About.com Economics

Long Run Inflation and Technological Development - Part III

Mon, 29 Jun 2009 16:54:36 +0000

I have commented in the past that it is impossible to measure inflation over long-periods of time (see here and here). Inflation "is an increase in the price of a basket of goods and services that is representative of the economy as a whole", but due to technological and taste changes, a representative basket of goods in 1979 is radically different than in 2009 and there is no objective way to compare the two.

It is an obvious point, but I think it is one economists all too often forget. That's why I was delighted to see the article Giving up my iPod for a Walkman:

When the Sony Walkman was launched, 30 years ago this week, it started a revolution in portable music. But how does it compare with its digital successors? The Magazine invited 13-year-old Scott Campbell to swap his iPod for a Walkman for a week.

Note that the "cannot measure inflation over long periods" argument does not claim the current goods are necessarily better. Just that they are different. Bring back the World Hockey Association!

Candidate for 2009's Worst Economics Article

Mon, 29 Jun 2009 08:23:44 +0000

I have read The sardine economy five times and I still cannot tell if it is sheer economic idiocy or an absolutely brilliant piece of satire. I am afraid it is probably the former, which saddens me as it is read by a fellow Canadian. (h/t: Worthwhile Canadian Initiative)

We are given a disclaimer that the author is not an economist:

I am not an economist. Even as an undergraduate, I didn't take one class in economics or political science. Instead, I took courses that had more relevance to real life and were of more practical use: The Idealism of Plato, Medieval Proofs of the Existence of God and The Dialectics of Hegel.

But apparently the author is no historian either, as he gives us this gem:

The Great Depression came to an end, not because of strategies formulated by economists, but by the outbreak of the second world war (when the generals started placing orders for obsolete weaponry of the type that had been used in the first world war.)

The Great Depression was really two downturns - a severe depression between 1929-33 and a deep but short downturn in 1937-38. The U.S. economy was growing at a 9% a year clip for the 3 years before they joined the war. Furthermore, most of the U.S. growth came from internal growth, rather than being export driven (so it was not because the U.S. was selling arms to other countries). The timing simply does not work, and had the author bothered to do any research, he would know how fallacious this claim is.

And what does he base this assertion on? The fact that the Dow Jones did not reach 1929 levels until 1954. But Teitel himself argues that stocks and financial markets do not represent the 'productive economy'. Which makes me wonder if this truly is a brilliant piece of a satire.

He rails against financial instruments and states:

When a large part of the gross domestic product of a country consists not of doing something useful but producing financial transactions, that country's economy becomes a house of cards waiting to collapse.

Which is a fair enough opinion. But then he goes on to add:

In Canada, where I live, the federal and one provincial government committed to General Motors the obscene amount of C$10.5bn, or 40% of all the corporate taxes it is estimated the federal government will collect in 2009.

What on earth does this have to do with exotic financial instruments? If you believe in "a real economy based on productive labour" then can you not make an argument that the government should help out failing industries based on 'productive labour'? I was against the GM bailout (I happen to live in the province Teitel is referring to) - I just don't understand the author's logic here.

Maybe I do not understand the logic because unlike Teitel I am not lawyer. I am curious to know if he considers his profession to be 'productive labour'.

Financial Arbitrage, Bernie Madoff and Free Lunches

Fri, 26 Jun 2009 09:48:30 +0000

Although we all would like to earn arbitrage profits, there probably aren't too many real-world opportunities to do so. I guess I am one of those people who believes the efficient market theory is approximately correct. Or the version I like to tell my students - "There may be individuals who can generate riskless excessive returns. But chances are, you're not one of them." Ed Glaeser argues that the searches for these profits leads people into getting suckered by scam artists such as Bernie Madoff:

If the lesson of the current crisis were that there were plenty of opportunities for arbitrage, then ordinary investors might conclude that they can beat the market, either by finding loopholes themselves or by investing with money managers who are skilled enough to beat the market. This type of logic led so many to trust their money with Bernie Madoff and his ilk. If an investment seems to good to be true, then you have to wonder if it is really just a Ponzi scheme.

It May Be Hard to Believe, But People Used to Wait in Suspense for Fed Releases...

Wed, 24 Jun 2009 14:52:17 +0000

To absolutely no one's surprise the Fed is standing pat on interest rates:

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period...

Again, not a surprise. As I discussed last week, the United States is likely to see rising levels of inflation, so the Fed funds rate will need to be raised. The Fed faces a difficult problem - if they raise rates too fast and too soon, they risk slowing or reversing the recovery. If they raise rates too slowly or too little, they risk runaway inflation. I must admit, I am glad I am not one of the ones having to make that decision.

Could the U.S. Have Inflation While Canada Experiences Deflation?

Thu, 18 Jun 2009 09:47:35 +0000

It appears Canada avoided deflation for now:

Canada�s annual rate of inflation edged higher in May due to lower energy prices than a year earlier that outweighed a rise in food costs.

Statistics Canada said Thursday the consumer price index rose 0.1% from a year earlier, after a 0.4% annual increase in April.

The slight increase in inflation came despite expectations that the country would dip into deflation in May. Economists had expected the annual inflation rate to come in at minus 0.2% in May.

Like many (but not all) economists, I expect to see rising levels of inflation in the United States thanks to massive increases in the money supply over the past few years. I particularly expect this to manifest itself through higher commodity prices, such as the price of oil.

Recall that the oil prices in U.S. dollars and the value of the Canadian dollar are highly positively correlated. The Canadian dollar will rise as oil prices rise, lowering the price of imported goods. Oil prices, when priced in Canadian dollars may or may not be higher, but the prices of other imported goods will almost certainly be lower. So it is, at least theoretically, possible for rising commodity prices to cause deflation.

Welcome to the Party. Can I Get You A Drink?

Thu, 18 Jun 2009 09:19:11 +0000

Keith Hennesey wonders Will the stimulus come too late?:

I began this blog at the end of March after the stimulus bill had become law. I had been struck by how much the stimulus debate had focused on whether the bill was efficient. (It clearly was not.) There was much less discussion of whether the stimulus would be effective, and of the timing of the macroeconomic boost...

s-l-o-o-o-w � CBO says that $25 B of spending had gone into the economy by May 22nd. That�s less than 4% of the total budgetary impact of that bill. Other news reports suggest that about $40 B is in the economy if you include the revenue side. Remember that almost all of the 2008 stimulus was in private hands by August 1. We will get very little GDP boost from fiscal stimulus in Q3 of 2009, and not much in Q4 either. The stimulus will begin to ramp up in Q1 of next year, and be in full swing by Q2 and Q3 of 2010.

I'll have to read Keith's archives, but even without doing so I suspect he had the same thoughts that I did. Specifically, that this sort of fiscal stimulus was necessarily going to be too late. My thoughts, back from 2008 when the issue was being ignored, are here: What Are The Key Ingredients of Fiscal Stimulus and Fiscal Stimulus - Unlikely To Work in the Real World.

What I have found really depressing about the entire fiscal stimulus debate is how little attention has been paid to what Hennesey calls "the timing of the macroeconomic boost". I guess I expect it from advocates of fiscal stimulus, such as Brad De Long and Paul Krugman. But I would have liked to seen more discussion of the issue from folks like Greg Mankiw.

I would feel like Cassandra about this issue, but Cassandra wasn't predictly the blindingly obvious which I likely am. I think it's just a case where a lot of very smart people are too intelligent to bother with simple details.

Not The Only One Who Dislikes the Publication System

Tue, 16 Jun 2009 11:13:21 +0000

Last week I gave my views on peer review and the authoring process. Turns out I am not the only one who has problems with the status quo. Business Deans have issues with it too, particularly when it comes to coauthorships:

Eighty percent of the business deans who responded to a recent survey said that co-authors are sometimes �carried� by a colleague on a published journal article, and most felt that faculty rewards are sometimes based on an undeserved publication record...

According to the study, more than 70 percent of journal articles in business have two or more co-authors, in part because the rapid expansion of knowledge in business disciplines makes such collaboration necessary.

Another, �more sinister� reason may be at play, the authors note: �This would be when an author grants another faculty member a co-authorship position on an article when he or she has done no work or very little work, thereby not deserving to be cited as a co-author.�

The motive might be to help another person get a promotion or achieve tenure, or it might involve a payback in which two scholars agree to share co-authorship on different papers, the authors say.

I am certain this happens from time to time, but I am not sure if it is frequent enough that it is a serious problem. Thoughts?

Cap-and-Trade vs. Carbon Taxes

Wed, 10 Jun 2009 20:41:56 +0000

John Whitehead disagrees with Greg Mankiw:

The worst blog post title of all time?

My nominee:

* Cap-and-trade looks worse and worse, Greg Mankiw's Blog

As the post goes on to say:

Although the [Waxman-Markey] bill changes incentives by putting a price on carbon, it also offers a large dose of command-and-control regulation.

In other words, cap-and-trade looks fine. Waxman-Markey looks bad because of all of the command-and-control it contains.

John is a friend, but I think I agree more with Prof. Mankiw on this one. Economists need to realize that we are never going to get a textbook perfect cap-and-trade system vs. a textbook perfect carbon tax system. Becuase of that there is not a great deal of point arguing the merits between the two, beyond as a blackboard exercise. What we will get is a cap-and-trade or a carbon tax system which is flawed thanks to the compromises, sausage making and horse-trading that go on when any political decision is made. So we will either get a carbon tax system that has hundreds of little exemptions, or a cap-and-trade system that looks an awful lot like Waxman-Markey.

Now to be fair to Prof. Whitehead, the Waxman-Markey act is likely to have a great deal more flaws than, say, the SO2 trading system in the Clean Air Act (1990). So while any real-world cap-and-trade system is likely to be imperfect, it does not necessarily have to be this imperfect. Thus he has a point by suggesting that Waxman-Markey does not invalidate the benefits of cap-and-trade.

The Peer Review Process - And Why It Doesn't Work

Sun, 07 Jun 2009 15:39:53 +0000

As someone who works in the 'real world', I have to admit I am having trouble finding sympathy for this viewpoint:

Today I got a "gentle reminder" that my review was due on June 9. It was a WTF moment because I had only agreed to review the paper on May 19!! The reminder letter said they had a policy of "reasonable turnaround" so I figured this was a weird typo/screw up. Then I went back and looked at the original request email. And it said that they wanted the review IN THREE WEEKS.

YIKES!!!

Here is the message I sent back to the editors:

"Wow. I can't believe you expect reviews in three weeks... I have no plans to complete a review in the next week or two. I honestly have to say that your turnaround policy is abusive. I guess I didn't notice the "deadline" TWO WEEKS AGO when I first agreed to do the review... I am still shaking my head in astonishment about the message you just sent me.

I don't intend to single out Prof. Grier for his view - I suspect it would be shared by the majority of academic economists. Plus, for some reason, reviewers are typically unpaid for their reviews - what is their incentive to do a good (and quick) job? And I am probably somewhat biased due to my poor experiences with the peer review system in the past.

Three weeks seems like more than a reasonable turn-around time to me. But then again, most of my work is in the private sector, so I am used to having to meet deadlines if I want to keep my clients as clients. I have done a number of peer reviews and they really do not take that long. And Grier admits that excessive delays are common in academia:

There is no doubt that long delays in getting feedback from journals is unprofessional and unnecessary. I have a piece with an ex-student that sat for 11 months before we got a review (which was a straightforward R&R) and now the revised version has been sitting for about 8 months. I almost don't remember what the paper is about!

This is a serious issue, given that tenure decisions are almost entirely based on a person's publication record. The system is broken because of how flawed the incentive system is. Professors have no incentive to provide a good or quick review. The only real incentive they have is to use the peer-review system to block competing research. I suspect many 11 month reviews have the following timeline:

Professor BigWig receives a paper to review.
Professor BigWig puts the paper on his 'to do' pile. Over time the paper gets buriedd because there is always something more valueable to work on.
Professor BigWig starts to receive reminder e-mails from the journal. After about the 5th one, he digs the paper out of the pile and hands it off to one of her grad students.
Grad student does the review, because she has to keep Professor BigWig happy. But she realizes that every minute spent on the review is a minute not spent on her Ph.D. thesis (or on Facebook). She does the review in the shortest time possible and returns it to Professor BigWig.
The review sits on Professor BigWig's desk for a month until the next reminder e-mail, at which point it is sent off to the journal.

There is a pretty easy solution to at least some of these problems - require authors to post an application fee (say $500) whenever they submit a paper to a journal. Give this fee to the reviews so long as they meet the necessary time line. It still doesn't solve the problem of peer-review as a mechanism to block competing research, but it would both speed up reviews and prevent authors from sending in papers that they know are 'not ready for prime-time'.

Who Are the Most Effective Economics Instructors? - Part II

Thu, 04 Jun 2009 09:59:28 +0000

In response to the post: Who Are the Most Effective Economics Instructors?, Craig Newmark writes:

I haven�t read the book, either, but here�s my guess at a big part of what�s going on: the non-tenure-track teachers give higher grades and/or lighter workloads than tenure-track faculty. Both are positively correlated with higher student evaluations.

As much as I dislike disagreeing with people who I know are smarter than me, I don't think this is it. I agree with Prof. Newmark that teachers that "higher grades and/or lighter workloads" are "positively correlated with higher student evaluations" (which throws the usefulness of student evaluations into question). But why would non-tenure-track teachers give higher grades and/or lighter workloads than non-tenure but tenure-track faculty? I'm not seeing the connection.

My guess of what is going on (again, assuming the data is correct) is that it has to do with differences in skill sets.

Consider the three groups of tenured professors, tenure-track professors and professorial wannabe's. All of them either want to be tenured professors or already are. But what do they want the job? It could be because they love teaching, but it could also be because they love research and teaching is just one the 'costs' in getting a research job. In other words, they don't teach because they want to, they teach because they have to.

Now consider "practitioner adjuncts" who are not trying to obtain a permanent position in academia. They are just teaching, part-time, for the sake or the joy of teaching. For these people, teaching is not a cost, it is a benefit. It makes sense that they would be better at it!

If that is the case, then why do we not have practitioner adjuncts teach every course? Why do we let so many who are ill-suited to teaching into the classroom?