Tuesday, October 30, 2012

Some readings

1. Alwyn Young argues that measures of GDP and consumption growth in Africa are flawed by mismeasurements, and that the Demographic and Health Survey, which collects "information on the ownership of durables, the quality of housing, the health and mortality of children, the education of the youth and the allocation of women's time in the home and the  market", enables a better and more consistent data source. The implications could be important for our view of Africa's development compared to other developing regions, as Young finds that
since 1990 real material consumption in sub-Saharan Africa has been rising at a rate three and half to four times that recorded by international data sources such as the PWT and UN, and on par with the growth  taking place in other regions of the world.
2. Here's a cool graph of how the Fed works

3. Alcott and Rogers find that for behavioral interventions to work, they need to be sustained for a period of time. They find that an energy conservation intervention where people were repeatedly reminded to save energy led to strong (but decreasing over time) responses after each warning, and that the long-term impact was only significant when the the intervention was long enough
attention is malleable, not static: an intervention can draw attention to one set of repeated behaviors, but that attention gradually returns to its baseline allocation. Second, our empirical results document how repeated intervention can eventually cause people to change the composition of their responses, which generates more persistent changes in outcomes.
One simple example they use to explain their findings is that if you repeatedly go to the (same?) gym, you'll find a gym buddy and develop a routine. There must be something like this in Charles Duhigg's book on the power of habit! From his NYT magazine piece last February:
One study from Duke University estimated that habits, rather than conscious decision-making, shape 45 percent of the choices we make every day...The process within our brains that creates habits is a three-step loop. First, there is a cue, a trigger that tells your brain to go into automatic mode and which habit to use. Then there is the routine, which can be physical or mental or emotional. Finally, there is a reward...
And on the gym example specifically:

In one project, 256 members of a health-insurance plan were invited to classes stressing the importance of exercise. Half the participants received an extra lesson on the theories of habit formation (the structure of the habit loop) and were asked to identify cues and rewards that might help them develop exercise routines.
The results were dramatic. Over the next four months, those participants who deliberately identified cues and rewards spent twice as much time exercising as their peers... According to another recent paper, if you want to start running in the morning, it’s essential that you choose a simple cue (like always putting on your sneakers before breakfast or leaving your running clothes next to your bed) and a clear reward (like a midday treat or even the sense of accomplishment that comes from ritually recording your miles in a log book). After a while, your brain will start anticipating that reward — craving the treat or the feeling of accomplishment — and there will be a measurable neurological impulse to lace up your jogging shoes each morning.



4. The New York Times has an interesting piece on the rise of the part-time worker. The switch is striking:
“Over the past two decades, many major retailers went from a quotient of 70 to 80 percent full-time to at least 70 percent part-time across the industry,”...the Bureau of Labor Statistics has found that the retail and wholesale sector, with a total of 18.6 million jobs, has cut a million full-time jobs since 2006, while adding more than 500,000 part-time jobs...in two leading industries — retailing and hospitality — the number of part-timers who would prefer to work full-time has jumped to 3.1 million, or two-and-a-half times the 2006 level, according to the Bureau of Labor Statistics. In retailing alone, nearly 30 percent of part-timers want full-time jobs, up from 10.6 percent in 2006
Those part-time workers take drastically lower pay:
part-time workers in service jobs received average compensation of $10.92 an hour in June, which includes $8.90 in wages plus benefits of $2.02. Full-time workers in that sector averaged 57 percent more in total compensation

The factors the NYT points out are
workers’ schedules have become far less predictable and stable. Many retailers now use sophisticated software that tracks the flow of customers...
...when Walmart spread nationwide and opened hundreds of 24-hour stores in the 1990s, that created intense competitive pressures and prompted many retailers to copy the company’s cost-cutting practices, including its heavy reliance on part-timers...
...the use of part-timers had also escalated because of the declining power of labor unions. “They set a standard for what a real job was — Monday through Friday with full-time hours,”...  

Saturday, October 27, 2012

Readings -- UK growth and black swans



FT Alphaville has a nice post on pessimism about he UK economy even after the somewhat good numbers for GDP this week, notably due to the Olympic bounce, and then make a general point on the problem of monetary policy pass-through to inflation in a leveraged, underconfident economy, via Nomura's Richard Koo
No matter how much liquidity the central bank supplies under such conditions, the money will not leave the vaults of financial institutions because there are no borrowers. Hence it cannot stimulate the economy.



The second, really important reading today is Florin Diacu's post in the New York Times on the appalling conviction of seven earthquake scientists for the failure to predict the L'Aquila April 2009 earthquake. There are two things to keep in mind here. The first is that the failure to think in terms of probabilities is, for everyday purposes, not a big problem, although it annoys me slightly. But it has had important consequences in this case. Yep, they said that an earthquake was unlikely. I made a comment on Brad Plumer's post in the WaPo this week when in a discussion of Intrade manipulation of the Romney v. Obama contract, he suggested, as a lot of people have, that Intrade had been wrong on the ACA ruling. In that particular case, Intrade predicted the overruling of the ACA mandate by the Supreme Court with a 80% probability, which gave you a 1 in 5 chance that it won't be overruled. Intrade was not wrong, or at least, the argument that is being made is incorrect.
The general point is really Nassim Taleb's black swan theory, and Diacu alludes to that in his editorial. You can't predict black swans, but you can build robust system that will be able to suffer extreme events. In the particular case of earthquakes, Diacu writes:
We should not fear earthquakes, since most of us will never experience a major one. But we must prepare infrastructure to withstand disaster and learn how to react when disasters do hit.
Yes.

Note: A New Scientist opinion post argues that the charges were less about the predicition accuracy than with the communication strategy:
Employed by Italy's Major Hazards Committee to assess earthquake risks and communicate them to the government and the public, the seismologists got the science right, but left the job of public communication to a civil protection official with no specialist knowledge of seismology. His statement to the press was, to put it mildly, a grossly inaccurate reflection of the situation: "The scientific community tells us there is no danger, because there is an ongoing discharge of energy. The situation looks favourable." At this point, the seismologists should have stepped in. But they did not, and the message stuck. 
I find it slightly confusing and still don't see why the scientists should be convicted for that. As Arthur Charpentier writes, they should then just say that there will be an earthquake every day: Instead of making a risky forecast, make the one that minimizes the type II error -- failing to predict an earthquake -- while forgetting everything about the type I -- predicting an earthquake when it doesn't happen

Risky prediction
Yay! Safe prediction


Friday, October 26, 2012

Morning stuff


  • The Wall Street Journal had an interesting case study on hysteresis. The story is on how new-home construction is just picking up, but prices are quite high because builders seemed to be capacity-constrained because of the layoffs and capital reduction after the bubble-pop.

Timber companies and drywall manufacturers, for example, laid off thousands of workers and idled capacity at plants when the downturn hit and want to see at least six months of rising demand before reversing course. (Lumber shortages are also the result of an infestation of bark beetles that has destroyed millions of acres of pine trees in the U.S. and Canada.)

  • The New York Times reports the creation of a new, right-wing party in Japan by the governor of Tokyo, who is the guy who caused the purchase of the Senkaku islands by the Japanese government last months, rekindling the fire in the sino-japanese relation. After the nomination of Abe at the head of Japan's conservative party (and his recent visit to the Yasukuni war shrine) , the evolution of Japanese politics, with its incessant succession of prime ministers and this rise in nationalism, is worrying  for the future geopolitical issue in South East Asia.
  • Hillary Clinton has had a long career and The Guardian is here to provide the gifs
  • Floyd Norris summarizes some good points about the Euro crisis. The first point is that the euro is still popular, even in crisis countries.
polls in Greece ... still show strong support for the euro, and so do polls in Finland, which has been upset over the need to support the periphery.
          but the most important point is the fact that "The euro zone as a whole is running smaller budget and current account deficits than is the United States. If it were one country, there might be articles about depressed regions, but not talk of collapse."



  • Silvio Berlusconi withdrawal from the national elections next spring might create a complete reshuffle of Italian politics as the right seemed to have been an aggregation of diverse party glued together by the polarizing leader, while the left is embroiled in a conflict between the young mayor of Florence and the current, older, party leader.

Wednesday, October 10, 2012

Behavioral econ and voting behavior

As a quick side-note to the previous post, I was told that I seem to really like Woodford's theory paper and that I should work on it. That's probably true. One thing that is fascinating in politics and how people vote is the importance of party labels. There are two main papers on this, that used the incidence of partisan and nonpartisan elections in the judiciary: how do voting patterns change between two comparable elections where only one o them has candidates explicitly linked to parties?

Squire and Smith use 1982 California sate supreme court confirmation contests and rely on survey data where the sample was split between people who were told the partisan affiliation of a candidate, and those who were not. Conclusion:

Partisan information increases the probability of an individual holding an opinion on the
elections, and results in votes which are based on the respondent's partisan identification and
opinion of the governor who appointed the justice. 

Snyder and Lim, more recently, have strong findings. The sad news:
we find that incumbent judges' quality has little effect on their vote share or probability of winning in partisan general elections...
we fi nd that voting is highly partisan in partisan judicial elections -- i.e., there is a strong correlation between the Democratic "normal vote" and the Democratic vote share for judges --but not in non-partisan or retention elections.

The nice thing with Woodford's paper is that the cognitive constraint explains the decoy effect. Consider the example of Huber et al. two goods that differ on price an quality, one is low price-low quality and one is high price-high quality. In the Figure below, those are the "Competitor" and "Target" goods. Each good dominates the other on one dimension. Let's assume for our example that the Target good is the high-quality high-price one. You can look at the choice people make based on this choice set.
Now, consider a new choice set where you introduce a good with intermediate quality (dimension 2) and higher price (dimension 1) than both goods. This is the shaded area in the picture. You can see that introducing this Decoy makes the choice still hard between the Decoy and the Competitor, but the choice between the Decoy and the Target is easy: the Target is the best product on both dimensions. The fact that the comparison is easy leads to the Target product being selected more often than initially.

Partisan labels are useful because they provide an easy dimension of comparison between the two candidates. One extra problem is that the interpretation of party labels is not clear. But that's a question for another time...

Resources for predictions of the US 2012 presidential elections

This post will be updated, but here are the links:



Tuesday, October 9, 2012

The future of behavioral econ and the importance of initial choices

I attended an interesting lecture by Sendhil Mullainhatan on the behavioral economics of poverty this morning, and I wanted to write something that came to my mind when listening to the first part of his talk, which was more about the philosophy of testing - and trying to solve for - behavioral biases in the field.

It seemed to me that there were two problems. First, it is hard to compare welfare before and after the experiment. If the problem at stake is about the take-up of HIV medication, then using a treatment increasing the take-up rate is probably indisputably an improvement. But other interventions, say on savings behavior, or less clear-cut.

The second problem is about the intervention itself. Mullainhatan discussed an experiment where he and some colleagues were just sending reminders to save money for the future purchase of fertilizer. The reminders "worked", in that the purchase of fertilizer increased. But what was the reminder actually doing? What behavioral bias did it solve? Was the problem actually a behavioral problem?

In any case, the thing I wanted to discuss was that the main issue with behavioral econ right now seems to be the unlimited number of biases that have been tested and proven. Have fun. So we don't really know what we're doing.

So let's say we choose the biases we want to study. We might then be entering into Hughes' theory of technology:
the technologies we end up using aren’t determined by any objective measure of quality. In fact, the tools we choose are often deeply flawed. They just happened to meet our particular social needs at a particular time and then became embedded in our culture.


If you think of the cars story, we're stuck today in an equilibrium with plenty of gasoline refueling station and people have cars working on gasoline, but for instance it would make a lot of sense to change that to have more cars, and more stations for natural gas, that function the same way, have a far lower energy-equivalent impact on greenhouse gas emissions, and is now far cheaper at least in the US.  Here's James Hamilton quoting Christopher Knittel:
Large-scale adoption of natural gas vehicles requires coordination between vehicle manufacturers, consumers, and refueling stations-- either existing gasoline stations or replacements. This creates a chicken-and- egg problem, or a network externality issue. 

I was thinking about this more generally because as Sendhil mentioned, there are a lot of theories we can test in behavioral. The first choice of what we choose to test might be important...

As a last point, one thing that might help us solve the problem is going one step back and look for models of thought process that will help us understand all those biases. This is what I feel Mike Woodford has been trying to do in an amazing paper that everybody should read. The simple idea is that people make choices not under a budget constraint, but under a cognitive constraint. With a budget/monetary constraint, you have to make choices between goods, say. With a cognitive constraint, you have to make choices about the precision of the information you're collecting. For instance, is it worth it to be able to distinguish between two different shades of blue? Is it worth it to make a distinction between two interest rates a couple of basis points apart? Generally, for instance, you discretize any continuous variable. You can also think of how you interpret probabilities. Certainty is easy to understand, but distinguishing 65% and 55% is pretty hard.
Models of rational inattention, or Xavier Gabaix'"sparsity-based model of bounded rationality" can also generate a list of behavioral biases that could provide a more general approach. Importantly, Mullainhatan concluded his talk on the impact of scarcity on what we choose to focus on, which is quite consistent with the three models mentioned above.

Monday, October 8, 2012

Questions to Glenn Hubbard, question to Jeffrey Liebman

I've been asked casually to list a set of questions for Glenn Hubbard and Jeffrey Liebman, economic advisors to Romney and Obama respectively,  for the Presidential Economic Advisers Forum 2012

It turns out that I had a lot of questions for Glenn Hubbard because I'm biased. Here's what I jolted quickly in full:
Hey Glenn,
There's the max level of deductions that Romney mentioned,  as a way to fund his tax cuts. The  First time he proposed it it was $17000. At the debate, it was “One way, for instance, would be to have a single number. Make up a number, $25,000, $50,000. Anybody can have deductions up to that amount.”. Any idea what the number would be? Should it be a single number, or be progressive? Do you believe in redistribution, by the way? 
You said in your WSJ editorial in August. that "The governor would also reduce the corporate income tax rate—the highest in the world—to 25%. In addition, he would broaden the tax base to ensure that tax reform is revenue-neutral." In your FT editorial last month, you say the same: "The GOP candidate would reform the corporate and individual income taxes, reducing marginal tax rates by just under one-third for the corporate tax and by 20 per cent for the individual income tax, while broadening the tax base to make up lost revenue."
You do not say that it won't increase taxes on middle class families, which is the third pillar of the trilemma the TPC has mentioned. Given the deduction cap of $17000, middle income families (above $64,000) will see tax increases. So now, we know what gives on the trilemma, right?
In your paper with Mankiw, Taylor and Hasset, and in another WSJ editorial, you say that Bordo's research found that financial crisis in the US had faster recoveries than today. How do you interpret his disagreement with your interpretation of his research? "“This recession is really quite different,” Bordo said. But he didn't see government policy as the obvious cause. “We found that a lot of the difference between what would've been predicted by the normal behavior of recessions and what we observed now is explained by the collapse of residential investment. Put another way, if residential investment were what it was in a normal recovery, we would have recovered already.”"
In your paper with Mankiw, Taylor and Hasset, you say that some empirical studies have found that the stimulus had a negative impact. However, the only ones we can find are Taylor's paper (which is one of you co-author, hey) and Conley and Dupor,. You cite Mian and Sufi, but they only considered Cash for Clunkers, and in Sufi's own words,  “I strongly believe the evidence shows these private debt overhangs are always longer, the recoveries always slower,”
So we're back to Housing. Mr Hubbard.Should we allow a huge refinance program that would "be the equivalent of a huge tax cut", as you proposed last year?  Stiglitz and Zandi advocated the same thing in August. In your jobs plan for the campaign, you seem disappointed in Obama's housing policies that you describe as "myriad housing programs that went nowhere". We haven't heard Mr Romney's housing policy except about reforming Fannie and Freddie ("End "Too-Big-To-Fail" And Reform Fannie Mae And Freddie Mac. The Romney-Ryan plan will completely end "too-big-to-fail" by reforming the GSEs. The four years since taxpayers took over Fannie Mae and Freddie Mac, spending $140 billion in the process, is too long to wait for reform. Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country."), a section that has been widely 
criticized for mixing various issues, like "too big to fail" and GSEs. So are we going to have a refinancing plan? Because that's where you could kill Obama. 
By the way, Obama economic advisor:
WHAT ABOUT HOUSING? Here are the two pieces I would use: Binyamin Applebaum in August and Zach Goldfarb last year. More precisely, you should look at Amir Sufi's column and paper (mentioned above), who advocates for a big principal writedown program but acknowledges the issue of strategic mortgage modification. So where's Obama going?  


So I have fewer questions for Jeffrey Liebman because I started with Hubbard and also because I'm biased.

On the redefinition of winning

Yesterday I posted about redefining words like "winning" and "specifics". So this quote from this morning NYT is quite timely (emphasis mine):
Mr. Obama’s advisers were so off balance that they did not show up in the media filing center for the traditional post-debate spin until long after the Republicans. But they were relieved that at least there was no single memorable moment to be used against Mr. Obama in an ad. And they took some solace from focus groups showing that he broke even with Mr. Romney on substance even if he lost over all.
Seriously.

See also Ezra Klein's reading of the debate here, with the conclusion:
I also don’t think he won by lying. This is a meme that’s cropped up over the last week, and while Romney did tell a few whoppers — that his plan covers preexisting conditions and that half of the green energy investments made in the stimulus have failed — he mostly danced around the ambiguities in his policies in a way that appeared to confound Obama. Indeed, while Obama’s policies are much more specific than Romney’s, Romney’s performance was much more specific than Obama’s. You saw this in the closing statements, where Obama ended with gauzy generalities and Romney closed by ticking off concrete policy promises.

The role of market beliefs in the European crisis and its policy implications.

Anne Laure Delatte discusses the results of a new OFCE report explaining the role of market beliefs/feelings in the European crisis. Her conclusion has 2 points: first, for the same economic situation, the spread between PIIGS countries and Germany changed depending on "market feeling". Second, and interestingly I think, she suggests that the impact starts on the CDS market.


Nos estimations confirment cette hypothèse pour un panel constitué de la Grèce, l’Irlande, l’Italie, l’Espagne et le  Portugal: sans une modification notable de la situation économique, les écarts de taux d’intérêt ont augmenté soudainement à la suite d’un changement dans les croyances de marché.
La question suivante est de savoir où se forment ces croyances du marché. Nous avons testé plusieurs hypothèses.  Finalement le marché des Credit Default Swaps (CDSs) joue ce rôle de catalyseur des sentiments de marché.


However, she proceeds to make a criticism of naked CDS that seem way too simplistic, saying that because most traders on the CDS market do not own the underlying bond of the CDS they're playing with, they should be defined as speculators.
Toutefois, rapidement, le produit d’assurance est devenu un instrument de spéculation : une grande majorité des opérateurs qui achètent des CDS ne sont pas propriétaires d’une obligation associée:
Because of this, she suggests that one policy implication is to forbid the buying of CDS by agents who do not own the underlying bond (a law banning those transactions will be in place starting in November).

However, it is not really clear that only sovereign bond holders are the only one who suffer from a sovereign default. For instance, we can look at this good op-ed by Turnbull and Wakeman recently in the WSJ
The premise that only sovereign-debt holders suffer when a country defaults is false. Many other agents are adversely affected by a default, and they should be allowed to purchase sovereign CDS.


 So again, the findings of the OFCE report are interesting, but the interpretation, and thus the policy implications that Delatte derives from it, might not be correct. However, her second policy proposal, that the CDS market would benefit from a clearing house instead of taking place over the counter, seems completely sensible to me.

Saturday, October 6, 2012

Truthiness and redefining words.

Speaking about the debates, one thing that puzzled me was the apparent redefinition of two words: "winning", and "specifics"


  • On "specifics", Rob Portman, who plays Barack Obama's in Mitt Romney's debate preps, stated somethign that has puzzled me for a while in the last couple of months: "he's offering specifics, he's offering a way forward. It's a 12-million job gain, by the way. Over the next ten years, the tax plan alone will gain 7 million jobs, because it's pro-growth." Now, yeah, specifics can be about the outcome of your policies. But it seems to me that in this context, "specifics" are about what the tax plan will be, not about the outcome. One specific (ah) reason being that you control the tax plan, you don't know what the effect will be. Also, I can say that my plan is a 12.2-million job gain and that's more specific. Also, that's better.
  • On  "winning": let's remember the infamous CNN segment after Paul Ryan's convention speech:

WOLF BLITZER, CNN ANCHOR: ...He delivered a powerful speech. Erin, a powerful speech. Although I marked at least seven or eight points that I'm sure the fact checkers will have some opportunities to dispute if they want to go forward, I'm sure they will. But as far as Mitt Romney's campaign is concerned, Paul Ryan certainly on this night delivered. 
ERIN BURNETT, CNN ANCHOR: That's right. Certainly so. I mean, obviously, we were jotting down points. There will be some issues there with some of the facts. But it motivated people. And he is a man who said I care deeply about every single word. I want to do a good job. And he did deliver on that. Precise, clear, and passionate. 
After the debate, where Romney was clearly better in is confidence and attitude, the debate was considered "won" by the Republican. But I'm pretty sure that a debate is won when you have the correct arguments. And by that count, I have no idea how Romney could have won. Related: Ezra Klein had a great piece on how the vagueness of Romney's position was useful for him.


Welfare reducing presidential debate

Watching the presidential debate on Wednesday, I was wondering whether debates might hurt the quality of voters' information because of "information crowding-out". People know that there is a debate, that they'll be able to learn information from the debate, and more importantly, that a lot of people are watching it.

Why would debate be more desirable than news pieces on CNN, in the NYT or on Wonkblog? Debates are a good focus point. If we believe the evidence on how opinions about debates are forming (i.e. that what matters is post-debate analysis by friends or TV channels), then we see that there is a "common value" component that make the debate more desirable as a source of information than newspaper articles or blog posts that you can't make sure people are reading at the same time as you are. There are multiple reasons why this can happen, say, social learning.

Now, I think it's also possible to say that debates are not the best source of information. The sources of information are biased and have an interest in manipulating their messages. Moreover, as we saw, the format has been quite restrictive if you look at all the issues that haven't been talked about: no talk about immigration, abortion, climate change, ...

The last piece of the puzzle is to say that watching the debate "prevents" you from getting other sources of news. Basically, you have other things you do. So you choose how much time you allocate to information. If you use up this time by watching the debate, that makes sense (second paragraph) but that's probably not good overall (third paragraph).