Economists lie more

Economists have a bad reputation, and this does not date from the recent crisis. This comes largely from those willing to prostitute themselves for various think tanks, lobby groups or trade group, or their employer, acting like a spokesperson than a critically-thinking and independent economist. Any many of those call themselves economists without actually being one (hence my earlier call for a certification). In the end, the general public thinks we are lying, mostly. Is there any truth to this?

Raúl López-Pérez and Eli Spiegelman performed some experiments where lying could be a winning strategy. While religiosity or gender does not impact the propensity of lying, one's undergraduate major matters, and the Business and Economics students fare the worst. And this does not come from selection into the major, it is acquired. So economists do lie more, because they see incentives to do so. Hence journalists should learn to interview economists that have no incentives to lie.

Somewhat relatedly, economists are also less generous, but in that case it is not acquired, but rather stemming from selection. But in both cases, it shows economists conform more to homo oeconomicus,

Nation building and economic growth

A major component of US foreign policy has been "nation building" through military and economic aid. This policy is of course not disinterested, and the ultimate goal is to secure commercial outlets for American businesses, and over some decades, to prevent the spread of the red menace, which is in fact related to the first goal. In terms of resources, this policy has been tremendously expensive, as the latest episode in Iraq has demonstrated. Is it worth it? That is difficult to measure, but if you think that what the us cares for is access to larger markets, then GDP growth should be a good metric for nation building success.

Ellyn Creasey, Ahmed Rahman and Katherine Smith find that nation building is moderately good for growth during a conflict, but quite bad thereafter. The latter result is not inconsistent with quite a bit of literature that shows that economic aid is not particularly useful, also absent nation building. What is new here is the stark contrast during and after the conflict. And if you wondered how they could measure a nation building effort: they look at economic aid conditional on military aid and the existence of a conflict currently or within the past seven years.

Incidentally, check out this promising new book and new blog about failed nations.

Ctrl-C Ctrl-V papers

The is a cottage industry that produces papers about rankings in the profession, rankings about journal, departments, or people in various subfields. These papers are mostly unimaginative and uninteresting, yet they find refuge in obscure field journals in the hope that this will attract a few readers and especially mentions in the honored departments. Why mention this literature? Once you have gathered the data for such a study, it is easy to slice the dataset up to produce rankings for a myriad of subfields. Thus a multiplication of papers. We could just ignore those papers, but I cannot. Indeed, there seems to be a tendency for the authors of these studies to just copy-and-paste from one paper to the author. I reported earlier about a case (who also was writing about professional rankings), and here is another one.

The duplicating fellows are George Halkos and Nickolaos Tzeremes. This tandem is incredibly productive, producing new papers by the shovel. And they got the work flow optimized. Produce a study and then replicate it on a slightly different topic. Do not bother with changing the text, simply substitute the numbers, put a paragraphs here and there for the specifics of the particular slice of the data, and done. Oh, and do not forget to change fonts and margins so that the copy job is not too obvious. Take as an example their line of work on ranking journals. First, there is a paper on journals in Economics, then mainstream journals in Economics, then Accounting, Banking and Finance, then agricultural, environmental and natural resource Economics, then socio-demographic journals. We are waiting with a bated breath for future developments.

Country size and the unemployment rate

When firms merge, they mention economies of scale and sharing of fix costs. They also sometimes imply increased market power. When firms shed business lines to shrink, they put forward concentrating on core business. From this, it is not very clear where it is an advantage to have a large or small firm. What about countries? Are large countries more successful? One way to look at it, is to compare the unemployment rate to country size. Why not.

Norbert Berthold and Klaus Gründler did that and find that small is beautiful. Indeed they find a positive correlation of the unemployment rate with population and with area, looking at subcontinents, countries and regions within countries. How could that be? They first offer a bizarre explanation, using a Cobb-Douglas production function where they substitute labor by population times the employment rate, then isolating the unemployment rate. Of course, if you leave the other factors constant, increasing population will increase the unemployment rate. The problem is that the other factors are not constant. The paper later ties the correlations in a parabolic way to collective bargaining and the size of the government, the reasoning being rather obscure.

What bugs me more about the paper, though, is first the underlying assumption that each data point (a region) is treated like a closed economy. Regions trade with each other, and this implies that labor markets are linked. This is especially the case when you look at Europe today where borders have much less significance than just ten years ago. Second, the analysis is performed for 2010, not long term averages. All what is said is thus valid for a particular point in the business cycle. Finally, nowhere in the text it is mentioned that populous regions may have different characteristics that could matter for unemployment, say they are more urban, have more manufacturing, are more diversified. After all, these regions are accidents of geography and history, and both lend some economic characteristics to them. And these are the ones that matter. Otherwise, you would get the idea that you just need to administratively split up countries, and immediately a labor market miracle happens.

Divorce risk is good for the savings rate

Savings rates have declined over the last decades in developed economies. Many explanations have been offered for this, including the availability of better insurance that allows to smooth out better potential risks. One other that was suggested was that the higher divorce rates and the larger number of out-of-wedlock children would lead to lower savings because economies of scale in consumption do not kick in. An old paper by Luis Cubeddu and José-Víctor Ríos-Rull dispelled this idea, showing in a model economy that the higher risk of divorce actually increases the savings rate, as people foresee the risk and accumulate precautionary savings.

You may dismiss this theoretical result on the grounds that there is no way that freshly married people foresee increased divorce risk and react by saving more. And that may be why this paper was never published. But they there is now evidence from Italy that there is some truth to this result.
Filippo Pericoli and Luigi Ventura, who do not quote the above study, find that this precautionary saving is actually quite substantial at 11% of overall savings. So there, Italians are more rational than we thought.

The housing bubble: fooled by efficiency

In retrospect, the large rise in housing prices before 2007 looks suspect, many would even call this a bubble. But when you observe it in real time, it is much more difficult to judge whether house price inflation is excessive, although economists have been calling for it. A characteristic of many bubbles is that expect prices to increases forever, while it clearly cannot be true, at least in this magnitude. So somehow people are fooled.

Brian Peterson rationalizes this in a search model where the search frictions allow prices to deviate from their fundamental. The innovation of this model is that people are assumed to believe that price are not affected by the search frictions: they think markets are fully efficient.This means that instead of bargaining over the house price level, buyers and sellers bargain over house price increases. One interesting consequence of this is that turn-over volume and price inflation are then positively correlated. And once you quantify the model, about 70% of he price run-up can be explained by this "foolish" behavior.

Risk preferences are heterogeneous across countries

In any international economic model I can think of, or any study comparing countries using economic models with utility maximizing utility, it is never considered that the preferences of households may differ. In closed economy models, some heterogeneity in preferences may be considered, but it is generally avoided because it is difficult to measure and in most cases would not make much a different anyway. But if we are thinking about some international imbalances, why not think about differences in aggregate preferences?

Marc Oliver Rieger, Mei Wang and Thorsten Hens look at the results of a survey administered across 45 countries that tries to elicit measurements about risk aversion, loss aversion and subjective probabilities. Too bad they did not consider discounting and the intertemporal elasticity of substitution. Anyway, they find that there are actually large differences across countries, differences that they attribute partially to economic conditions and "culture." For the former, the authors looks a GDP per capita and the human development index. I would also have looked at a measure of financial development. It seems to me that people become financially more sophisticated and thus willing to take risks if they are more exposed to financial markets. But I can be proven wrong.

Why are the poor more generous?

Poor people are more generous than rich people when giving to charities. Their donations to churches are proportionally also higher. That seems rather puzzling, as the marginal utility of consumption is higher for a poor person, to she should be less willing to give something away. Of course, you could also argue that this person is poor because she is giving away too much. But there should be a better explanation.

Julio Rotemberg offers one. He bases his model on the fact that people like making donations to causes they can identify with: they are OK with making anonymous donations in such a case because it helps like-minded people, and they like it when others agree with them, and are thus willing to help them. The model yields multiple equilibria, some in which the rich give the bulk of donations, others where the poor do. This can help rationalize why the proportion donors varies so much from one country to another, and so independently from the size of the welfare state. Some parameter values lead to people donating in the hope it will encourage others to do so. These equilibria should be dismissed, according to results I recently discussed. The model also seems to build on the fact that there is little crowding out of private charity from public funds, which I doubt according to recent evidence I discussed here. But the model predicts nicely that there is a strong incentive for charities to differentiate themselves to capture donations, even if this not increase total donations.

The Econophysics of migration

Sorry to report a second time in the same week about Econophysics (previous one here), but this paper is just too bizarre for me not to mention it. Physicists have the reputation, maybe wrongly, to be very bright, methodical and keen on logic. Hence it surprises me very much when I see this papers were completely senseless arguments are made and empirical evidence is tortured in utmost comical ways. I sincerely hope only the worst physicists make it to Econophysics and my view of the profession is thus biased.

Today's paper is by Anca Gheorghiu and Ion Spanulescu. It starts with a paragraph that has nothing to do with the topic, migration, that should from the onset get a failing grade from any teacher beyond elementary school:

Physics, is the most suitable for modelling the economic phenomena and structures or financial-banking operations, because it takes into consideration the process variables characteristics and permits to use some procedures – including the mathematical one – especially probability theory for minimizing or eliminating such influences depending on human factor and unexpected phenomena also, which cannot be predicted by direct methods.

I think was is meant here is that physics bring statistics to the table when analyzing economic phenomena. Color me shocked. After some generic rambling about what causes migration, the authors come up with an "improved model" (their words) for migration: the net present value of migrating equals the benefits of migrating less the costs of migrating. We are making significant progress here.

But there is more. Gheorghiu and Spanulescu then think of various countries as attractors, and that various forces pull people towards the respective countries. This is of course the well-known gravitational model of migration. Hey, we are using Physics concepts in Economics already! Of course, these economic attractors must be defined, and they come up with gold reserves, computers per capita and the proportion of Internet users. Why is a bit a mystery to me. The empirical evidence is presented in the form of histograms, which are apparently at the forefront of statistical techniques.

For some reason, the authors then compare countries to positive and negative electric charges and try to somehow fit migration into the Coulomb's law of electrostatic interaction. I was hoping the electro-magnetic properties of gold, the use of electrons in computers and the Internet would justify the previous empirical analysis, but no, it is entirely forgotten. Indeed, there is no attempt to somehow link all this to any measurement.

I have already spent too much time on this.

Understanding Chinese household savings

It is not a secret that the Chinese are saving like crazy. The big question is why their savings rate is the highest in the world and it was addressed before on this blog (more below). The explanation that this would have to do with life-cycle considerations as the population ages (with few children) has by now been largely dismissed. So can explain it?

Riccardo Cristadoro and Daniela Marconi make the point that we really need to look at households, as firms or the government have not increased their savings rate sufficiently. Using panel data, they notice that the savings behavior differs markedly across provinces. And one aspect that does as well vary across provinces is the provision of social services and the access to credit. Thus they tie the high savings rate with the need to build up precautionary savings. This corroborates my previous posts about increased idiosyncratic risk and the reform of the public pension system.

Coping with the crisis in transition and developing countries

The recent crisis is a truly global phenomenon, yet we hear only about how the developing economies are struggling. There were some reports about food riots over the surge in primary good prices, and then these economies faded away from the limelights. While the BRIC have not relatively very well, what about the others?

Rasmus Heltberg, Naomi Hossain, Anna Reva and Carolyn Turk report that the fluctuations in the terms of trade and prices in general have been very hard on developing and transition economies. Using households level data from 17 countries, they observe that the crisis was in fact harder than in the developed economies where it originated. Indeed, there is mention of skipped meals, reduced education, increased crime and societal issues. While I would have expected the export sector to be most affected, it appears the informal sector, which mostly caters to domestic needs was hit the hardest. And we can only hope this will be over soon, as the impact seems profound and long-lasting.

The econophysics of religion

Other social scientists do not like when economists venture into their turf and challenge established methodology. We economists, of course, welcome these instances of Economics imperialism because we believe our methods are superior. But other scientists also venture into Economics, and the most brazen are the physicists. They created a new field, Econophysics, that has been met with bewilderment or amusement by economists, including myself (Exhibits A and B). Economics and Econophysics largely ignore each other. Here is now the paper that will be with upmost bewilderment in social sciences, Econophysics applied to religion.

Marcel Ausloos studies a religious sect, the Antoinists, over 80 years. Lacking information about membership, attention is turned towards income and expense reports. Ausloos tries to find patterns and regimes in the data in order to understand the growth and decay of the cult. While there is some discussion of GDP and demographics, the exercise is all about fitting the evolution of expenses with a mixture of geometric growth and a sine wave in three different regimes. Why is not clear. And I also do not think the data has been adjusted for inflation. A really bizarre study, I doubt scholars in religion will learn much from it, and economists certainly nothing except to view this field even more with suspicion.

On the advantages of open-source econometrics

I find it surprisingly difficult to encourage my colleagues or my employer to go for open-source software. It appears to be very difficult to overcome the idea that if it is free, it cannot be good. But open-source software is not only good and free, by its very name, it is possible to look at its entrails. This implies that if there is an error, anybody can find it and fix it. With proprietary software, errors are much more difficult to detect, and then one is at the mercy of the publisher to do something about and disseminate a patch. You may think this is not a problem for you, well let's see whether this example hits closer to home.

Talha and Yasemin Yalta have looked at a series of econometrics software bundles and in particular tested for their accuracy. It turns out that fixes for gretl, the open-source one, were rapidly applied. The commercial products, though, took up to five years to correct them. And I know of at least one case where the software publisher refused to correct an error, because "published results would then not replicate." And imagine all the errors we do not see because the code is secret...

PS: another interesting point the authors raise is that commercial publishers do not make old versions of their software available for replication purposes. That can be a serious problem, for example if someone were accused of falsifying results, or just being sloppy.

I do not understand US policy

The current situation in the US can be summarized in the following way: the economy is growing again, although not yet as fast as steady state, and unemployment is still high. Most sectors are doing kind of OK except for the construction sector, which operates roughly at half capacity. Budgets deficits are very high, but not at record level once you factor in cyclical effects. Inflation is moderate and on target around 2%, including its expectations. Everyone is sitting on a lot of cash and nominal interest rates are minimal. The crisis has been going on since 1997, 4.5 years.

What is the Federal Reserve doing? Keep in mind that it cannot address structural issues in the economy and cannot only boost the economy in the short term, if at all. Bernanke and co. are keeping interest rates rock bottom until at least 2014. That would be seven years of emergency measures. If you want to instill some confidence in the economy, you do not go about telling everyone the economy needs to stay in the emergency room three more years.

And by the way, if inflation is targeted at 2% and nominal interest rates are at zero for the foreseeable future, that means real interest rates are negative. Take any model and throw in negative real interest rates. The result are pretty ugly, especially if this is more than temporary. Yet this is what the Fed seems to be advocating.

And why would you need such low interest rates? A Taylor rule would call for low interest rates if inflation (or inflation expectations) are too high (correction: too low). They are not. Or if output is below potential. That may well be the case, but I do not think it is to the extend that the Fed believes it is. The rhetoric coming from the Board indicates that the potential output is simply a continuation of the trend line from before the crisis. I do not think it is adequate. The construction sector is gone, and is going to be gone for a while because of an oversupply of residences and structures. Most households suffered a significant wealth shock that is not going to recuperate soon, and consumption has shifted down. Long time unemployed are simply not employable because of sectoral reallocation. Potential GDP has suffered a permanent shock, and while it will get back to the usual trend growth, it will not get back of the previous path.

For the Fed, this means that it is currently chasing a target it will never be able to reach. Its estimate of potential GDP is much too excessive. And the difference is due to structural issues the Fed does not have the means to address.

Which brings us to fiscal policy. Temporary tax cuts of various sorts are good to address temporary weaknesses in consumption. They work best when targeted towards people with high propensities to consume. These are the poor, and more generally the liquidity constrained. These are not the rich, and certainly not everyone. And if the loss in consumption is permanent, then this cannot be address with such temporary measures. You just have to accept it and live with it. Thus: taxes need to go back up, especially for the rich, also because they got an unnecessary free ride in the past years.

And then there is the sectoral problem. Construction is in the dumps. If you want to do something about it, you target public spending towards construction. Not general tax cuts, not across the board stimulus. And the US could actually need some serious infrastructure replacement and improvements. Actually, it is the perfect time to catch up on lost time here: costs are low, interest rates are low.

Now there is of course the stimulus package. But it has had no impact because it was not sufficiently targeted towards infrastructure, It went to state governments, which just used this manna to avoid getting into debt. It went into all sort of pet projects, very few of which had anything to do with construction. And if there was some construction, it went into initiatives that have such long horizons that they are not going to help anytime soon.

So what needs to be done? Washington needs to acknowledge that the targeted path is too ambitious. Bring interest rates back up, This will entice people and businesses to do something with all the cash they are sitting on. The US Treasury needs to focus on infrastructure spending and restructure tax rates. And do not tell me we first have to wait until the presidential election is over.

Shopping hours competition

Firms not only compete with prices, but also with product characteristics. In the retail market, an important characteristic is the opening times. In some areas, for example in much of Europe, shopping times are regulated, the motivation being to give retail workers somewhat "normal" working hours. In some countries, for example the United States, there is much less regulation, and shops have extensive if not around-the-clock hours to satisfy King Customer.

Miguel Flores, who must have won the award for the shortest paper title, studies whether regulation is welfare enhancing when incumbent retailers can prevent entry of competitors by strategically choosing opening times. This essentially comes down to a model of competition through product differentiation. The standard result that regulation is bad when there is little diversity (regulation cannot promote differentiation) and good when there is a lot of it still holds here. The subtlety of the paper is to consider a situation where the incumbent chooses hours of operation, the competitor chooses to enter and its hours, and then they compete on hours. It is thus a two-dimensional space with entry deterrence on one.

Fiscal policy and climate change

It becomes more and more difficult to deny that something is happening to the weather and that climate change is a reality. From the point of view of the economist, this implies that there is more scope for distortionary taxation to mitigate climate change, and this brings a series of opportunities to improve the economy in indirect ways. The big fear of business is that sin taxes on pollution will curtail their production and profits. Of course, this is the whole point of these taxes, that is to internalize the effect of pollution, and that often means either reducing production or increasing production costs.

But as Benjamin Jones, Michael Keen and Jon Strand point out, this has also important benefits for businesses: the added tax revenue allows to reduce other taxes, in particular the ones that are bad for business: corporate taxes or income taxes could even be eliminated in a so-called greening of the tax code. This is one important reason one should tax polluting production or energy instead of subsidizing energy-efficient production or alternative energy, as I have already repeated at great lengths on this blog. But this is easier said than done, as the public will surely call for public expenses to cope with climate change. Politically, it is much easier to give firms technology to pollute less than have them buy it because polluting alternatives have become too expensive. But because it is easier politically does not mean it is right.

Tax rates over the business cycle

With all the talk about cyclical austerity measures, it is surprising that little is known about the cyclical behavior of tax rates. For one, the tax code is complex and it cannot be summarized by a single number. That can be done by looking at aggregates, but of course aggregate tax rates are endogenous to economic activity as soon as there is some progressivity.

This does not deter Carlos Vegh and Guillermo Vuletin who analyze various tax rates for 62 countries over 40 years, using top marginal rates for corporate and personal incomes, as well as VAT. The results are striking: there is no correlation of tax rates with the business cycle in developed economies, but they are noticeably procyclical in developing ones. Why would this be the case? A simple model can explain this. Public consumption is always procyclical, for example if private and public consumption are complements. If public consumption is a large share of national income, tax rates need to go up to sustain increased expenses in a boom. If the public consumption share is rather small, as is typically the case in developed economies, tax increases are not required.

Being landlocked and making it worse

No matter how you specify your growth regression, it always turns out that being landlocked is bad for a country. The lack of direct access to the sea and thus world markets seems to hurt the capacity to specialize for exports and acquire cheap imports. As a consequence, it stands to reason that any landlocked country should try to circumvent this physical hurdle by creating institutions that foster trade, say by joining free-trade agreements.

Well, the reality seems to be the exact opposite. Ingo Borchert, Batshur Gootiiz, Arti Grover and Aaditya Mattoo find that landlocked economies in general have more restrictive policies in anything that relates to trade and interacting with the rest of the world, such as telecommunications and transportation. And with such policies, international policy assistance is unlikely to have much impact. But one make also ask oneself whether landlocked countries naturally tend to shun the rest to the world, an attitude that is difficult to overcome.

How to fight corruption

Conventional wisdom tells us corruption is bad (except for a few people). The evidence is surprisingly mixed (see old post), but that has not deterred every government or international agency to at least pretend to do something about it. Eradicating or attenuating corruption rarely works, maybe it is because the approach is wrong.

Martin Dufwenberg and Giancarlo Spagnolo verify an innovative angle to attack bribing, as proposed by Kaushik Basu and widely discussed in the Indian press: make bribing legal, but levy heavy fines on accepting bribes. That is somehow similar to the situation in some countries where consuming some drugs is legal, but their commerce is not. The conundrum the proposal tries to resolve is that briber and bribe-taker are usually partners in crime and unlikely to report the activity. By guaranteeing immunity to one party with return of the bribe, it is more likely that the corruptive transaction will be reported. But it turns out to optimize it, immunity should only be granted to those who report a bribe. Indeed, this gives stronger incentives to report. Also, granting immunity to any briber would have made it morally acceptable to bribe. To this I would have added that one also offer the repented briber a commission on top of the returned bribe. Then it would become profitable to report bribes, even when the requested service is ultimately not provided.

The deadweight loss of gift certificates

Giving gifts in kind induces large deadweight losses, as I discussed in one of my very first blog posts. The basic idea is that people do not value their gifts as much as they would be willing to spend on, or at least that they would have spent the cost of the gift in a Pareto-improving way. If instead of receiving a gift in kind one obtains a gift card, the added flexibility should give us a small to negligible deadweight loss. I would compare this to an incomplete market that can get close to complete, in well-being, with very few securities like government bonds.

Flóra Felsö and Adriaan Soetevent study spending habits of gift certificate recipients. They find that the vast majority is not really constrained by having to buy at a particular merchant and only alter a little bit the timing of their purchases. One in seven (more among females), though, considers the gift certificate separately from the budget constraint and buys something one could not afford. While these people are happy about it, there is obviously still a loss in well-being. Indeed, if they want this purchase so much, they would have bought it from the "normal" funds. All in all, the deadweight loss from gift certificates does not seem important.

Obese self-discriminators

Minorities, ugly, fat and "different" people are discriminated against, there is no question about it. It is very unfortunate, and laws (and education) try to correct this. Unfortunately, those that are discriminated may not be helping their cause by not doing enough to promote themselves.
think if it like they conceded defeat against discrimination.

What is the evidence? Pablo Brañas-Garza & Antonios Proestakis ran some experiments where people were supposed to declare how much they feel they should be compensated to fill the experiment questionnaire. It turns out that obese people were asking significantly less frequently (-5%) for money, and when they ask for some they ask for much less (-20%). What is most important here is that they self-diagnose themselves as obese, less whether they actually. Seeing this, my first reaction was that they ask for less because their opportunity cost is lower, as they do earn less. But the authors take account of the wage. So it must be that obese have such low self-esteem that they cannot be ambitious in what they ask for.

Egoistic giving

Why do people give to charity? It could be because they care about others. It could be for tax reasons. It could be to offload some guilt. It could be to improve one's standing in society. It could be to encourage others to do the same. Or it could be a combination of all the above. In a more fundamental way, the question is whether philanthropy is egoistic or altruistic.

To address this, Dean Karlan and Margaret McConnell examines donors to Yale University. During a telephone campaign, some potential donors were told about the opportunity of being recognized as donor in the college's newsletter. They responded by giving more frequently (+3%) and more (+14%) than the control group. Variations in the amount necessary to be listed did not yield significant effects, though. One can conclude from this that people donate at least in part to elevate their status and/or to encourage others to give.

To disentangle to two, Karlan and McConnell use a better controlled environment, the laboratory. They work with undergraduates to see whether the latter are willing to part with US$5 to help fight AIDS, tuberculosis and malaria. In some rounds, donors are announced, but no difference in giving is noticed by varying the timing of the announcements. One can thus conclude that giving to encourage others to give is not an important factor, even with such small amounts.