Tag: economics (page 2 of 2)

More Momentum for the Social Sciences–Nobel Edition

For those that have not yet heard, the Nobel Prize for Economics (actually named the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) was awarded this year to two recipients, one of whom–Elinor Ostrom–is a Political Scientist. As Tyler Cowen of Marginal Revolution notes:

It’s a nod in the direction of social science, rather than economics per se. It’s another homage to the New Institutional Economics and also to Law and Economics. It’s rewarding larger rather than smaller ideas, practical economics rather than abstract theory.

For those interested in a deeper discussion of her work, Henry Farrell at Crooked Timber provides an excellent overview and personal reflection on Ostrom.

As a political scientist, this is especially gratifying and I think reflective of some broader trends in social science, whereby the best insights and research culminate from the cross-fertilization of ideas from multiple disciplines within the social sciences (as well as the hard sciences). If you look at some of the more recent winners, their work transcended the discipline of economics and had a much broader impact on the study of human behavior and social dynamics broadly.

Personally, my research focused on decision-making, signaling & reputation, and conflict. The work of recent winners, such as Thomas Schelling (game theory), Daniel Kahneman (behavioral economics), A. Michael Spence (signaling), John Harsanyi & John Nash (game theory), and Douglass North (path-dependence, neo-institutionalism), all played a role in how I approached (and continue to approach) those issues.

Maybe a day will come when the prize is renamed the Nobel Prize for Social Science–another step towards the social sciences getting their day.

[Cross-posted at bill | petti]

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ABM in the Social Sciences

While I am in the throes of designing and implementing an agent-based modeling approach to study how democracies react to extreme external shocks, I wanted to take a brief break from coding and writing to highlight two very interesting pieces in the current issue of Nature that address ABM directly. The first, “Economics: Meltdown modelling,” discusses how advanced agent-based models might be able to help predict future economic crashes—complete with a vignette where a futuristic ABM prevents a collapse. The problem, as the article asserts, is that ABM is often rejected by mainstream economists.

Many [economists] argue that agent-based models haven’t had the same level of testing…agent-based model of a market with many diverse players and a rich structure may contain many variable parameters. So even if its output matches reality, it’s not always clear if this is because of careful tuning of those parameters, or because the model succeeds in capturing realistic system dynamics. That leads many economists and social scientists to wonder whether any such model can be trusted. But agent-based enthusiasts counter that conventional economic models also contain many tunable parameters and are therefore subject to the same criticism.

This aversion to ABM is persistent throughout the social sciences, which creates an odd dynamic where ABM enthusiasts must often spend a great deal of time justifying their use before research can even begin. What’s baffling about this situation, however, is that ABM is just a tool; useful in for some research questions, but ultimately an imperfect device—just as nearly all other research methods in the social sciences are imperfect. This is precisely the sentiment of the authors of the second article, an op-ed entitled, “The economy needs agent-based modelling.” In discussing the current state of the art in analytical economic models the authors note:

The best models they have are of two types, both with fatal flaws. Type one is econometric: empirical statistical models that are fitted to past data. These successfully forecast a few quarters ahead as long as things stay more or less the same, but fail in the face of great change. Type two goes by the name of ‘dynamic stochastic general equilibrium’. These models assume a perfect world, and by their very nature rule out crises of the type we are experiencing now…As a result, economic policy-makers are basing their decisions on common sense, and on anecdotal analogies to previous crises such as Japan’s ‘lost decade’ or the Great Depression. The leaders of the world are flying the economy by the seat of their pants.

Why then, is ABM treated as being particularly fallible? As a user and developer I have pondered this many times. I believe the primary issue for many critics is the notion of “creating a universe for experimentation,” i.e. the belief that an ABM can account for all of the complexity. The easy response to such a critique is simple: no one believes that. My first exposure to ABM were zero intelligence agents, and I was struck by how such simple models could predict the dynamics of real markets (so much so, that I thought I might name a blog after them someday). Quality ABM’s focus on a narrow set of agent attributes, and attempt to glean the maximum insight from these simple mechanics. For a more philosophical response I will paraphrase the great econometrician Neal Beck in saying that, “all of statistics is a sub-field of theology.” That is, with any model we assume to know the “real truth,” but accept the inherent error and still attempt to build knowledge from the analytsis. ABM are no different, however, these models simply leverage a different technology and analytical framework to produce conclusions.

I welcome both critics and supporters of ABM to make the case for and against their use. It should be noted, however, that those railing against new technology often become victims of their own shortsightedness.

Photo: Nature

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Voting with their feet

Here’s an interesting factoid: For the first time since the Great Depression, the migration of people from the less-developed to developed countries may have reversed. Remittances are expected to be dropping next year by 8 percent. On the other hand, many of the returnees have skills and capital, and that may help back home.

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Why the Kremlin worries (but not too much…yet)

The BBC:

Thousands of people have held rallies across Russia protesting against what they describe as the government’s mismanagement of the economy.

The biggest demonstration took place in the eastern city of Vladivostok, where protesters demanded the resignation of Prime Minister Vladimir Putin.

In the capital Moscow, police arrested a number of people at an unauthorised gathering by a radical party.

Meanwhile, government supporters also held their rallies across the country.

Protests on such a large scale were unthinkable just a few months ago as the economy boomed with record high oil prices and as the Kremlin tightened its grip over almost all aspects of society, the BBC’s Richard Galpin in Moscow says.

But now with the economy in deep trouble, there is real fear amongst ordinary people about what the future will hold, he says.

He adds that unemployment is rising rapidly, as are the prices of basic food and utilities.

I cannot emphasize enough how much of the Kremlin’s legitimacy rests–either directly or indirectly–on good economic performance.

There’s a lot more to write about recent developments involving the Russians. I hope to get around to it soon.

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I’ve never met a man…

Today, I took the family to the Will Rogers Memorial Museum in Claremore, Oklahoma. If you’ve never heard of Rogers, then you might want to learn. He was quite a man.

Rogers was an entertainer, a writer, a public speaker, amateur philosopher, etc. In 1931, he went on the radio with President Herbert Hoover to talk about the Depression. He seemed truly troubled by what was happening:

So here we are in a country with more wheat and more corn and more money in the bank, more cotton, more everything in the world—there’s not a product that you can name that we haven’t got more of it than any other country ever had on the face of the earth—and yet we’ve got people starving. We’ll hold the distinction of being the only nation in the history of the world that ever went to the poor house in an automobile. The potter’s fields are lined with granaries full of grain. Now if there ain’t something cockeyed in an arrangement like that then this microphone here in front of me is—well, it’s a cuspidor, that’s all.

Now I think that they’ll arrange it—I think some of our big men will perhaps get some way of fixing a different distribution of things. If they don’t they are certainly not big men and won’t be with us long, that’s one thing…

A bit later, Rogers asked Americans to help their fellow citizens:

These people that you’re asked to aid, why they’re not asking for charity, they are naturally asking for a job, but if you can’t give ‘em a job why the next best thing you can do is see that they have food and the necessities of life. You know, there’s not a one of us who has anything that these people that are without it now haven’t contributed to what we’ve got. I don’t suppose there’s the most unemployed or the hungriest man in America has contributed in one way to the wealth of every millionaire in America. It wasn’t the working class that brought this condition on at all. It was the big boys themselves who thought that this financial drunk we were going through was going to last forever. They over—merged and over—capitalized, and over—everything else. That’s the fix we’re in now.

Now I think that every town and every city will raise this money. In fact, they can’t afford not to. They’ve got the money because there’s as much money in the country as there ever was. Only fewer people have it, but it’s there. And I think the towns will all raise it because I’ve been on a good many charity affairs allover the country and I have yet to see a town or a city ever fail to raise the money when they knew the need was there, and they saw the necessity. Every one ‘em will come through.

Europe don’t like us and they think we’re arrogant, and bad manners, and have a million faults, but every one of ’em, well, they give us credit for being liberal.

Doggone it, people are liberal. Americans—I don’t know about America being fundamentally sound and all that after-dinner hooey, but I do know that America is fundamentally liberal.

Rogers was known for his witty remarks on a wide variety of political and economic topics.

Obviously, this extended radio address was a little more serious.

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Hegemony, the Economy, and Baseball’s Winter Meetings

Baseball’s winter meetings start today in Vegas, which means loads of hot-stove league excitement for baseball fans like myself. However, I don’t expect my team to make one of the marquee deals, those big money contracts are usually the province of the big market, big money teams like the Yankees, Mets, Sawks, and Angles.

The art of rooting for a small market team is to understand how to do more with less, and, most importantly, how to minimize risk in the land of free-agent mega-contracts. If you’re the Yankees, you can sign a Carl Pavano, say, to a 4-year, $40 million contract, and when misses 2 full seasons and large portions of two more, you grouse about it and then go sign another pitcher to replace him and continue about your merry way. If you’re a small market GM, however, such contracts aren’t even an option. You can’t afford to put so much of your scarce revenue into a non-performing player. So, small market teams must look for diamonds in the rough, offering low risk, in terms of guaranteed money, contracts to a number of players, hoping one works out because they can’t afford to be wrong on a guaranteed, multi-year, mega-million dollar deal that would cripple the franchise.

In short, the key difference between the big money teams and small market teams is their capacity to absorb a mistake.

Which brings us to tonight’s word: weathering the global recession.

In grading a series of papers for my Hegemony class, an interesting theme emerged. While many contemporary commentators are lamenting the fact that the current global economic meltdown has put a damper on US global leadership, I think that there is an under-appreciated aspect to the economic crisis. Namely, the US is in a position to weather the storm, absorb the hit, and recover. Yes, there is certainly more economic pain to come and, for certain, it will hurt. But, if you haven’t noticed, this economic crisis is global, and its going to hurt the rest of the world a lot more than it will hurt the USA.

With the price of oil now down to $43/barrel, oil producing nations are in dire straits. The promises they made at $140 are ludicrous, and much of their basic economic models are simply unsustainable at prices this low. Russia, Venezuela, Saudi Arabia–they are all in serious trouble.

Even China, the supposed great rival to US hegemony, is in dire economic straits. They have proposed a $500 billion stimulus package, but depend on the health of global export markets to keep factories humming and producing the 9-11% annual economic growth they need to maintain domestic political stability. This puts the CCP in a real political bind.

All of which is to say, the US standing in the world might not be as drastically reduced as a result of the global economic crisis as one might initially think. Everyone will take a hit, but the Yankees / Yanquis are in a much stronger position to be able to absorb the hit and remain competitive. We are strong enough to recover from our own mistakes. Others are not so bit or so fortunate.

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Can we collect benefits now?

Alex Tabarrok explains why government employees should be considered unemployed.

Some of you will, I expect, object that Tabarrock is actually referring to those employed by receiving money from workfare programs, specifically those, uh, affiliated with the Works Progress Administration (WPA) during the New Deal. Yes he is. But I fail to see why one class of government employees is actually “unemployed” while every other government employee is “employed.”

I suppose one could argue that WPA workers were only temporarily paid for providing goods and services. To my mind, that answer creates fascinating conceptual issues, such as whether someone who loses his or her job becomes retroactively unemployed whilst they were working. But, more to the point, it would seem to place many government contractors into the ranks of the unemployed. My wife, for example, has a one-year non-renewable contractor position. Somehow, though, I think any application she submitted for unemployment insurance would be rejected.

(h/t Henry Farrell)

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Now might be a good time to consider panic

If this doesn’t have you worried, this should, as it indicates a significant degree of panic by those who are supposed to save our economy. When Dr. Doom is surprised by the deterioration of the markets, things are bad indeed.

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Bailing out the bailout

Rachel Maddow just asked perhaps the most insightful question of this bailout to date: Is this economic crisis global warming or the Iraq War? Is it a real crisis that builds slowly that people fail to acknowledge, or is it a bunch of hype and hysteria over what is, in the end, nothing.

Laura D’Andrea Tyson says that this credit crunch is real and real bad, and your job is at risk. Its not a bail-out, but a rescue of a broken market.

Therein lies the rub. I think there are two fundamental issues that have doomed the bailout bill earlier today.

First, this is a really complicated mess, and no one understands what is actually going on. Who among you actually understands credit-default swaps, or the leveraging of commercial paper for mortgage-backed securities? Not me. Probably not you. One of the major difficulties here is that there is no story to explain what is happening, leaving no reason to justify the extraordinary actions necessary to save the economic markets. There’s a lot of assigning of blame, but there’s little explanation of what actually is the problem. I’m not saying that there needs to be a blue-ribbon commission producing a report. Rather, what is needed is a narrative that makes sense of what is going on in such a way that people can actually understand what is happening and that justifies a response. All we have now is a series of bank failures, the biggest drop in the Dow ever, and a back and forth of Presidential politics.

So what has actually happened? Two items have broken through: 1) people can’t pay mortgages and 2) wall street bankers made some poor bets. Neither of these really sounds all that drastic, and neither of these really calls out for action. People are annoyed with others who borrowed over their heads when they were responsible, but its hard to blame families for tough economic times. No one really has any sympathy for Wall Street.

The massive problems that remain–the credit crunch, the insolvency of key financial instruments, the potential lack of cash for business operations, this is much more significant but much less of the story. If a rescue operation is going to have any chance of success, its proponents need to develop a narrative on the crisis before they can sell the solution.

Second, this is a “bailout.” Of Wall Street, no less. No one likes to bail-out fat cats who make poor decisions. Except that at this point its far beyond a bailout, its rescue of a broken financial system by extensive nationalization, regulation, and government intervention. This intervention needs another frame. FDR, who has re-emerged as everyone’s favorite President these days, was an expert at this. The New Deal socialized large parts of the economy. Lend-Lease paved the way for entry into World War II. But Roosevelt was expert in telling the American People that, when your neighbor’s house is on fire, you give them the hose now and worry about payment later.

This is more than a bailout, its a rescue of a broken system on the verge of collapse. Except that you wouldn’t know that from the event itself. If Congress and the Administration are going to rescue the economy, they need a plausible narrative of what is going on to explain the seriousness of the problem and to form the basis of a political coalition. Then they need to start talking about a government rescue to save the economy, and drop all this Wall Street bailout jargon.

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Scribbles in My Notebook on AIG

One of my favorite Cleveland sports columnists often does a column of brief observations and insights after a game or big event. I don’t scribble, and I lack a notebook, but watching the AIG bailout has me thinking about a few things:

Wow, that’s a lot of money. To put this in perspective, recall the 2004 Presidential Election, when Kerry was rolled for being for the $87 billion before he was against it. That was a yearly supplemental appropriation to fund the war in Iraq and Afghanistan. Paulson spent about the same to bail out AIG in one day.

This may have avoided an imminent financial crisis, but (and I’m not the first to say this, but its so important as to bear repeating) this 1) did nothing to address the roots of this crisis that got us to this point in the first place and 2) did nothing to address the fact that another shoe dropping seems imminent. Shouldn’t there be hearings on emergency financial sector reform or something?

I think Sebastian Mallaby made a good point in the Post yesterday:

If Paulson’s gamble pays off, it could affect the character of globalization. For the past two decades or so, international finance has developed largely on U.S. terms and in the U.S. image. The Federal Reserve has stood behind the dollar, which is the world’s dominant reserve currency, and the world’s faith in the dollar has allowed the Fed to cut interest rates in response to global shocks such as Russia’s default in 1998 without risking a run on the currency. Meanwhile, U.S. banks have dreamed up funky new financial instruments that have been marketed all over the world. To a considerable extent, the globalization of finance has meant its Americanization.

The first 12 months of this crisis scrambled that equation. The Fed cut interest rates, as it often does in response to trouble. But this time the world lost confidence in the dollar, which failed to play its traditional role as a safe store of value in tough times and instead seesawed wildly. The innovative U.S. banks lost billions of dollars and were forced to turn for help to the new masters of finance — foreign sovereign wealth funds. And U.S.-style financial innovation suffered a massive reputational blow. No less a commentator than Paul Volcker, the former Fed chairman, has emerged to denounce it.

The longer the financial turbulence goes on, the greater the likely backlash against U.S.-style financial globalization. But Paulson’s gamble — if it succeeds — could limit the damage. By refusing to use the Fed’s balance sheet to bail out Lehman, he may have saved the Fed from becoming further bogged down in its crisis-management role, freeing it to focus more on preserving the value of the dollar. And by repealing the too-entangled doctrine, Paulson may have strengthened market penalties for banks that mismanage modern financial instruments — thereby increasing the chances that sophisticated, market-based finance can flourish safely.

I don’ think folks yet understand how profound this crisis might become. The Dollar as Global Reserve currency allows the US to do all kinds of things that no other country can get away with. The US budget looks more like Argentina in a bad year than the IMF recommended Washington Consensus, but the US can get away with it and Argentina can’t because the US can always sell debt, and there remains a market for dollar-denominated debt. If the dollar loses this preeminent position, the US is in for major major economic turbulence.

In less than a week, the Dow lost nearly 1000 points reacting to the AIG bailout. But, this is a highly skewed indicator, because AID is one of the 30 stocks that make up the Dow. AIG’s loss in value has a direct impact on the Dow–the decline is not a great indicator of the degree of investor mood. Better would be the Dow without AIG or some other indicator. But, the Dow, S&P 500, and NASDAQ are all down about 4-5% today (AIG is part of the S&P also).

Lots of people are making a comparison to the bailout of Chrysler back in the early 80’s. I wonder if the bailout of Mexico in 1994 might be more appropriate–the Treasury and Fed acting on their own to bail out a bad and highly interconnected position in the global economy.

One really hopes that Krugman is right about this: Bernanke is a leading expert on the Great Depression, so he might be able to keep it from happening again.

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Henry Paulson as “The Stabilizer”

The US bailout of Fannie Mae and Freddie Mac was a massive government intervention into the securities market. Why do this?

Dan Drezner gives some insightful instant analysis, noting how the fall-out has reverberated through the global economy, hitting China, Russia, Sovereign Wealth Funds, and many other key international actors. The US Government:

is also trying to soothe financial markets and-more important-please foreign creditors. China is far and away the largest foreign investor in long-term U.S. government agency debt-more than $375 billion. In the past month Chinese officials had warned about the implications of a collapse of the two housing giants.

Beijing was not the only foreign government to raise hackles about the status quo-other foreign officials voiced their concerns directly to Treasury Secretary Henry Paulson. Senator Chuck Schumer told the Wall Street Journal that, “There was a real fear that foreign governments would start dumping Fannie and Freddie…and not buy the bonds.”

As long as the United States runs a current account deficit of more than $500 billion a year, it will need the trust of foreign capital and foreign governments. Judging by the global market reaction, seizing Fannie Mae and Freddie Mac helped preserve that goodwill abroad. One reason this happened on a Sunday was so that Asian stock markets would have the first opportunity to respond.

How necessary was this reassurance to international capital markets? The nightmare scenario Paulson faced was:

But let’s say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.

Charles Kindleberger famously observed:

For the world economy to be stabilized, there has to be a stabilizer–one stabilizer.

Here you have the US acting to stabilize the international economy in the face of a potential global meltdown. They left themselves no choice.

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The market punished Russia

Dan previously reported that the European Union decided not to impose economic sanctions on Russia — at least for now. However, The New York Times had an interesting story on September 3 noting that the market was imposing its own penalty on Russia for its war versus Georgia.

…[I}nvestors are also unnerved by the aftermath of the five-day war in early August.

Russian shares have lost about a third of their value since hitting record highs in May. Russian and Western bank analysts polled by Reuters have cut forecasts for Russia’s gold and foreign exchange reserves.

As much as $25 billion in foreign capital may have left Russia since the Georgia conflict started, they said: while their growth forecasts were little changed at 7.5 percent, the crisis sharply cut the liquidity of the banking system.

Apparently, the Russian “stock exchange’s benchmark RTS index…suffered its biggest decline since the financial crisis in 1998.”

A major investor from Hong Kong is quite pessimistic:

“I have assets in both Georgia and Russia and I’m going to get out. What seemed a great idea at that time has become a sort of disaster,” said a 31-year-old banker at one of the world’s top 10 investment banks, who — like most here — spoke on condition of anonymity.

A British investor who lost money in 1998 is anonymously quoted saying “we’ll soon see a downward spiral that will result in another crash — give it a few months.”

On the other hand, at least one investment advisor was willing to be quoted by name in the article. “Armine Guledjian, vice-president of Halcyon Power Investment Company and a native Californian” admittedly has a strong self interest at stake. Still, she says simply:

“This is a great time to invest, as markets are so low.”

Don’t view that as an official Duck of Minerva recommendation.

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Child: Labor

Perspectives on Politics just published a depressing assessment of the prospects for women in the academy, placing much of the blame for the glass ceiling on the “intractable tension between professional success and family duties.” The section of the article concludes:

“Virtually every woman with children [interviewed] noted the difficulties in balancing career and family. Mary and Gale remind us that family versus career is a human problem, not just one with which women wrestle.”

Hear, hear. While the authors conclude that there is little evidence that society or political science as a profession is taking it seriously as such, one might make the same argument about the study itself, which looks at women in the profession, rather than parents in the profession, including fathers, for whom – at least for that small but growing percentage who takes on half the work at home – may be even more disadvantaged career-wise. (It would have been great to see the sex-disaggregated statistics.)

The authors aren’t alone: a new Caucus within the ISA that is seeking to address family issues within the profession calls itself “Mothers in IR,” reifying the idea that parenting is primarily a women’s issue; at my insitution, the Child Care SubCommittee lobbying for more family-friendly policies is subsumed under the Gender Equity Committee rather than mainstreamed into the Benefits and Welfare process. No wonder the issue isn’t taken very seriously.

In my mind, all this is a huge part of the problem. That’s why, on Father’s Day this week, I was happy to see the New York Times report in-depth on families, mostly working professionals, who have come up with creative arrangements for splitting child-care 50/50 in order to support one another’s careers. The article presents a balanced view of the impacts of equal parenting on the career choices of both men and women, as well as many examples of how it can work and what employers can do to make it easier for fathers and mothers.

But. Even here, it matters quite a lot how you define “work” versus “fun” in child rearing. Dr. Sampson Lee Blair, a sociologist who studies work/family dynamics at University of Buffalo is quoted in the NYT article:

“The social scientist’s definition of child care “is attending to the physical needs of a child — dressing a child, cooking for a child, feeding and cleaning them,” Blair says. It doesn’t include the fun stuff, like playing and reading and kissing good night.”

Hello: I say, reading at night is work, too, for three reasons.

A) It is of value to the kid; it doesn’t matter whether it’s fun or not – I also love my job as a teacher, but that doesn’t mean I shouldn’t get paid.

B) Sometimes, it’s not fun, lying in bed with a book at 8pm when you’re exhausted but know you need to get back up to troll around on blogs watch the Daily Show prep for class and have to struggle to stay awake while you do it – that can be work.

Part of the problem is that society wants to exclude from the definition of “work” anything that society thinks we’re supposed to want to do unconditionally out of love, regardless of how hard it is or what its actual economic value. This assumption needs to be challenged of caring work done by both sexes. My husband may love to garden and fix things, but that doesn’t mean I should discount these contributions to our household as “hobbies.”

In her (once again, inaptly titled) book The Price of Motherhood, Ann Crittenden offers a better definition of the the economic value of the labor it takes to raise children well: the price you would have to pay someone else to do the work for you.

What if we calculated the cost of this labor of child rearing as a percentage of GDP?

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