Giffen goods, illustrated

The first real-world evidence, according to the authors (pdf).

This paper provides the first real-world evidence of Giffen behavior, i.e., upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, we find strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu. The data provide new insight into the consumption behavior of the poor, who act as though maximizing utility subject to subsistence concerns. We find that their elasticity of demand depends significantly, and nonlinearly, on the severity of their poverty. Understanding this heterogeneity is important for the effective design of welfare programs for the poor.

Gains from trade and specialization, illustrated

Returns to education, illustrated

More here.

Opportunity cost, illustrated

General equilibrium, illustrated

From the Worthwhile Canadian Initiative:

Q1. What happens if they built robots that could do my job as well as I could, and those robots got cheaper and cheaper over time? My wages would have to fall so I could compete with the robots, and I would be worse off.
Q2. What happens if they built robots that could do everyone's job as well as they could, and those robots got cheaper and cheaper over time? Everyone's wages would have to fall so they could compete with the robots, and everyone would be worse off. 

Q1 is a partial equilibrium question and answer.
Q2 is a general equilibrium question and answer...

It is very easy to understand that if I stand up I can see the stage better. It is less easy, but still easy to understand, that if I stand up I will make some other people see the stage worse. It is much harder to figure out whether the losses to some other people's vision are bigger or smaller than the gains to my vision. It depends. On a lot of things. And adding up those gains and losses when each individual stands up in turn is extremely hard. Instead we have to jump to the general equilibrium experiment, where everyone stands up at once. And even then we need to make some assumptions about the distributions of people's heights, and the locations of seats in the theatre, to figure out who can see better or worse when everyone stands up. 

Trying to add up all the partial equilibrium effects in the case of robots is almost impossibly hard. Let's see. If a robot could replace me, and my wages fell, what would that do to the cost of a university education? And how would that affect prices and other people's wages? And how would the Bank of Canada react if it pushed down prices across the economy? And what about investment in robots, and the jobs created there? What would I do instead? And what would happen to profits of robot manufacturers? And the owners of robots?

Econ link list of the day

1. US debt problems? Sell Alaska.

2. The worldwide decline of manufacturing. (It just means we've been more productive in producing manufactured goods, as manifested in lower prices; note that value = pxq.)

3. Why aren't there more retractions in econ journals?

4. Links from blogs to other blogs as micro-transactions of trust.

Where to be born in 2013

In my mind this can potentially be an alternative measure of standard of living, superior to GDP. From The Economist:

Its quality-of-life index links the results of subjective life-satisfaction surveys—how happy people say they are—to objective determinants of the quality of life across countries. Being rich helps more than anything else, but it is not all that counts; things like crime, trust in public institutions and the health of family life matter too. In all, the index takes 11 statistically significant indicators into account. They are a mixed bunch: some are fixed factors, such as geography; others change only very slowly over time (demography, many social and cultural characteristics); and some factors depend on policies and the state of the world economy.

Christmas macro tunes!

Gains from trade, illustrated

Dream academic paper of the day, by Assaf Zimring. A perfect article to teach to introductory students.

Gains from Trade: Lessons from the 2007-2010 Gaza Blockade

This paper uses detailed household expenditure and firm production data to study the welfare consequences of the blockade on the Gaza Strip between 2007 and 2010. Using the West Bank as a counterfactual, I find that being removed from world markets reduced welfare by 17%-28% on average. Moreover, households with larger pre-blockade expenditure levels experienced disproportionally larger welfare losses. These effects are substantially larger than the predictions of standard trade models. I show that this discrepancy is due to a combination of resource reallocation and reduced productivity. Using firm level data I find that the blockade triggered reallocation of workers across firms and sectors, especially from manufacturing and into services, and from industries that use imported inputs intensively, or export. In addition, labor productivity fell sharply by 24%-29%. This decline was however significantly higher in manufacturing (45%) than in services (5%).

Adverse selection, illustrated

Man divorces and sues wife for ugly baby

The northern Chinese man, Jian Feng, married his wife and was reportedly absolutely in love with her. Soon, as will happen, she became pregnant and gave birth to a baby girl, which was when the problems arose for Feng. He thought the baby was incredibly ugly, to the point where it horrified him. The baby resembled neither of her parents, so Feng demanded to know who the father was, because jumping to conclusions about your wife’s faithfulness is the obvious thing to do when you have an ugly baby. 

As it turns out, his wife didn’t cheat, but did gloss over the fact that she had spent $100,000 on intense plastic surgery to severely change how she looked before she met him. It’s the kind of thing that can slip your mind on the first date. After his wife revealed this to him, Feng took the only right-minded course of action and divorced and sued her, claiming that she got him to marry her under false pretences. The false pretence presumably being that she was good looking. Incredibly, the (presumably male) judge sympathised with Feng and he won $120,000 in the case.

Comparative advantage, illustrated

On correlated variables

Repost from Econometrics by Simulation:

* If A is correlated with B and B with C, does A need to therefore be correlated with C? 

* No. 

clear 

set obs 10000 

gen A = rnormal()  

gen C = rnormal()

gen B = A+C 

corr A B C

Infographic: Dominance in the Olympics

Also, Prof. Sicat's latest column, "Sports and national development", exploring the link between economic prosperity and success in the Olympics.

Happiness and economic growth

Source:

The changing nature of the US government

Source:

I'm sure the exact assumptions behind these numbers are debateable, but the broad theme seems well-established. Back in the 1960s, about one-third of all federal spending was devoted to building up these various types of capital. Now only half that share of federal spending goes to these purposes, and the Third Way report projects that public investment spending may be headed for just 5% of all federal spending in a few decades. Conversely, entitlement spending was only about 15% of all federal spending back in the 1960s. Now it's more than half of all federal spending, and the share is rising. The main functions of what the U.S. government actually does are shifting before our eyes.

Tragedy of the commons, illustrated

Case in point: antibiotics resistance:

The problem arises, paradoxically, because antibiotics are such a miraculous medical invention that they are heavily and broadly prescribed, even for relatively minor conditions like bronchitis or ear infections, and even for virus-caused conditions like flu where antibiotics don't even work. When antibiotics are so widely used, bacteria mutate in response and build up resistance. 

"In the United States, for example, resistance to the bacterium methicillin-resistant Staphylococcus aureus (MRSA), has reached 60 percent. This means six out of 10 patients with this virulent staph infection can no longer be treated with oxacillin, a relatively low cost drug. But what still amounts to a cost problem in rich countries is becoming a serious threat to public health in the developing world: lower-income countries face a growing toll of death and morbidity from curable infections because the generally available antibiotics no longer work." 

The problems only start with infections that are resistant. Without antibiotics, almost every form of surgery lead to additional and potentially severe infections.

One obvious answer is to invent new antibiotics, but it has gotten more difficult and costly to do so... 

Many natural resources--like fisheries or forests or clean air--share the trait that if they are used in moderation, they have an ability to renew themselves and to continue. However, if they are overused, the resource can be depleted in a way that it has great difficulty in recovering. Moreover, as the "tragedy of the commons" scenario points out, every individual has an incentive to overuse a common resource, because the gains of using that resource all flow to the individual, while the social costs of overusing the resource are shared across society. This is the economic basis for arguing that natural resources need to be managed in some way: perhaps through private property rights like ownership or marketable quotas, or perhaps through more direct regulation of use, to prevent their overuse and depletion. 

The effectiveness of antibiotics fits this scenario. Each doctor and patient has an individual incentive to use a wide spectrum of antibiotics to treat any given condition. The benefits to the patient are immediate, while the potential costs of creating greater resistance to antibiotics are shared across society. The effectiveness of antibiotics is an extraordinarily important social resource, but it is being eroded by overuse. Exactly how to prevent overuse of this resource is debatable, but the need to take steps to do so is clear.

Featured paper of the day: Spam economics

"The economics of spam" (Rao, Reiley)

We estimate that American firms and consumers experience costs of almost $20 billion annually due to spam. Our figure is more conservative than the $50 billion figure often cited by other authors, and we also note that the figure would be much higher if it were not for private investment in anti-spam technology by firms, which we detail further on. Based on the work of crafty computer scientists who have infiltrated and monitored spammers' activity, we estimate that spammers and spam-advertised merchants collect gross worldwide revenues on the order of $200 million per year. Thus, the "externality ratio" of external costs to internal benefits for spam is around 100:1. In this paper, we start by describing the history of the market for spam, highlighting the strategic cat-and-mouse game between spammers and email providers. We discuss how th e market structure for spamming has evolved from a diffuse network of independent spammers running their own online stores to a highly specialized industry featuring a well-organized network of merchants, spam distributors (botnets), and spammers (or "advertisers"). We then put the spam market's externality ratio of 100 into context by comparing it to other activities with negative externalities. Lastly, we evaluate various policy proposals designed to solve the spam problem, cautioning that these proposals may err in assuming away the spammers' ability to adapt.

Coasean bargaining, illustrated

Source:

An author called Patrick Wensink ripped off the trademarked Jack Daniel’s label for the cover of a novel called Broken Piano for President, whose principal (perhaps only) interesting characteristic is that it was published by a press called Lazy Fascist. Clearly this is a conflict over the use of a property right, and the author is enjoying uncompensated benefits. One would think that, as Jack Daniel’s clearly owns the property right, the company could force the author to change the cover. Apparently, however, the transaction costs of doing that are high, so the attorney for Jack Daniel’s wrote the author a charming cease-and-desist letter that actually offered to bribe the author to change the cover right away. This is a general point, I suppose, now that I think about it: as the transaction costs rise of using official legal institutions to resolve externality conflicts, the de facto owner of the right can effectively switch, even in a world in which the transaction costs we usually talk about – those of finding and negotiating with the conflicting users of the property – remain small enough to allow Coasean bargaining.

Diminishing marginal productivity, illustrated

The limits of human physical ability. Source here.

Painting the slow US recovery with graphs

Repost from John Cochrane's blog:

1) Real GDP levels seem to have assumed a lower trajectory since 2007...

2) ...and, while it is necessary to be skeptical of trend lines in general, the above trend line is pretty solid throughout the years.

3) Here's what a recovery is supposed to look like (still, using trend lines); this shows recovery from the recession in the early 1980s...

According to John Cochrane:

You see that after the severe 1980 recession at the even more severe 1982 recession, the economy recovered to trend, by posting a few years of 6% growth. The tragedy is poorly expressed in growth rates. By 1987, the economy was back on the prior trend line. We are now 14.5% below the trendline, and each year that goes by like this we lose another half a percent. The average person in the economy is producing 14.5% less, and earning 14.5% less, than if we had followed the path following the 1982 recession.

 4) According to the Congressional Budget Office, what we're seeing now is the "new normal".

 

5) The employment picture is just as dismal:

Employment declined by about 7 million people, from 63% of the population to about 58%. And it has stayed there ever since. The "job gains" you hear about in the news are just barely keeping up with population. As we are about 14% below trend and slowly losing ground, we are 7 million jobs short and sitting there too.

 

6) Of course, linking output and employment is productivity. The graph below seems to show that output per worker has grown a lot since the 1960s and 1970s...

In the short run, capital doesn't change much, so as a rough guide you make more output when you hire more workers (or increase hours) and vice versa. So, GDP = Productivity x workers. To get more workers, we need to make a lot more GDP. The lackluster GDP growth is the other side of the terrible employment coin.

There's more in the graph. In the long run, rising productivity is behind everything good in the economy. It's what gives more income per capita. Rising productivity is the only hope for paying for entitlements and getting out of our deficit trap. It's the main hope for long-run GDP growth, after the empolyment-population ratio reverts to where it should be. Rising productivity comes from new ideas, new companies, new ways of doing business. It isn't all pleasant. Lots of incumbents lose out. Rising productivity is the core of a "growth" agenda as economists understand the word. 

 

7) Worst, zooming into the 2000s productivity data, the trajectory since 2003 is noticeably lower.

 

In sum, total real output and output per worker seem to be doomed to lower trajectories in the future, owing to the real impacts of the 2007-2008 financial crisis, and employment is hardly keeping up with the US population. The US is in for rough decades ahead (sadly, so does the rest of the world).

Infographic: Gender imbalances at the Olympics

Latest on the Big Mac Index

Meme of the day: Skeptical African kid

I just can't help it; it's becoming popular nowadays:

Government bonds since 1860

Spain has a big problem: future prospects are dim, so investors need a lot more yield to compensate for their bonds' long exposure. From The Economist:

ALTHOUGH government bonds are usually regarded as a “safe asset”, they have been highly volatile over the long term. Spanish yields may just have reached a high for the euro-area period, over 7.5% on July 24th, but they have been higher in the past—during the revolutionary period of the 1870s, the loss of colonies like Cuba and the Philippines in the 1890s, the civil war of the 1930s and, of course, the inflationary period of the 1970s. During the latter era all bond yields rose sharply, creating a fantastic buying opportunity in the early 1980s. For the last 30 years, the trend in American and German bond yields has been relentlessly downward, creating the current historic lows. No doubt some of the buyers of German and American bonds are Italian and Spanish investors fleeing their domestic markets. While such yields look a terrible bargain by historic standards, it is worth noting that low American yields persisted for a long time in the late 1940s and early 1950s before inflation started to take its toll.

Graph and link bonanza

Notable things from across the econ blogosphere:

1. Share of women in the Olympics roster:

2. Mapping the world's couch potatoes:

They found that 31% of adults do not get enough physical activity—defined as 30 minutes of moderate exercise five days a week, or 20 minutes of vigorous exercise three days a week, or some combination of the two. Women tend to get less exercise—34% are inactive, compared with 28% of men—but there are exceptions.... These figures are worrying. According to another paper in the Lancet, insufficient activity has about the same effect on life expectancy as smoking.

3. Computing and robotics stats (see link for the graphs).

4. The new economics of privacy (from Digitopoly):

“It has become cheap and easy to pry into the lives of others at the same time that protecting our own lives has become time-consuming and expensive. A look at two companies — one that sells your data and another that protects it — shows the business and policy lessons of this new reality.”

5. What are the "high-touch" professions?

There are two broad shifts that account for much of this decline: globalization and computerization. From T-shirts to toys, manufacturing jobs have migrated to low-wage countries like Vietnam, Bangladesh, and of course China. Meanwhile, many of the tasks that might have been done by middle-income Americans employed as bookkeepers or middle managers have been replaced by spreadsheets and data algorithms.

6. Cellphones as the single most effective tool for socioeconomic empowerment:

An amazing story of how a new technology has revolutionized the world and empowered individuals and transformed lives, especially in the developing countries. The simple cell phone has probably done more to reduce poverty globally and promote economic growth around the planet than all of the efforts of the World Bank.

7. A proxy for measuring "uncertainty":

 

8. The Gender Inequality Index (GII):

9. The latest on the debate about income tax progressivity:

Greg Mankiw: "That is, the middle class, having long been a net contributor to the funding of government, is now a net recipient of government largess.... I recognize that part of this change is attributable to temporary measures to deal with the deep recession. But it is noteworthy nonetheless, as other deep recessions, such as that in 1982, did not produce a similar policy response." 

Gary Becker: "I conclude that even with considerable uncertainty about how much higher taxes on higher-income individuals would reduce their work effort and their investments, the expected gain from raising these taxes is likely to be negative. The trend toward lower marginal tax rates during the past 50 years was perhaps mainly the result of interest group pressure from higher income individuals, but it also receives support from a benefit-cost analysis of the expected effects of tax increases on behavior."

10. Inequality and family structure (from Economix; this deserves a separate post soon):

An interesting pattern over the last four decades is that inequality has grown much faster for households with children than it has for households over all — an indication that changes in family structure (as opposed to wages and employment alone) have increased inequality.

 

The article shows how single parenthood has grown in the middle income third. The data, from Mr. Western and Ms. Shollenberger, can also be analyzed by fourths, as it is below.  

While the decline of two-parent families is most striking in the bottom quarter, that is a familiar story and had largely occurred by 1990. Much of the recent growth has occurred in the second-lowest quarter, sometimes called the working class. In that group, the share of households with children headed by unmarried parents has soared to nearly 40 percent and the growth has continued in recent years.... 

Changes in family structure may explain anywhere from 15 to 40 percent of the increased inequality in recent decades. Readers may wonder why there is such a broad range of estimates. It depends on the time period examined, the income rungs examined, and assumptions about how much the absent parent might have brought into the household. 

There is a lot of research showing that single parenthood puts children at a higher risk of experiencing poverty. But there is not much that examines its long-term effects on a child’s chances of moving up the income ladder.

Connecting dots in Excel

To fill in gaps in your data, just replace the empty cells with the following formula:

=NA()

And surprise, dots will be connected. No need for interpolation. This is particularly useful for making yield curves in Excel. Source of photo here.

Firefighters vs. fire: some statistics

Funny:

Electronics and growth

Particularly pertinent for the Philippines. From The Economist:

THE electronics industry accounts for two-fifths of manufacturing output in Asia, according to calculations by HSBC. So when electronics grows quickly, Asia's GDP tends to speed up too, to the tune of almost 0.2 percentage points for each full-point increase in the electronics sector. Unfortunately this correlation also applies when things slow down (see left-hand chart). And recent signs are that Asia’s electronics industry is doing just that: HSBC’s lead indicator, which gives a rough two-month preview of future production, has slowed sharply in recent months, in contrast to the latest available output figures. One bright side, given the economic woes of Europe and America, is that Asian manufacturing is no longer as closely tied to Western markets as it was. Three of the five components that comprise HSBC's lead indicator measure conditions within Asia. So when the next rebound occurs, it is likely to be home-grown.

Seasonal adjustment

Some economic trends (such as unemployment and consumption of certain goods) take on a seasonal component; i.e., the trends consistently go up or down every year in a cycle. Hence, to remove such contamination and examine the true underlying trend, such trends must be reported only after executing seasonal adjustment (overview here, in-depth guide to the actual process here).

Examples of trends that need to be seasonally adjusted, from this post on the Conversable Economist:

Datagasm: World Bank links up to Stata!

From the World Bank site:

Stata is a statistical computing package widely used in the business and academic worlds. We use it at the World Bank and it’s great to see a new version of the wbopendata module that gives Stata users direct access to much of the data on data.worldbank.org... 

It’s important to have convenient access to the best data available. The wbopendata module connects to the World Bank Open Data API and provides direct access to the latest version of the Bank’s data though the Stata interface – there’s no unnecessary downloading or management of data needed.
The new version of wbopendata lets you:

• Access 1,000 new indicators, bringing the total up from 4,200 to 5,300 time series.

• Access the metadata of the downloaded series: including indicator definitions, the organization and/or agency responsible for its collection, and links to available supporting information.

• Easily link the indicators downloaded to maps from within Stata.

• Access data in three Stata-supported languages: English, Spanish or French

The wbopendata module lets you connect to information from over 256 and regions since 1960, the accessible datasets include:

• World Development Indicators

• Global Development Finance

• The African Development Indicators

• Doing Business

• Education Statistics

• Enterprise Surveys

• Gender Statistics

• Health Nutrition and Population Statistics

• Millennium Development Goals

• Worldwide Governance Indicators

To begin, just type in Stata: 

ssc install wbopendata

Further instructions can be found here. Cannot wait to try it out!

Do anti-poverty programs raise marginal tax rates?

Yes, according to this US study. Subject to caveats:

we calculate the effective average marginal tax rate if this household increases its income from $10,000 to $40,000. That is, how much of the additional $30,000 of earnings is lost to government through direct taxes or loss of benefits? The average marginal tax rate in the first bar of Table 3, 29 percent, is based simply on federal and state direct taxes, including Social Security and the EITC. The rate rises appreciably as the family enrolls in additional transfer programs in bars 2 and 3. For a family enrolled in all the more universal non-wait-listed programs like SNAP, Medicaid, and SCHIP, the average effective marginal tax rate could be 55 percent. Enrolling the family in additional waitlisted programs, like housing assistance and TANF, ratchets the rate up above 80 percent....

Featured paper of the day: Projection bias

"Projection bias in the car and housing markets" (Busse, et al.)

Projection bias is the tendency to overpredict the degree to which one’s future tastes will resemble one’s current tastes. We test for evidence of projection bias in two of the largest and most important consumer markets – the car and housing markets. Using data for more than forty million vehicle transactions and four million housing purchases, we explore the impact of the weather on purchasing decisions. We find that the choice to purchase a convertible, a 4-wheel drive, or a vehicle that is black in color is highly dependent on the weather at the time of purchase in a way that is inconsistent with classical utility theory. Similarly, we find that the hedonic value that a swimming pool and that central air add to a house is higher when the house goes under contract in the summertime compared to the wintertime.

Graph of the day: Mining and prosperity

Point in case: Inner Mongolia and its supply of germanium. 

Unintended consequences, illustrated

Source:

In August 2010, an abuse-deterrent formulation of the widely abused prescription opioid OxyContin was introduced. The intent was to make OxyContin more difficult to solubilize or crush, thus discouraging abuse through injection and inhalation. We examined the effect of the abuse-deterrent formulation on the abuse of OxyContin and other opioids.

Of all opioids used to “get high in the past 30 days at least once," OxyContin fell from 47.4% of respondents to 30.0%, whereas heroin use nearly doubled.

Our data show that an abuse-deterrent formulation successfully reduced abuse of a specific drug but also generated an unanticipated outcome: replacement of the abuse-deterrent formulation with alternative opioid medications and heroin, a drug that may pose a much greater overall risk to public health than OxyContin. Thus, abuse-deterrent formulations may not be the “magic bullets” that many hoped they would be in solving the growing problem of opioid abuse. 

Intergenerational economic mobility

Recently this topic has interested me a lot. I wonder how many studies have looked into this aspect in the Philippines. These figures from Economix are particularly instructive:

1) In terms of income, absolute mobility looks good...

...but relative mobility is less so. If there were perfect mobility, each of the components per column in the figure below would assume the same size. However, a disproportionate amount of the poorest children stay poor as adults (in the same way a lot of the rich remain rich in adulthood).

2) As for wealth, much fewer are able to exceed their parents' wealth in absolute terms...

...and relative mobility is just as bad as with income.

"Pew’s calculations are all based on the Panel Study of Income Dynamics, or P.S.I.D., a longitudinal data set that has followed families from 1968 to the present. The wealth numbers in particular are based on parents’ wealth in 1984 versus the mean of their children’s wealth as measured in 2001, 2003, 2005, 2007 and 2009."

Contributions of Anna Schwartz

Eminent female economists are dying these days!

David Romer:

But to truly honor Anna, what you need to do is to go back to your university or wherever you work after the conference is over, and do work that’s so damn good that it changes the way we think about basic questions in macroeconomics, and that’s so damn careful and thorough that fifty years from now, it’s still the first place that people look when they want to learn about an issue that your work addresses. 

And, you’ll keep doing that work for decades. To put Anna’s research longevity in perspective, if you’re currently finishing your second year in graduate school, you’re probably about the same age that Anna was when she published her first paper. To match Anna’s research longevity, you’ll need to stay actively involved in important research until about 2080.

From City Journal:

Anna Schwartz must be the oldest active revolutionary on earth. Born in 1915 in New York, she can still be found nearly every day at her office in the National Bureau of Economic Research on Fifth Avenue, where she has been tirelessly gathering data since 1941. And as her experience proves, data can transform the world. During the 1960s, with Milton Friedman, she wrote A Monetary History of the United States, a book that forever changed our knowledge of economics and the way that governments operate. Schwartz put ten years of detective work into the project, which helped found the monetarist theory of economics. “Not only by gathering new data but by coming up with new ways to measure information, we were able to demonstrate the link between the quantity of money generated by the banks, inflation, and the business cycle,” she explains. 

Milton Friedman (himself!):

I have thought a great deal about what, if anything, I could say on the occasion of this conference that I have not already said, and there isn’t much. So I thought I would talk a bit about the problems of collaboration. That is a subject on which Anna and I both have a great deal of experience. We have collaborated with one another for over thirty years. It has been a remarkable experience, certainly on my part. During those thirty years, I do not recall any kind of personal acrimony or altercation, even though we had many differences of opinion about individual items. From my point of view, it was an almost perfect example of collaboration. Anna did all the work and I got a lot of the credit. How much more can you ask than that? That led me to think about the more general topic of collaboration, which I think is interesting, in part, because I have been very much impressed that the extent of collaboration, the number of papers in professional journals which are signed by two or three or four persons, is very sharply on the increase. I do not know why that is happening. I wish that one of you would construct a theory of the determinants of collaboration Historically, collaboration is a very rare thing in economics, especially in economic theory.... 

It has been a real joy and pleasure to collaborate with Anna over these years, because I always knew that everything she did was going to be done right. It was going to be precise, it was going to be accurate, it was going to be thoughtful. Moreover, both of us were prepared to change our views or to change what we had done or written if the other provided evidence that we were wrong or that there was a better way. In general, collaboration is a very intimate kind of thing. It only works if people have real confidence in one another, and respect one another’s integrity and one another’s competence. I certainly can say that I have been very fortunate indeed in that respect...

Contributions of Elinor Ostrom

From today's op-ed by Prof. Emmanuel de Dios:

Before Ostrom, economists were wont to divide goods casually between “private goods” and “public goods”, depending on whether goods were consumed privately, or “collectively” by groups (or even the entire society). This pat dichotomy fit into a policy mind-set that assigned the provision of goods to either markets or the state: hence, Coke and rice should be left to the market’s purview, while national defence, roads and bridges are best provided by government.

Ostrom’s great service was to show that many cases actually fell between the cracks, and that many goods and services could not be efficiently provided or managed either by government or by markets. Just think of the problems of Laguna de Ba-i, of the country’s forest cover, or of Manila’s esteros. On the other hand, there are many examples of collectively consumed goods that are provided privately, from toll expressways, to cable TV, to country clubs. In short, counter-examples abound that constantly tested the rule....

Ostrom noted that markets were good at providing private goods (subtractable and exclusive), while governments were probably best suited to providing truly public goods, i.e., non-subtractable and non-exclusive goods. Examples are defence against foreign invasion, or warding off planet-threatening asteroids, urban roads, and, yes, street-lighting. The biggest problems are presented, however, by goods that are both subtractable and non-exclusive, for which Ostrom popularised the term “common-pool resources”....

Two factors are relevant. The first is population size (hello again, RH bill!).... The second, subtler factor is institutions. Ostrom—who unlike many Nobel economists actually bothered with fieldwork—noted that many traditional communities were able to manage common-pool resource problems by thrashing out rules to govern their use. She adverts to numerous historical and contemporary experiences of communally determined fishing rights and irrigation systems, including the sanjeras of Ilocos and of the Ifugao rice terraces. Part of the awkward problems of development, however, is the inevitable erosion of the homogeneity and cultural integrity of traditional communities. This process erodes the traditional rules that formerly governed and restricted the use of the commons and it frequently leads instead to the free-for-all promoted by impersonal and individualistic systems. Say good-bye to exclusiveness and hello to open access.

While the rule of broader impersonal law is gradually supposed to supplant traditional rules, this process is not straightforward and typically stalls when the state is fiscally weak and politically challenged. Population growth and modernisation meanwhile have eroded traditional resource-management systems without providing an effective alternative. The result is an awkward institutional middle-income country trap, where the old traditional rules have faded but new laws have not taken root or are only weakly enforced. Ostrom’s work raises important and difficult questions for governments and peoples of developing countries. It presents them the challenge of developing institutions and organisations to adequately address problems of common-pool resources in a contemporary setting. 

Can the state, if only properly equipped and provisioned, still serve as such an institution? Or, taking a cue from the past, must new organisations of lower order than the state but larger than individuals play that role? How can public action be mobilised for local goals in a modernising context based on the spread of anonymous exchange and impersonal relations? What is the future role, if any, for culture and social solidarity? Are there creative ways of fostering cooperation between smaller organisations and the state in resolving common-pool problems, between formal law and informal norms and customs?

Econometrics tips of the day

1. Stata's predict command (from Econometrics by Simulation):

* Stata's predict command is an extremely useful command for many purposes.
* In this post we will go through how it works. And manually program in long hand some of the things it does.
* First let's start with OLS
* Imagine the underlying population model Y = g(x1, x2)
* Now imagine an estimator Y = f(x1, x2)
* What most estimations do is they take the Y and the xs and estimate some variant of f.
* In the linear case Y = b0 + b1x1 + b2x2 + u
* Most estimation commands attempt to estimate b0, b1, and b2. Which is great!
* But after estiamting b0, b1, and b2 what we may ask,
* "How does u look? Does it look normal, thus justifying the use of OLS?"
* We may also ask, "How does the estimated y look? This is often not particularly interesting since it is purely linear but often 'yhat' the predicted y is used in post estimation techniques."

2. Local vs. global approximations: 

Approximating unknown (continuously differentiable) functions by using a Taylor (MacLaurin) series expansion is common-place in econometrics. However, do you ever pause to recall that such approximations are only locally valid - that is, valid only in a neighbourhood of the (possibly vector) point about which the approximation is made? 

Unlike some other types of approximations - such as Fourier approximations - they are not globally valid.

Data is vs. data are

The debate continues...

From The Guardian:

It's like agenda, a Latin plural that is now almost universally used as a singular. Technically the singular is datum/agendum, but we feel it sounds increasingly hyper-correct, old-fashioned and pompous to say "the data are".

From The Economist:

We have a strong urge to just have language behave, but regular readers of this column know that, as the original Johnson knew, it just won't. He famously said that "to enchain syllables, and to lash the wind, are equally the undertakings of pride". Less well known, but perhaps more to the point, he pointed to the unruliness of language as the sign of a healthy culture constantly enriching itself....

From The WSJ:

We suspect that the plural will continue to dominate in our prose.

Addendum: From the Economist, a more data-driven approach to the controversy.

Addendum 2: From Nathan Yau.

I say data is. The plural version sounds weird to me.

Probit vs. logit

Repost from Econometrics by Simulation:

* This is a comparison of how well the logit does relative to the probit when the data is generated from the assumptions underlying the probit.

* First let's generate data that is consistent with the probit assumptions

clear
set seed 101
set obs 1000

* x is the explanatory variable
gen x = rnormal()*(1/2)^(1/2)

* u is the error
gen u = rnormal()*(1/2)^(1/2)

* y is the unobservable structural y
gen y = x + u

* In order to do a probit correctly the underlying distribution has to be standard normal (which is not a restriction so long as you remember when generating values.)

* This is why rnormal*(1/2)^(1/2) -> var(y)=var(x+u)=(1/2)*1+(1/2)*1=1
sum y
* Pretty close to 1 in the sample

* y_prob is the probability of observing a 1 given
gen y_prob = normal(y)

* y is the actual binary draws
gen y_observed = rbinomial(1,y_prob)

* now let's try estimating probit first
probit y_observed x
  * Save the estimated coefficient to a local macro
  local coef_probit = _b[x]

* let's predict the probabilities
predict y_probit
  label var y_probit "Probit fitted values"

* Now let's estimate the logit
logit y_observed x
* Save the logit to a local macro
local coef_logit = _b[x]

* predict the probabilities from the logit
predict y_logit
  label var y_logit "Logit fitted values"

* We can see that both the probit and the logit are almost identical
two (line y_logit x, sort) (line y_probit x, sort)

di "It is a somewhat well known property that probits and logits are in practice almost linearly equivalent."
di "The ratio of probit to logit is: `=`coef_probit'/`coef_logit''"

reg y_probit y_logit
* Check out that R-squared!

* So what does all of this practically mean?

* Feel free to switch between probit and logit whenever you want.  The choice should not generally significantly affect your estimates.

* Note: for mathematical reasons sometimes it is easier using one over the other.

* Finally, if you want to recover the original coefficient on x the best thing to do is to take the average partial effect (APE)

probit y_observed x

di (1/2)^(1/2)

test x==.70710678
* The probit results get fairly close but we reject the null

Islamic law and economic development

Source:

Islamic nations in the Middle East on the whole have underperformed their counterparts in the West. Asian nations that were poorer than the Arab world at the beginning of the Cold War have overtaken the Middle East. And promising experiments with democracy have been few and far between... 

The question of why is a contentious one. Has the Islamic world been held back by its treatment at the hands of history? Or could the roots of the problem lie in its shared religion—in the Koran, and Islamic belief itself? 

A provocative new answer is emerging from the work of Timur Kuran, a Turkish-American economist at Duke University and one of the most influential thinkers about how, exactly, Islam shapes societies. In a growing body of work, Kuran argues that the blame for the Islamic world’s economic stagnation and democracy deficit lies with a distinct set of institutions that Islamic law created over centuries. The way traditional Islamic law handled finance, inheritance, and incorporation, he argues, held back both economic and political development. These practices aren’t inherent in the religion—they emerged long after the establishment of Islam, and have partly receded from use in the modern era. But they left a profound legacy in many societies where Islam held sway. 

Islamic partnerships and inheritance law limited the ability of merchants to pool capital and build competitive enterprises with long life spans. Islam’s emphasis on fairness and a division of assets among children had the unfortunate effect of preventing large-scale businesses from taking root. Meanwhile, the primary vehicle for organizing institutions—the Islamic trust—placed severe limits on the development of civic institutions such as universities, guilds, and charities. Over time, the result was a stagnant economy and an enfeebled civil society with no way to challenge the established political order.

On CCTVs and crime

Tonight's episode of Bawal ang Pasaway brought into light fundamental issues regarding public policy and unintended consequences. The issue revolves around the increasing use of CCTVs in metropolitan areas in the Philippines, and the proposed law requiring private CCTV owners to submit their footages to help investigations of crimes. Here are some of the specific issues:

Do CCTVs deter crime? To be sure, evidence is mixed around the world. Also, it may depend on the context: e.g., how will CCTVs in Tondo compare with CCTVs in Forbes Park? But the specific question posed by Mareng Winnie was whether CCTVs can effectively deter crime when the death penalty cannot. Winnie Castelo went on to say things about criminal psychology, human behavior, but all the same failed to reach a possible answer to this: while the threat of execution via the death row is distant and highly uncertain, the threat of being caught on CCTV is much more immediate, tangible, and certain.   Human psychology would suggest that people value present risks more than distant risks, so there may be basis for the deterrence theory.

Will the proposed law ensure the protection of the right to privacy? This is of course a legal and philosophical issue, boiling down to whether private rights weigh more than what is (abominably) called the "common welfare" or "public welfare". A more practical issue may be the unintended consequence of the law on the very decision of private entities/individuals to install CCTVs. That is, given the danger of legal sanction if one refuses to submit CCTV footage, there may be a disincentive to expand the use of CCTVs, if at all, in favor of other deterrent security measures (e.g., improved lighting). This is a valid concern that necessitates empirical investigation before any wild guess/conjecture may be legitimately spewed out in public interviews.

Is extensive or widespread use of CCTVs optimal? This is related to the question of whether aspiring for zero crime is optimal. Obviously, it isn't, mainly for two reasons. First, costs are likely skyrocket faster than the rise in benefits after some point. Second, installing cameras in every nook and corner will result in a perverse equilibrium, one characterized by fundamental changes in the behavior and strategy of criminal elements. They will surely find a way to go around CCTVs, either by aiming to remove CCTVs in the routes they will use in executing a crime, or lobbying for the decreased use of CCTVs...name it, they'll think of it. As always, human behavior is endogenously determined, and will only adapt to the attendant exogenous parameters.

Red flag: NSO's 2003 Master Sample

The sad fact is that the samples of Philippine household surveys (such as the FIES, LFS, APIS, NDHS) before and after 2003 are non-comparable. This is because of the reconstruction of NSO's master sample in 2003 owing to the results of the 2000 Census of Population and Housing (here is a brochure; here is a detailed paper). Thus, be careful when choosing your sample years especially when you intend to follow/trace households over time.

There goes Ford

Today's op-ed by Prof. Sicat:

Ford Motor Co. recently announced that it will close its manufacturing plant in Sta. Rosa, Laguna at the end of the year. This comes at a time when signs are looking up for the Philippine economy’s near term future. 

It is a business decision, the announcement says. It is part of a restructuring decision of the whole Ford Motor Co. international operations... 

Ford’s Philippine presence is even smaller and marginal. From the viewpoint of the entire Ford Motor Co., it is essentially a footloose operation that headquarters could cut off easily The plant has an employment of only 450 workers... 

Any investment closure by a name brand which has salutary advertising impact for the country invites questions about the investment climate. Even in a time of improving expectations, it is an event not to be ignored. 

Philippine policy-makers who want to strengthen the inflow of investments in manufacturing and industry should heed lessons that our neighbors offer to us. The problem has been structural for the Philippines for decades. To them, their experience has been a breeze in getting foreign FDI to come in. We have to make headway in reforming the policy problems. 

When it began to industrialize, Thailand had very liberal encouragement for foreign direct investments. We were actually ahead of Thailand, nay, ahead of any major country in ASEAN in the promotion of industrialization. We were confident but we stuck to our policies of qualified entry of foreign investments because of the constitutional restrictions... 

Another way of saying this is that they devised national policies that were simpler, leveling the playing field for all investors so that foreign investors were almost on the same footing as those for their own nationals. Foreign investors found it easier to set up businesses. 

The result was continuous influx of FDIs. That cumulation of FDIs over time created a large base of manufacturing operations in industry over a wide area of the economy. When big industrial investors came into the country, supplier companies of those large foreign companies followed suit. 

As the manufacturing industries deepened, the domestic supply chain in industry became more diversified. This is one reason why the export industries from industry have been able to have a larger impact on domestic economic procession.

Human capital growth in the US

Already plateauing? Naturally, many are worried about its implications on long-run growth. Source: