “ready to go.” States, he said, want to use the money for roads and bridges, airports, transit systems, ports, railways, schools, waste water treatment plants and broadband networks. “Every billion dollars spent on infrastructure produces 40,000 new jobs,” he said."

Mr. Rendell is the governor of Pennsylvania. The quote is talking in reference to a proposed $500bn stimulus package.

If you trust the governor's numbers, some arithmetic (numbers) would imply that the $136bn of infrastructure would lower the US unemployment rate from 6.5% to about 3.1%. Suuuure. No word on just how less money than has been committed to saving AIG would not only fix everything, but make it better than ever.

Monday, December 1, 2008

Around the Department

The department of economics will be hosting a showing of "It's a Wonderful Life", Dec.24th, 8:30pm. This probably says something, though I'm afraid of drawing conclusions.

It's really fun to watch the letters come in for the job market candidates this year. I don't think we have any bona fide stars on the market, but I obviously am not equipped to evaluate candidates based on their job market papers - I can only look at publications, which none of our people have. Too early to daydream, of course, but it's nice to root for someone, given the conflict inherent in supporting others in the class.

Now that I've pretty much finished the courses, let me write up the first term curricula:
SLP: Stokey-Lucas-Prescott, Recursive Methods in Economic Dynamics
MWG: Mas-Collel-Whinston-Green, Microeconomic Theory

Math camp: Two weeks, covering the first seven chapters of Baby Rudin and a brief review of linear algebra. Proof of Brouwer's fixed point theorem via Sperner's Lemma.

Math for economists: All of Sundaram's book (which I really like), Ch.23-25 from Simon and Blume on differential/difference equations, Ch.7 from SLP on measure and integration and some stuff on probability from notes.

Micro (or as we call it, Modern Price Theory): Lecture notes the prof forked from his Stanford professor; six units: Choice, Producer Theory, Theory of the Firm, Consumer Theory, Choice and Uncertainty, General Equilibrium. MWG as a reference, also Kreps, but we're not following either closely at all, e.g. we had two-three classes on monotone comparative statics.

Math Stats/Econometrics: Ch 1-9 of Amemiya's Introduction to Statistics and Econometrics, also econometrics as covered in Wooldridge Ch. 4-9, i.e. the linear model and basic challenges when using it. Amemiya's advanced text as a supplement.

Macro: SLP as primary reference, roughly Ch.2-5 (thoroughly), 8-11, 15-16 (as needed). Units: Dynamic programming, equilibrium in the growth model and the welfare theorems (Arrow-Debreu), market structures and uncertainty (sequential markets, recursive competitive equilibrium, asset pricing), heterogeneous agent models, overlapping generations models.