Saturday, January 31, 2009

Dohoho

"Even as the White House tried to defuse the controversy, support remained strong, even within the administration, for a bill passed this week by the U.S. House of Representatives that bans the use of foreign iron and steel in projects funded by the package.

I don't view that as some of the pure free traders view it, as a harbinger of protectionism. I don't buy that at all," Vice-President Joe Biden told CNBC on Thursday. "So I think it's legitimate to have some portions of Buy American in it."

No sir, restrictions on trade are not protectionism. Clearly. Article.

POSTSCRIPT: Brad DeLong bumps Menzie Chinn off the top of the podium in the "most distinguished CV to post here contest", according to the IDEAS rank score - barring anonymous comments - so I'll take a minute to respond. No, I have not read anything by Donald Luskin. But the minute any party starts throwing ad hominems around in any economic debate, stimulus or otherwise, the discussion can get passed off as a bunch of ivory tower eggheads (well, if Luskin was an academic, but you get my point) having a turf war, as opposed to a highly relevant debate. This is what bothers me about Krugman, e.g. when he pointed out to Fama that savings are endogenously determined last week - you can do it without personally insulting the guy.

Thursday, January 29, 2009

Time

I don't read Brad DeLong, but I was pointed to his blog today to read a post where he had dubbed someone "The Stupidest Man Alive Emeritus". Truly, the pinnacle of reasoned debate.

In general, I tend not to trust economists who have the time to post nine blog entries a day - and it's only 3pm in California. Presumably if I dug backwards at all, I could find worse, e.g. yesterday featured twelve entries.

Let me throw out a quick note to those of you who haven't seen it: the US stimulus plan will include prohibits on importing materials, particularly steel, for the purpose of building public works projects. That being said, it will take a heck of a lot more than a trade dispute for the average Canadian to think poorly of him.

Working on a pretty substantive post on education for Maclean's as a follow-up to the reaction I received last time. If I can finish up this macro calibration before it gets too late, I'll throw it up tonight.

Wednesday, January 28, 2009

Expectations

I can't help but think the minute any semi-respectable outlet says "the current economic climate has the potential to exceed the Great Depression in severity" or somesuch, it'll be picked up and recirculated to the point where most papers are headlining "experts forecast worst economic downturn ever" in a matter of days - and in turn helping to fulfill that deadline.

It's hard to tell a compelling story where modern communications technology does not have the potential to compound a recessionary shock much more quickly than in the telegraph days.

Tuesday, January 27, 2009

Humour Me Here

Would the advent of cryogenic technology where it becomes possible to revive a frozen person (as opposed to today, where we can freeze but not thaw) substantially affect the business cycle? Would workers laid off at the start of a recession opt for a period of freezing instead of simply becoming discouraged? Wake me up when the unemployment rate is back down to 5.5%? Has anyone modeled this sort of thing?

A Special Social

The economics department congregated today in one of the nicer rooms in the library to celebrate Lionel McKenzie's 90th birthday. I have previously attended university functions where there was free alcohol, but not free champagne. I'm told it was good stuff, though I'm not able to render judgment myself, as I'd never tried it before. Ron Jones - someone who's been here with McKenzie since 1957 - managed to sneak into his homily a citation to a study which ranked Rochester very highly in terms of top papers per graduate over some time frame. I wonder if that would be a suitable part of the program elsewhere.

Talked to a couple of the professors who are currently sorting through the pile of applications for the Ph.D. program. About half of them are from China, so 200 and change. We only have one Chinese professor here, so she gets stuck with preliminary evaluations over a lot of them. It's interesting how different professors care about different things - for example, one guy doesn't care at all about master's degrees.

Also, seems like Rochester will be attempting hires this year. At least, we plan on extending a few offers. As I understand, there's currently some debate in the department about whether the current contingent - 20 or so - is sufficient critical mass. I've heard rumours about bumping that up considerably, but I wouldn't put a ton of stock in that, since the body of students is just too small.

Flyouts for the prospective entrants will be late March, I'm looking forward to being on this side of the fence.

Monday, January 26, 2009

Quote of the Day

"If today's Washington were moved back in time a hundred years, they wouldn't be able to bail out buggy whip factories quickly enough: manufacturing and green jobs together!"

Couple of links. The CAW tells us that for some reason, car companies don't like money. In fact, they hate money so much that they refuse to move all their factories to Canada, where they could make a killing if only they listened. Actually, the data do support that Canadian factories produce vehicles in fewer hours, even taking into consideration the types of car. The CAW report doesn't talk about cost, differences between the plants, etc, so presumably there's something out there in Canada that makes us less than the manufacturing paradise the CAW describes - e.g. the cost of Mexican labour probably offsets the 35% (CAW numbers) productivity advantage. Coincidentally, unionized plants are even better for the manufacturer!

Obama has officially repudiated the Pigou Club by implementing strict standards on mileage. Since this is of course a big cost for the auto companies, I would expect another auto bailout in the near future.

Friday, January 23, 2009

Second Term Curricula

Okay, a couple of weeks into the second term, here's what I can tell you. Three courses, as opposed to the four of the introductory term. There's no follow-on to 'Math for Economists', but it's not uncommon to take Measure & Integration from the math department. The ambitious first years take it, and some second years, particularly the econometricians and the micro theory guys. I have officially wimped out on doing it.

Micro. Three parts. Game theory, from notes, as the prof considers the MWG treatment undergrad level. Asymmetric information for the second unit. Welfare/public choice/mechanism design to round it out. Bolton and Dewatripont's 'Contract Theory' is the recommended source after MWG.

Macro. Two parts. First is all business cycles. Basically just DSGE, and is being taught from papers, as opposed to a text. Second part is labour-macro, which will mostly be search theory. That's what I'm really looking forward to, you'll likely hear a lot about that half of the course as a consequence.

Metrics. Remains the weakest point. Not venturing out from Wooldridge. In the first term, the professor did a mad rush through the last month, covering ten chapters inside four weeks, but it seems like we'll be revisiting most of that material again. Being taught by a business school prof and is taken with the first year business school PhD's - but the econ crowd trounces them pretty solidly. The mathematical backgrounds are just so different.

Programming is becoming a standard requirement, Matlab being the tool of choice. The econometrics assignments will all require matlab programming, as will the macro. Matlab specifically because it doesn't have any high-powered statistical routines, so one is forced to attack things from scratch. Weekly assignments in each course, as usual.

POSTSCRIPT: I finished reading Kevin Major's 'As Near to Heaven by Sea', which is a very anecdotal history of Newfoundland, in constrast to the Prowse volume, which has more footnotes than any textbook I've seen. When I finish that one, expect a few posts on Newfoundland history. I went through a couple of years of grade school with one of his kids.

Thursday, January 22, 2009

Back to Business Cycles

I solved my very first business cycle model today (paper here), so it feels like an auspicious time to continue the discussion from Nick Rowe's post the other day instead of booting up a video game for an hour before I head back across the river to start a micro assignment.

Firstly, it's worth pointing out that all economic statistics are unreliable to a degree, particularly macroeconomic ones, particularly ones trying to measure a concept like 'national output', i.e. GDP. Okay, there isn't a better alternative - people have proposed things like 'green GDP', I am personally more concerned about the value of leisure (and by extension, utility from work), but nothing has caught on.

Anyway, I can't say I know anything about Austrian economics, aside from a paper on endogenous growth and creative destruction I wrote years ago, but I do agree with the sentiment that it would be "unwise to estimate potential output by extrapolating from past actual output". Let me tell a story.

Suppose that one day a tree growing hundred-dollar bills sprouts in the backyard. Actually, this isn't a monetary story. Suppose a tree sprouts that grows cell phones. You think this is pretty awesome. With your new-found wealth, you even let your neighbours plant a few of your homegrown phones and soon enough more productive trees pop up in their backyards. The boom times roll into town as you and your colleagues sell cell phones to the world. The whole economy is growing on the strength of this additional production.

Six months later, you find out that these farmed cell phones kill their users within a year from a previously unknown disease. Farming abruptly stops, wiping out the investment in cell phone farms and techniques, taking the economy into a protracted recession.

This is basically how I imagine the financial crisis, with the cell phones being weird forms of debt and the disease being the unappreciated risk. Ex ante, before we know these phones cause cancer, we think we're doing well, i.e. we believe potential GDP is expanding rapidly from exploiting these new productive opportunities.

However, in retrospect, it wasn't at all. The transition from expansion to recession occured without anything 'real' actually happening, only the correction of misperception. However, an ideal index of welfare would actually increase when the news broke, because we now we won't all die from our phones.

If this is an accurate parable of what happened, then fiscal stimulus is pretty much useless - fiscal stimulus can only push GDP back to potential, not raise potential, unless you're way out there on the Keynesian side. But in my story, potential was low all the time and we were only managing to do as well as we were by fluke. This recession is bringing us back to reality; it's not something that can be fixed.

Faith and Writing

One of the best rewards from blogging is that it marked the first time my thoughts, ideas or writings have actually come under criticism. The scribbled red marks that one gets back in grade 12 english - that I didn't interpret the poem well or whatnot - are simply too easy to dismiss as pointless and subjective. But on the blogosphere, when someone, even an anonymous person from the other end of the internet, actually takes issue with your train of thought on a subject that's relatively concrete, it's entirely different.

I remain quite tentative about reading my comments at times, though I do appreciate them, because criticism is still something I have difficulty handling, and on the internet it's rarely anything but harsh. However, the implantation of the idea that one must be ready to defend their written word is important, and I owe that, and by proxy, harsh comments, a lot.

I have a post on student loans over at Maclean's that is currently being savaged, in case you're wondering where this is coming from.

Friday, January 16, 2009

10,000!

Thanks for visiting, everyone. I know the sitemeter is inaccurate, particularly because RSS feeds are a truly wonderful thing (and I started counting four months late), but I have to celebrate something. I've recorded visits from 82 countries. (Why am I relatively popular in Australia and Colombia?) Thanks also for all the comments. I read them all, but sometimes I'm hesitant to open the email and it takes me awhile to work up the nerve.

Anyway, if you think there's something I do well or something you'd like to hear more about that I may be qualified to comment on, please let me know. I'm often stuck for topics myself.

POSTSCRIPT: In case you're wondering, the google ads have returned, in fifteen months or so, about enough for a meal at Tim's. Were there one easily accessible. About $0.50/click, though, so I can see how some people can really monetize traffic. You now know why they're everywhere.

Wednesday, January 14, 2009

On Multipliers

One point that I've yet to see stressed much in the econoblogosphere is that the magic of fiscal stimulus depends on the economy being significantly below potential output, for all but the most extreme Keynesians. I am not at all convinced that this holds. Not that I have the time to delve into the calculations of potential GDP, but I'd suspect they rely on estimates of the value of financial services (and perhaps also auto production, to pull out another industry) that don't reflect how these goods and services will be valued going forward.

Two stories can be told. One, the contraction is predominately caused by the obsolescence of large amounts of physical and human capital due to changes in the economy - e.g. new information comes to light about the risk of certain financial products, resulting in a change of preferences which renders said capital useless, reducing potential GDP and causing a recession. Two, aggregate demand drops for an exogenous (think random), such as we don't like oranges today as much as we did yesterday, which happily leaves potential GDP chugging along, as good as ever.

Okay, I'm playing favourites, yes, but I'd still like to see a good rebuttal of why American potential GDP isn't down.

EDIT: The first story is the States, but the second story could well be Canada - the exogenous shock in the USA reducing aggregate demand here at home. Fiscal stimulus could induce Canadians to buy up those lost exports, for example, and increase GDP.

EDIT: I concede there could be positive second-order effects from fiscal stimulus, e.g. self-discovery or TFP improvements from infrastructure investment, but there are also negative ones, e.g. anticipation of higher future taxes, governmental deadweight loss and distorting incentives (think ethanol), etc.

Theorem: We Have Gotten Better At Macro

PROOF:
Seems like we've learned something about stabilization policy, doesn't it? Yes, the trend is slightly down because the labour market has become more rigid over time for a number of reasons (I lead with the proliferation of company-specific benefits), but the decrease in the variance is pretty good, isn't it?

Image blatantly stolen from Econbrowser.

Econ 101: Wages

Article from the Telegram:
The Kentucky Fried Chicken (KFC) restaurant on 115 Duckworth St. in St. John's has closed its doors and franchise owner David Hefferman says it's mainly because it was so hard to find people to work for him.
...
"We were having a major problem getting employees. Even with the minimum wage going up, that hasn't helped," he said.
...
He charges that increasing the minimum wage to its current rate of $8.50 an hour is hurting people in the fast-food industry more than anyone else.

Truly, the recession is affecting Newfoundland terribly. Cough. But that's not the point. Mr. Hefferman is only having trouble finding employees because he is only willing to pay the minimum wage. One can get more than the minimum wage working in a call centre, without having to deal with deep fryers or customers. Presumably if the minimum wage was repealed and he attempted to pay less, he would have even more trouble finding employees.

It may well be that the KFC is not profitable paying workers $10 or $11 hour, but it's fallacious to argue that the minimum wage is hurting fast food restaurants, since the equilibrium wage is in excess of $8.50 for the conditions KFC offers. The only culprit to his bottom line is the plethora of other job opportunities available to residents of the capital city.

POSTSCRIPT: Interestingly enough, the quality of comments on the Telegram website is several times higher than the quality of comments on the Globe site. Go figure.

Monday, January 12, 2009

Project Sundaram: Update

I've uploaded solutions for chapters 3 and 4, .pdf and .tex. Actually, I didn't finish either chapter because I am lazy. The choice between video games and math is simple. Mostly done, though. Presumably I won't update these files again until May. It was a very good refresher for TeX skills, though. If anyone out there is bored and feels like writing some solutions, feel free.

POSTSCRIPT: Back to class Wednesday.

Thursday, January 8, 2009

Stupid Marketing Idea of the Day

"Lexus has announced plans to send targeted messages to buyers of its cars based on the buyer's zip code and vehicle type. Unlike regular spam, these messages will be delivered directly to the buyer's vehicle, and will play to the vehicle's occupants as audio. Lexus has promised to make the messages relevant to the car buyers."

From Slashdot. Can you think of a better reason to not buy a car? These are luxury vehicles. I can see trying to stuff this into a low-end car that's being sold on basis of one thing, low sticker price, but wow.

Severity of Recession

Just wanted to highlight this line:
The number of people continuing to claim jobless benefits jumped unexpectedly by 101,000 to 4.61 million. That was above analysts' expectations of 4.5 million and the highest level since November, 1982, when the nation was emerging from a steep recession, though the labour force has grown by about half since then.

A lot of people have been pegging this as the worst downturn since the 30's, but I'd say it still has a ways to go. No predictions on whether it will go there or not, though.

Peak Oil is Dead

This is probably somewhat obvious, but I suddenly stumbled across the thought that a belief in forthcoming catastrophe resulting from running low on oil is pretty much impossible. There are a lot more worries about the economy today with oil bouncing around $50 than there were when it was $100, before the financial problems really started hitting home. Similiarly, the world has proven that it can take $130 oil without too much discomfort. I find it very hard to believe that renewable sources are more expensive than that.

Not saying such a transition would be cheap, it would likely render several large vintages of capital equipment obsolete, but predicting a peak oil crisis just seems foolish to me now.

Wednesday, January 7, 2009

Religion and Economic Growth

We find that economic growth responds positively to the extent of religious
beliefs, notably those in hell and heaven, but negatively to church attendance. That is, growth depends on the extent of believing relative to belonging.

Full paper by Barro and McCleary. (Five years old.) Unfortunately, the data under consideration here only cover 1981-1999. I would like to see this subject attacked from a historical basis, e.g. Rome, Dark Ages, etc, etc, etc. File that one under 'neat regressions that will only be run after we develop a time machine to collect the appropriate data'. It's a big folder.

Tuesday, January 6, 2009

Opportunity Costs

Microsoft understands economics...
Phishing is a classic example of tragedy of the commons, where there is open access to a resource that has limited ability to regenerate. Since each phisher independently seeks to maximize his return, the resource is over-grazed and yields far less than it is capable of. The situation stabilizes only when the average phisher is making only as much as he gives up in opportunity cost.

That could have come out of an economics textbook. Report is here.

Yet my grandmother does not. This much was demonstrated over supper tonight when I tried to expound on how foolish it is to consume to the point of sickness in order not to waste food. The food has already been prepared, it's a sunk cost, the opportunity cost of not eating is zero, not positive, as she advocated. Unless, of course, one only remembers to order less next if one gets sick this time.

Friday, January 2, 2009

Canadian Econoblogosphere Forecasting Contest 2009!

Time to look stupid. Rules:
1. Unconditional point-forecasts only, for these 5 macroeconomic variables (you can do others as well if you like).
2. Only those who have made a forecast will be allowed to laugh at others' forecasts in January 2010.
3. No prize for the best forecast (other than bragging rights).
4. "Best" forecast is defined as that which minimises the following loss function:
Loss = sum of absolute value of [(forecast-actual)/latest available end of 2008 actual].

CPI, November 2009, year over year: +1.1%
Unemployment, November 2009: 7.4%
US/Can exchange rate, December 31 2009: US$ 0.86
Bank of Canada overnight rate target, December 31 2009: 0.5%
TSX, December 31 2009: 11,250

Feel free to make your own stabs. Or just tell me why I'm wrong.

Thursday, January 1, 2009

Optimism

One of the neat things about economists is that in general the profession is really quite confident that over any reasonably long length of time, things will get better. There are very few economists that believe a substantial chunk of the world will be worse off in 2012 (or 2011, or 2019) than it is today.

People in Newfoundland and Labrador should be able to appreciate this more than most. Well, at least those living within the greater capital region. I basically don't know anything about anything that's not reasonably close to St. John's, so it's hard for me to comment. But it is practically impossible not to argue that the capital region has been extremely prosperous.

Okay, I'm not sure what rural Newfoundland will look like in a couple of decades, but I hate to make predictious. Still, I have confidence. So Happy New Year. Don't stare too hard at your year-end portfolio statements.

POSTSCRIPT: I was expecting to be blogging frequently over the last week of 2008, but a host of health issues had moderated the ambition. Hope your holidays weren't ruined as a consequence.