Dealing with microdata is relatively easy, as you have plenty of data points and can freely add explanatory variables with running the risk of running out of degrees of freedom. The story is different for macrodata, as series are much shorter, and one can quickly eat degrees of freedom by using lagged variables. The prime example here are the often abused vector autoregressions (VAR), that get larger and larger, and faster than new data points accumulate. The latest fad is to run regressions with time varying parameters, including in VARs, which is deadly for degrees of freedom as this is roughly equivalent to adding a boatload of dummy variables to the mix. Hence the need to be more parsimonious.
How parsimonious should one be? Joshua Chan, Gary Koop, Roberto Leon-Gonzalez and Rodney Strachan think the solution is in time-varying parsimony. The idea is that sometimes one needs a more complex model, and sometimes a few variables are sufficient. While this allows to spare degrees of freedom when one can do with few variables, this gain on paper is lost, and probably more than lost, by the implicit degrees of freedom used in selecting the right model. This is an old problem than is swept under the rug is many empirical applications, but in this case it becomes even more apparent because so many parameters and models are involved.
Thursday, June 30, 2011
Wednesday, June 29, 2011
Venezuela's downfall
Venezuela was once the poster child in Latin America on how to do well (the opposite being Argentina), growing richer than European economies in the 1950's from quite modest means in less than two generations. And then all went downhill, and the country continues to slide into poverty. While many like to put blame on Chavez and his "revolution," the trend started long before he came to power.
Omar Bello, Juan Blyde and Diego Restuccia, instead of going through the usual case study that just rehashes anecdotal evidence, perform a growth accounting exercise to give the start of an answer. They find that the exceptional growth episode was due to a combination of plain old capital accumulation along with total factor productivity growth originating in the booming oil industry and its foreign direct investment transferring know-how to locals. The following collapse shows the undoing of this but with a very different origin. A severe misallocation of resources lead to a drop in total factor productivity, which then triggered capital loss. And how did the government manage ti create the mess? First, it steered the economy away from oil, which may be a good idea for diversification. But the second error was to favor heavy industries, a common development mistake. And third, general government meddling in affairs it should not be looking at. Chavez has just continued a long tradition in this regard.
Omar Bello, Juan Blyde and Diego Restuccia, instead of going through the usual case study that just rehashes anecdotal evidence, perform a growth accounting exercise to give the start of an answer. They find that the exceptional growth episode was due to a combination of plain old capital accumulation along with total factor productivity growth originating in the booming oil industry and its foreign direct investment transferring know-how to locals. The following collapse shows the undoing of this but with a very different origin. A severe misallocation of resources lead to a drop in total factor productivity, which then triggered capital loss. And how did the government manage ti create the mess? First, it steered the economy away from oil, which may be a good idea for diversification. But the second error was to favor heavy industries, a common development mistake. And third, general government meddling in affairs it should not be looking at. Chavez has just continued a long tradition in this regard.
Tuesday, June 28, 2011
Energy spending and household poverty
There is broad agreement that energy, especially polluting energy, is too cheap, calling for higher energy taxes. The problem is that such taxes are believed to be highly regressive, as poor households spend a larger share of their income on energy for transportation, heating and cooling. Of course, this could be alleviated by an appropriate redistribution of the proceeds, but to do this properly one first needs to understand well the energy spending of poor households.
Tooraj Jamasb and Helena Meier do this for the United Kingdom. There, households that spend more than 10% of their income on energy are considered "fuel poor" and deemed as having difficulties heating their home. I have always been suspicious of such definitions, as one may choose to spend more to heat at higher temperatures, for example, without being considered at risk. But this definition may indeed capture a good portion of the households of interest. While Jamasb and Meier find the usual conclusions (fuel poor households are poor, have children or are retired, spend more time at home), they also put high hope in smart meters. By showing current energy consumption, they hope that these meters will trigger behavioral changes and in particular help so far ill-informed households manage better the available energy and look for energy efficiency. As so often, good information goes a long way in managing scarcity.
Tooraj Jamasb and Helena Meier do this for the United Kingdom. There, households that spend more than 10% of their income on energy are considered "fuel poor" and deemed as having difficulties heating their home. I have always been suspicious of such definitions, as one may choose to spend more to heat at higher temperatures, for example, without being considered at risk. But this definition may indeed capture a good portion of the households of interest. While Jamasb and Meier find the usual conclusions (fuel poor households are poor, have children or are retired, spend more time at home), they also put high hope in smart meters. By showing current energy consumption, they hope that these meters will trigger behavioral changes and in particular help so far ill-informed households manage better the available energy and look for energy efficiency. As so often, good information goes a long way in managing scarcity.
Monday, June 27, 2011
Education for gifted students: all for nothing?
Not every kid progress at the same pace through school, this is why some occasionally need to repeat their grade. How to handle gifted children is more controversial. Should they be allowed to skip a grade? Should they be offered special classes? Or should they simply follow the normal stream at the risk of getting bored? A good argument for devoting additional resources to them is that they will likely be the future leaders and entrepreneurs, and those are deemed to be the engines of growth.
Sa Bui, Steven Craig and Scott Imberman study the issue in the United States. Interestingly, the US has been steering towards channeling additional funding towards lagging students through the "No child left behind" laws, ironically implemented by a Republican administration. Gifted programs suffered from this reallocation, and the question whether this had an impact on the outcomes of gifted children. Comparing fifth-graders who were the last eligible for a gifted student program to those how just missed out, Bui, Craig and Imberman hardly find a difference. The science outcomes are better when looking at a randomization experiment for eligibility to a gifted student magnet school. This may be due that in such schools, classes are at a higher level and teachers may be better (and parents may get more involved). However, students may be suffering from a lower class rank among their peers. So it may all come to a draw. There is no easy solution.
Sa Bui, Steven Craig and Scott Imberman study the issue in the United States. Interestingly, the US has been steering towards channeling additional funding towards lagging students through the "No child left behind" laws, ironically implemented by a Republican administration. Gifted programs suffered from this reallocation, and the question whether this had an impact on the outcomes of gifted children. Comparing fifth-graders who were the last eligible for a gifted student program to those how just missed out, Bui, Craig and Imberman hardly find a difference. The science outcomes are better when looking at a randomization experiment for eligibility to a gifted student magnet school. This may be due that in such schools, classes are at a higher level and teachers may be better (and parents may get more involved). However, students may be suffering from a lower class rank among their peers. So it may all come to a draw. There is no easy solution.
Saturday, June 25, 2011
About the bastardization of news
Earlier this week, I have has the "opportunity" to spend significant time in a US hotel room. The town being of little interest, I used my time to get some work done and to watch some TV. There was the opportunity to see two interesting events, on the same day: the press conference of Ben Bernanke and the statement of Barack Obama about the war in Afghanistan. What a huge disappointment both were.
This is not Bernanke's or Obama's fault, though. The big news channel were treating this like an American Idol contest, with personalities (or journalists, what is the difference now anyways) doing instant ratings on how well they perceived the speakers. Which was then followed by an analysis of some random tweets.
The sad truth is that people will form their opinion from this circus. Never mind that Bernanke and Obama are experts in their field, have thought very hard about their issues with a lot of expert advice, these journalists know on the spot what is best and will dismiss without justification any argument by the push of a button.
This brings me back to the idea that Economics needs some way to certify people to separate those who pretend to know something about Economics and those who do. The latter are mostly unwilling to talk in sound bites and instant opinion, thus the media rushes to the pretend economists. And I wonder how many of the journalists I saw judging Bernanke have any degree in Economics, let alone a graduate degree.
This is not Bernanke's or Obama's fault, though. The big news channel were treating this like an American Idol contest, with personalities (or journalists, what is the difference now anyways) doing instant ratings on how well they perceived the speakers. Which was then followed by an analysis of some random tweets.
The sad truth is that people will form their opinion from this circus. Never mind that Bernanke and Obama are experts in their field, have thought very hard about their issues with a lot of expert advice, these journalists know on the spot what is best and will dismiss without justification any argument by the push of a button.
This brings me back to the idea that Economics needs some way to certify people to separate those who pretend to know something about Economics and those who do. The latter are mostly unwilling to talk in sound bites and instant opinion, thus the media rushes to the pretend economists. And I wonder how many of the journalists I saw judging Bernanke have any degree in Economics, let alone a graduate degree.
Friday, June 24, 2011
Property rights and natural resources
It is a firmly established conventional wisdom that natural resources are best preserved when there are well established property rights. It is the quintessential example of the tragedy of the commons that if everyone is allowed, say, to take water, water will be over-exploited. This wisdom takes, however, a crucial assumption: that once the resources is taken, property rights are well established and uncontestable. What would happen if not?
Louis Hotte, Randy McFerrin and Douglas Wills show that reverting this assumption can have a dramatic impact. Suppose that you took a freely available resource, but that now anyone can contest your ownership of that resource. Depending on the consequences, you may not want to extract in the first place. It thus matters in which way the state is weak. If it is weak in that it gives away rights to natural resources, then there will be over-exploitation. If it is weak in that it cannot enforce property rights in general, and in particular when it comes to bring product to the market, then it is the Wild West and under-exploitation may ensue. Theft is a powerful mechanism to kill markets.
Louis Hotte, Randy McFerrin and Douglas Wills show that reverting this assumption can have a dramatic impact. Suppose that you took a freely available resource, but that now anyone can contest your ownership of that resource. Depending on the consequences, you may not want to extract in the first place. It thus matters in which way the state is weak. If it is weak in that it gives away rights to natural resources, then there will be over-exploitation. If it is weak in that it cannot enforce property rights in general, and in particular when it comes to bring product to the market, then it is the Wild West and under-exploitation may ensue. Theft is a powerful mechanism to kill markets.
Thursday, June 23, 2011
What is a sticky price?
An amazing amount of scholarly effort is devoted to figuring out optimal stabilization policies in developed economies. I am not convinced this effort is well-placed, as fluctuations in developing economies are much larger and long-term trends quickly swamp short-term fluctuations in welfare assessment for developed economies. The last recession in the US may make it worth to look at stabilization though.
Greg Mankiw and Matthew Weinzierl have a piece of rather pedagogical nature trying to convince us that stabilization policy is worthwhile. Their model is essentially the one that is taught to undergraduates: a two-period model with households maximizing intertemporal utility from consumption, a government, and firms that maximize discounted profits. Oddly, firms do not care about the resale value of capital in the second period, which makes investment largely irrelevant. Finally, prices are fixed the first period, but can be changed in the second period.
Beyond the pedagogical merit, can this model be used for serious policy prescriptions, which Mankiw and Weinzierl even quantify? For one, the last recession was sufficiently important that prices and wages actually adjusted down in the short term, which violates the critical premise of the model. Indeed, all what policy tries to do is undo the frictions stemming from price rigidity. Second, when prices do indeed not change in the short-term, it is presumably when it is not worth doing do so, thus policy intervention also does not seem worth it. Of course, it could be that there is a genuine Keynesian lack of demand, but this can be attacked best by dealing with what causes the lack of demand, not by creating artificial demand through government expenses. For the last recession, this would have been easing collateral constraints. Third, the model assumes a money quantity equation, which imposes a constant money velocity. I thought we all had agreed long ago this was a silly assumption.
I really do not understand the point of this paper. After all, as Mankiw likes to say on his blog, all this can already be found in his favorite textbook.
Greg Mankiw and Matthew Weinzierl have a piece of rather pedagogical nature trying to convince us that stabilization policy is worthwhile. Their model is essentially the one that is taught to undergraduates: a two-period model with households maximizing intertemporal utility from consumption, a government, and firms that maximize discounted profits. Oddly, firms do not care about the resale value of capital in the second period, which makes investment largely irrelevant. Finally, prices are fixed the first period, but can be changed in the second period.
Beyond the pedagogical merit, can this model be used for serious policy prescriptions, which Mankiw and Weinzierl even quantify? For one, the last recession was sufficiently important that prices and wages actually adjusted down in the short term, which violates the critical premise of the model. Indeed, all what policy tries to do is undo the frictions stemming from price rigidity. Second, when prices do indeed not change in the short-term, it is presumably when it is not worth doing do so, thus policy intervention also does not seem worth it. Of course, it could be that there is a genuine Keynesian lack of demand, but this can be attacked best by dealing with what causes the lack of demand, not by creating artificial demand through government expenses. For the last recession, this would have been easing collateral constraints. Third, the model assumes a money quantity equation, which imposes a constant money velocity. I thought we all had agreed long ago this was a silly assumption.
I really do not understand the point of this paper. After all, as Mankiw likes to say on his blog, all this can already be found in his favorite textbook.
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