Friday, June 26, 2015

More Greek Notes

perhaps Greece should be printing some notes this weekend...

Recently, Christian Odendahl had a sensible take on what should be done in Greece, but reasonable advice from economists is being overtaken by politics and events.  Catherine Rampell:
Greeks are hoarding cash and sending their savings abroad; by a conservative estimate, Greek bank deposits have fallen by about 45 percent since their peak in 2009. Recent talk of capital controls and bank closures has only accelerated this bank run (or, as some have dubbed it, a “bank jog”), making the banking sector weaker, and, by the day, even more in need of European assistance. Last week alone, Greeks withdrew an estimated 4 billion euros. For those keeping track, that’s two-and-a-half times what the country owes the IMF at the end of the month. 
Karl Whelan discusses the connection between a Greek government default, the ECB and a euro exit -- in theory, the ECB could help Greece stay in the euro even if the government defaults, but it doesn't appear inclined to.  Ultimately, if the euro is to avoid similar crises in the future, it needs to be robust to a sovereign default.

Reports over the deal terms being discussed are hardly encouraging.  Wonkblog's Matt O'Brien writes:
Europe is making life so difficult for Greece with such specific demands for austerity that it almost seems like Europe is trying to get Greece to leave the euro now. Before this latest showdown, Greece had actually cut so much that it had a budget surplus before interest payments...

But Europe isn't interested in that. It's interested in making Greece run bigger and bigger budget surpluses, without much regard for the economic consequences. Not only that, but Greece has to run surpluses the way Europe wants them to. Never mind that Greece has already cut its spending a lot, already cut its pensions a lot, and already reformed its labor markets a lot. There are always new cuts and new reforms that Europe says will make Greece grow at some point in the future.

If this is how it's going to be, why should Greece stay in the euro? It sure seems like Europe is trying to force Syriza to do what Syriza said it wouldn't just to prove a point: don't underestimate the power of the ECB. It's a not-so-subtle message to the anti-austerity parties in Spain and Portugal that they have nothing to gain and everything to lose from challenging the budget-cutting status quo.
Although its the EU that deserves most of the blame, the IMF's role has been controversial, too: see this Politico article and this Ambrose Evans-Pritchard column.  At the IMF's blog chief economist Olivier Blanchard explains what the IMF believes a "credible deal" requires.

See also: James Galbraith on "reform", and Branko Milanovic on what this means for Europe.

Update (6/29): The Greek government has called a referendum and imposed capital controls.  See Eichengreen, Krugman and Stiglitz (and Tony Yates for a take somewhat more critical of the Greek government) Charles Wyplosz on the ECBFrancisco Saraceno and Matt Yglesias on the politics, and Hugo Dixon on how the referendum may play out.

Thursday, May 21, 2015

A Theory of Production

Economists often use the word "technology" to mean the relationship between output and factors of production such as capital and labor.  The Cobb-Douglas production function, which is a ubiquitous description of technology has its origin in a 1928 AER article, "A Theory of Production," by Charles Cobb and Paul Douglas.

Using C to denote capital, L for labor and P for production, the production function makes its first appearance:
Although the description of technology is a theoretical contribution, much of the article is empirical in nature, as they construct indexes of capital and labor in order to test their model.  They compare the production implied by their function and estimates of capital and labor, P', with a measure of actual production.
To a contemporary macroeconomist reader, the striking thing about the article is the extent to which it anticipates how we analyze business cycles today.  Cobb and Douglas, separate out cyclical and trend components (using 3 year moving averages) and show that the deviations of actual production and the production implied by changes in capital and labor are procyclical.
The article includes a chronology of business cycles which aligns with the NBER chronology; the NBER recessions during this period are
  • June 1899 - Dec. 1900
  • Sept. 1902 - Aug. 1904
  • May 1907 - June 1908
  • Jan. 1910 - Jan. 1912
  • Jan. 1913 - Dec. 1914
  • Aug. 1918 - Mar. 1919
  • Jan. 1920 - July 1921
Cobb and Douglas' estimates are annual, but several of these do line up with points where P' (implied production) exceeds actual production, P.

Today these deviations of actual output from the amount implied by changes in factors of production are known as "Solow residuals" after work by Robert Solow in the 1950s and interpreted as measures of technological progress (i.e., our ability to wring more output out of given amounts of capital and labor).  Although Solow was mainly concerned with long-run growth trends, in the 1980's, Real Business Cycle theorists interpreted short-run fluctuations as "technology shocks".  In Real Business Cycle models these shocks drive economic fluctuations, and the same pattern identified by Cobb and Douglas - using postwar data and newer detrending techniques - was cited in support of this theory.  One weakness of this argument is that short run movements in the Solow residual are at least partly due to utilization - "factor hoarding" - rather than changes in technology.  This, too, was anticipated by Cobb and Douglas:
The index does not of course measure the short-time fluctuations in the amount of capital used.  Thus, no allowance is made for the capital which is allowed to be idle during periods of business depression nor for the greater than normal intensity of use int he form of second shifts etc., which characterizes the periods of prospertity.
Overall, this article would fit very well into a syllabus for a current course on business cycle theory.  Hmm...

Monday, May 4, 2015

Greek Notes

A key point about "bailouts" - we say that a borrower got rescued, but the real beneficiary is usually the original creditors.  In the case of Greece, Ashoka Mody reminds us, Europe and the IMF got German and French banks off the hook:
Greece's onerous obligations to the IMF, the European Central Bank and European governments can be traced back to April 2010, when they made a fateful mistake. Instead of allowing Greece to default on its insurmountable debts to private creditors, they chose to lend it the money to pay in full.

At the time, many called for immediately restructuring privately held debt, thus imposing losses on the banks and investors who had lent money to Greece. Among them were several members of the IMF’s board and Karl Otto Pohl, a former president of the Bundesbank and a key architect of the euro. The IMF and European authorities responded that restructuring would cause global financial mayhem. As Pohl candidly noted, that was merely a cover for bailing out German and French banks, which had been among the largest enablers of Greek profligacy.

Ultimately, the authorities' approach merely replaced one problem with another: IMF and official European loans were used to repay private creditors. Thus, despite a belated restructuring in 2012, Greece's obligations remain unbearable -- only now they are owed almost entirely to official creditors.
This complicates the politics: the citizenry of Europe feels that Greece has already gotten a rescue at their expense, and now any restructuring is a hit to government finances (including to those of the US, as the largest shareholder of the IMF).  But since the debt has been transferred from the private to the official sector, it is tempting to believe that a Greek default - and an exit from the euro - are less likely to spark a financial crisis (though I wouldn't be so sure about this; people thought markets were "prepared" for Lehman's bankruptcy after all...).

The Greek government's handling of the situation has been less than smooth - I'm not sure what to make of the complaints about their negotiating style, but raising old war reparations claims and playing footsie with Putin do not seem like constructive steps.  Still, the fundamental position articulated by Greek finance minister Varoufakis in this Project Syndicate piece seems very reasonable (much more so than that of the EU finance ministers sniping at him).

As Paul Krugman wrote last week:
[E]xiting the euro would be extremely costly and disruptive in Greece, and would pose huge political and financial risks for the rest of Europe. It’s therefore something to be avoided if there’s a halfway decent alternative. And there is, or should be....

The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope.

But right now that deal doesn’t seem to be coming together...
And as Antonio Fatas points out:
What the European partners want is much less clear. They would love to get paid back on all the current Greek government debt that they hold but that's unlikely to happen. Some would love to see Greece outside of the Euro area so that they do not have to deal with this again. There is a sense that whatever agreement is found now will not be the last one. The lack of trust has reached levels that has made it clear to some that Grexit is the best long-term outcome. But they are afraid of the consequences, both in the short run and in the long run in terms of credibility of the membership that would be left after Greece was gone. 
This will be a test of the wisdom and statesmanship of Europe's leaders; Roger Cohen reminds us why - despite how lousy it looks at the moment - the European project is worth saving.  Things look set down to go down to the wire: the Greek government is scrounging all the euros out of its couch cushions but at some point it will miss a payment, which will force some difficult decisions.  Here's hoping Angela Merkel, Mario Draghi et al. rise to the occasion.

Update (5/5): The FT's Gideon Rachman makes a case for Grexit.

Saturday, May 2, 2015

TPP and Developing Countries

One of the claims about the Trans-Pacific Partnership (TPP) agreement is that it will benefit developing countries.  At Vox, Dylan Matthews spoke with Kimberly Ann Elliot of the Center for Global Development about how it will affect Vietnam, which has the lowest income among the countries negotiating the treaty.

Their discussion highlights a number of broader issues which arise with these regional (or "preferential") trade agreements:
  • Trade diversion: part of the perceived benefit for Vietnam would be that its exports would get more favorable treatment than those of other developing countries, like Cambodia, that are not members of the TPP.  This is not necessarily a gain in terms of overall economic efficiency.
  • Preference erosion: once countries in an agreement have preferential treatment for their exports, they may resist multilateral reductions in trade barriers with bigger global benefits (i.e., agreements through the WTO), because that would reduce their advantage relative to nonmembers.
  • Rules of origin: in an age of multinational production chains, defining whether a good exported from a particular country is eligible for preferential treatment is less than straightforward. Rules of origin (ROOs) are meant to prevent trans-shipment, e.g., bringing Chinese goods to the US through Vietnam, but doing so creates a great deal of complexity in these agreements as questions like how should a shirt made in Vietnam of Indian cloth be treated need to be hammered out.
Overall, this is a further reminder that assessing the economics of these agreements is much more complex than simply applying our findings about the gains from trade.

Wednesday, April 29, 2015


From the BEA, a disappointing first estimate of first quarter GDP: they have the annualized growth rate at a mere 0.2%.

Consumption, the largest part of GDP, was a bit stronger at 1.9%, but government purchases were a drag, falling at a -0.8% rate.  The strong dollar helped reduce net exports; exports fell at a 7.2% rate.  Another worrying note is that there was a substantial positive contribution from inventories - while this adds to GDP, it also means a greater stock of unsold goods which could lead firms to cut back production in the future. 

This isn't the first time in recent memory that first quarter GDP has seemed weak.  As Justin Wolfers notes, it seems like something may be off with the seasonal adjustment (i.e., the government attempts to take out the normal seasonal patterns, like the decline in retail after the holidays).  While the seasonal adjustment should take into account typical effects of weather, White House economic advisor Jason Furman notes that this winter was harsher than usual.

Another major indicator of economic activity is growth in payrolls, which averaged a reasonably healthy 197,000 during the first three months of the year.  So I don't think the GDP estimate - which is, as always, subject to substantial revision anyway - is cause for panic, but it is a cautionary signal to the Fed as it contemplates when to start raising the federal funds rate target.

Thursday, April 23, 2015

Noah Smith's PhD Advice

Noah Smith's latest Bloomberg column about the pros and cons of going for a PhD is a worthwhile corrective to the increasing tendency to assume "more education is better."  He concludes:
So make no mistake: graduate school is no picnic. Yes, there are modest financial rewards. But unless you’re one of those people who absolutely loves being a scholar, you’re probably going to pay heavy costs in terms of your lifestyle and mental state. These are things I wish I had known about before I did my own Ph.D. Think twice before jumping on the grad school train.
I think "modest" may overstate the financial rewards.  Conditions vary widely by discipline, so its hard to generalize.  My own advice - tailored to economics - is here.

Wednesday, April 22, 2015

Economics Needs More Women

that's the headline on this Wesleying post by econ major Kerry Nix '16 (and in the post there is a link to a longer report that is well worth reading).

First of all: yes.

Overall, as the report notes, about 25-30-ish percent of Economics students at Wesleyan are female; this is pretty consistent with national averages.  So, its not just us, but that doesn't mean that we can't do some things locally.

My colleagues are an extraordinarily conscientious group of people and I have no doubt that this will get careful consideration.  In the meantime, however, here are a few scattered thoughts on some of the issues raised:

There is quite a bit of concern about whether the atmosphere in classrooms with a relatively large number of students and a lopsided gender ratio is particularly off-putting to women.  I think this is plausible, though this is one of several concerns where it might be helpful to have some survey research to back up (or not!) our anecdotal impressions. 

Many of our classes rely primarily on lecture-based pedagogy; there are some suggestions in the report that other approaches - e.g., in-class problem-solving or inverted classrooms - might be more appealing to female students.

In this regard, at present, I think the situation at Wesleyan is that we're very constrained by class size: our enrollments (and majors) per FTE are among the highest in the university.  While the size of the department has increased slightly, it hasn't remotely kept up with the growth in enrollments.  What that means is that our sections of Econ 110 (our intro class for majors) typically have 40-50 students; sections of the lower-level electives and the core intermediate sequence for majors have enrollment caps of 35 (and are very often at or near this cap); it is only the upper-level electives that could be considered "small," and even these have 25 students per class.  While these numbers don't seem high in the universe of American higher education overall, this is in the context of an institution where 72% of class sections have an enrollment of 19 or fewer and where many of the incoming students have chosen a liberal arts college with the expectation of small classes.

In a large class, it will be inherently less comfortable for most to participate and ask questions and the report suggests this might disproportionately affect female students (though I think it's a concern for everyone).  As instructors, it also limits our pedagogy, and the preponderance of lecturing in economics is partly a reflection of our class sizes.  I have been able to integrate some in-class problem solving in Econ 270 (a lower-level international economics elective) and Econ 110.  In Econ 302 (the core macroeconomics course), I experimented with an inverted classroom in the fall; I think it went quite well, but I happened to have a section with a smaller enrollment - I doubt it will be as successful when (if) I have a more typical enrollment of 35.

Another issue raised is the mathematical intensity of our curriculum and how this might interact with lower levels of mathematical confidence in female students.  As a factual matter, I don't think a confidence differential is warranted; there's no lack of math ability in the women coming into our classes - this is true both relative to men and in an absolute sense.  However, I suppose stereotypes that mathematical stuff is "hard" and "softer" topics are better suited to women are deeply embedded in the broader culture - hopefully fading over time, but not quickly enough.  Overall, I believe the mathematical rigor of our program is a strong suit - Wesleyan is very unusual in utilizing calculus from the outset (Econ 110).  One of the most valuable things that students take away from studying economics is the habits of mind - i.e., a particular type of critical thinking - that come from the discipline imposed by thinking in terms of models, expressed and manipulated in mathematical language.  Moreover, economics as it is practiced is a very mathematical discipline - while some may not like this (and I was a very math-averse economics undergraduate myself at one point) - I think our introductory class more honestly represents what studying economics involves than the more typical style of university "principles" courses which try to minimize using math.

Relatedly, the report discusses concerns about relevance -
Caroline finds disconnectedness between Econ and the real world, saying “it does seem like just learning how to crunch numbers right now, but I think learning...what sort of policy differences you could make if you learned about Econ, and I think that would encourage more people to take Econ.”
I'm not sure this is gender-specific; as an instructor, I need to guide my students through the theory - this is, for most, the hardest part, and where they most need the help of a professor (one of the reasons I majored in economics was that I perceived I needed this as a student).  We're time-constrained in class, but I've tried to use reading assignments to enhance students' sense of how the theory applies.  Over the course of the curriculum, the students learn about how we test theory against data and develop an understanding of how we choose which models (and therefore what simplifications) are appropriate under alternative circumstances.  But this all rests on groundwork we build in the introductory class and I think it is worth thinking about whether there might be changes we could make in its structure that could address some of these concerns.

The report also mentions grades, citing Claudia Goldin's research that women are more likely then men to be put off further study by low grades in introductory classes (summarized in this Washington Post column by Catherine Rampell, which I discussed in an recent post).  Economics does have one of the lowest grade point averages at Wesleyan - our grades are inflated, but less so than those in most other departments.  I think this is a serious issue - this effort at Wellesley to impose common grading standards demonstrated how much grading differentials across departments distort students' choices.  To the extent that women's choices are more affected then men's, grade inflation is a gender equity issue.  However, I think the culprit is not the economics department, but others where the grade inflation has gotten out of control (which I think is an unsurprising symptom of the reliance on student evaluations in promotion and tenure).

Another issue raised by the report is whether men are more likely to be attracted to economics because they believe it suits their vocational goals.  The misperception that an economics major is a proxy for studying business or finance runs deep.  I should write more about this sometime; for now, I'll simply say that this reflects a fundamentally incorrect view of what economics is about.  To the extent that this is disproportionately bringing more male students into economics, they're coming for the wrong reasons and the implication would be that "economics needs fewer men."

There's quite a bit more in the report that is worth thinking about.  Some of the issues are fundamentally about student culture - Wesleyan students seem to mostly be pretty good at maintaining their culture and supporting each other, so I am optimistic that the students can make progress, as well as the faculty.

Tuesday, March 31, 2015

Minimum Wages and Economics

Tim Harford writes on the minimum wage:
The UK minimum wage took effect 16 years ago this week, on April 1 1999. As with the Equal Pay Act, economically literate commentators feared trouble, and for much the same reason: the minimum wage would destroy jobs and harm those it was intended to help. We would face the tragic situation of employers who would only wish to hire at a low wage, workers who would rather have poorly paid work than no work at all, and the government outlawing the whole affair.

And yet, the minimum wage does not seem to have destroyed many jobs — or at least, not in a way that can be discerned by slicing up the aggregate data. (One exception: there is some evidence that in care homes, where large numbers of people are paid the minimum wage, employment has been dented.)

The general trend seems a puzzling suspension of the law of supply and demand. One explanation of the puzzle is that higher wages may attract more committed workers, with higher morale, better attendance and lower turnover. On this view, the minimum wage pushed employers into doing something they might have been wise to do anyway. To the extent that it imposed net costs on employers, they were small enough to make little difference to their appetite for hiring.

An alternative response is that the data are noisy and don’t tell us much, so we should stick to basic economic reasoning. But do we give the data a fair hearing?
At its best, economics is a fruitful dialogue between theory and empirical (data) work.  All economic models are, by nature, simplifications.  One of the judgments we have to make is whether some of the simplifcations we've made are inappropriate.  Testing our models against the data helps us do that.

The first tool an economist will reach for in trying to analyze a market is supply and demand; in that context, a minimum wage is a price floor, which creates an excess supply of labor (i.e., unemployment):
(the equilibrium wage and quantity of labor are labelled with superscript e's, and the m's mark the minimum wage and corresponding amount of labor).

We like supply and demand because it is simple and works well in many context; but the labor market is one case where its simplicity can lead us astray.  As Paul Krugman recently put it:
[B]ecause workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.
Indeed, some empirical research has demonstrated that minimum wages do not have the effects implied by the supply and demand framework.  This NYT Magazine piece by Annie Lowrey summarized David Card and Alan Krueger's classic paper on the subject and some of the subsequent dispute.

Economic News on TV

A nice bit of parody, "Every TV News Report on the Economy in One"

Monday, March 30, 2015

STEM versus Liberal Education?

In a Washington Post column headlined "Why America's Obsession with STEM Education is Dangerous," Fareed Zakaria writes:
This dismissal of broad-based learning, however, comes from a fundamental misreading of the facts — and puts America on a dangerously narrow path for the future. The United States has led the world in economic dynamism, innovation and entrepreneurship thanks to exactly the kind of teaching we are now told to defenestrate. A broad general education helps foster critical thinking and creativity. Exposure to a variety of fields produces synergy and cross fertilization. Yes, science and technology are crucial components of this education, but so are English and philosophy. When unveiling a new edition of the iPad, Steve Jobs explained that “it’s in Apple’s DNA that technology alone is not enough — that it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our hearts sing.” 
There is much to agree with in the case he makes for liberal education, but the way he (and the Post's headline writers) frame it is problematic.  We don't face a tension between science, engineering and mathematics and liberal education; science and mathematics are part of liberal education, and engineering should be too.

Zakaria is right that liberal education is concerned with "critical thinking and creativity."  To be effectual, these require a set of intellectual tools to understand the world around us.  Liberal education as it is practiced does fairly well through the humanities and social sciences of expanding students' capacities to think about the human and social world.  But the social world is shaped by the physical and biological, the mechanical and computational.  And here I worry we aren't doing such a good job - we seem too ready to declare that we're not "math people" (and, it mostly follows from this, not science or engineering people).  Doing so early in a child's academic life means that they will later find many areas closed off to them.  At the college level, we accommodate this with science for non-scientist courses - every college has its "physics for poets" and "rocks for jocks."   Some of them are likely fantastic classes, but there is a worrying asymmetry - we don't seem to feel a need to offer "poetry for physicists" or "social theory for biologists".  To some extent, this reflects what we're given - too many of our incoming students have already "tracked" away from serious studies in math and science (or turned off to them).  But it raises a question of the seriousness of our commitment to science and math as a real part of liberal education.

The importance of science and math in liberal education is not just in knowing "stuff," or "how stuff works" - though I think knowing stuff, and how it works, is often underrated - but in learning other modes of thought which can extend our mental capacities and give us another perspective.

While Zakaria picked up on our current STEM-mania (much of which is misguided, even on its own terms), and his column's headline puts science and liberal arts in a false opposition, his real target - a narrow vocationalism - is a valid one.  Economic insecurity and the wage premium for college graduates have helped entrench the belief that a college degree is some sort of golden ticket. This is a far too circumscribed view: a good education should enhance one's working life (regardless of how remunerative) - but it should also enrich our lives as citizens and people.  That is, it should help us, as Keynes put it, to "live wisely, agreeably and well."  We would be better able to do this if we took science and math education a little more seriously.

Update (3/31): At, Union College's Chad Orzel has a nice response - "science is essentially human" - to Zakaria's piece.