Archive for December, 2009

Clive Crook on Climategate

Monday, December 14th, 2009

As one Climategate e-mailer noted, we do not understand why global warming has paused lately: the models cannot account for it. But this is not for public consumption. …. Just keep saying “flat-earthers” ….

Once scientists are engaged as advocates, science is in trouble. Like intelligence agencies fitting the facts to the policy, they are no longer to be trusted. The IPCC may be serving a righteous cause, but it is not the honest broker this process needs. It has made itself a political agency – at times, a propaganda unit. All this, the public can see.

For the sake of their own credibility, scientists should maintain a cautious distance from politics, and those who take up politics should not expect the deference to disinterested scholars they would otherwise deserve.

Clive Crook, “Trust the public on climate change”, Financial Times, 14 December 2009.

In other news, Paul Samuelson, a giant of 20th century economics, has died at age 94.

value-added taxes

Sunday, December 13th, 2009

Journalist Catherine Rampell asks why the government of the United States, following the lead of “nearly 150 other countries, in developed and developing economies alike”, does not collect some type of VAT (sometimes called, as in Canada, a “goods and services tax”, or GST).

Her answer?

Politics, mostly. Back in 1988, Lawrence Summers — now President Obama’s chief economic adviser — explained this with an observant quip: “Liberals think it’s regressive and conservatives think it’s a money machine.”

If they reverse their positions, the VAT may happen, he said.

Catherine Rampell, “Value-Added Taxes: Not So Foreign”, Economix, 11 December 2009.

For a clear explanation of how value-added taxes work, see Ms Rampell’s New York Times article:

Catherine Rampell, “Many See the VAT Option as a Cure for Deficits”, New York Times, 11 December 2009.

Ms Rampell’s NY Times profile explains “Catherine grew up in South Florida (the New York part) and graduated from Princeton”.

2010-2011 Economists Calendar

Sunday, December 13th, 2009

As I mentioned in a previous post, I am very pleased with the new Economists Calendar. The calendar highlights the contributions of 18 dead economists – one each month, beginning in January 2010. I received a copy free in the mail as part of my American Economic Association membership. If you are not a member, you can order copies here. The price is US$15, dropping to US$12 each for 5 copies and US$6 for 100 copies or more, shipped to the same address. Shipping is free to any address in the world, but the AEA does not guarantee that its publication will reach you before January.

Thanks to Steve Landsburg for the pointer.

GrowthGate?

Friday, December 11th, 2009

Despite Climategate, even a superficial reading seems to indicate that there is enough evidence for effects of man-made activity on the climate.

Surprisingly, there is a lot less evidence for effects of man-made activity on something that actually is completely man-made: the rate of economic growth in each country.

I had this frustrating thought as I was reading an important new paper, “Determinants of Economic Growth: Will Data Tell?”

The paper gives a conclusive and resounding answer to the question in the title: no.

William Easterly, “Why there’s no “GrowthGate:” Frustration vs. Chicanery in Explaining Growth”, Aid Watch, 10 December 2009.

There is much more! Bill Easterly goes on to explain why “it has taken economists a lot of hard work to attain this level of sublime ignorance”, concluding “The only guilty ones might be those who continue to run growth econometrics today without acknowledging that our Three-Act Tragi-Comedy is so OVER.”

Derrill Watson, in a comment, cited three of Easterly’s own publications (1993, 1997, 2007) and accused him of belonging to the “guilty” group of GrowthGate researchers. In a brief response, Easterly explained that he was running regressions in LEVELS of per capita income; these – he alleges – are more reliable than GROWTH regressions. Easterly promises to provide us with further information on this distinction at a later date.

Martin Feldstein on the dollar as a reserve currency

Thursday, December 10th, 2009

Harvard economist Martin Feldstein argues that even though the US dollar is losing its status as the world’s principal “reserve currency”, it has a bright future as an “investment currency”.  The large foreign exchange holdings held by some central banks, he argues, are not reserves in the traditional sense. In reality they are investment funds, albeit “investment funds that also deter attacks by forex speculators”.

It is prudent for any country with large foreign exchange balances to diversify those funds. It is not surprising then that countries such as China and Korea are diversifying away from dollars, primarily into euros.

That diversification cuts demand for the dollar, putting pressure on its value. Market participants should see this as a natural consequence of the shift of foreign exchange balances from liquid dollar emergency reserves to longer-term multi-currency investment portfolios. But even as countries diversify away from exclusive reliance on dollars, the dollar will continue to be the main form of liquid investment for countries around the world.

As this portfolio rebalancing comes to an end, demand for dollars will stop falling. At the same time, the dollar’s reduced value will shrink the US trade deficit, reducing the annual supply of dollars. This stronger demand for dollars and reduced supply can end the dollar’s decline. What looks like a crisis of confidence in the dollar as a reserve currency is just part of the evolutionary process that will eventually halt the dollar’s decline.

Martin Feldstein, “The dollar’s fall reflects a new role for reserves”, Financial Times, 10 December 2009.

Nothing can go on forever, certainly not the decline of the dollar, but I am not confident that the process of adjustment will be so easy. The implication of Feldstein’s line of reasoning is that central banks will choose to invest only a small amount of their foreign exchange in US treasury bills. What will happen to US interest rates – and the cost of financing the massive US public debt – as Asian central banks dump US treasury bills? Big sums are involved. As Feldstein notes, Thailand holds foreign exchange assets of $100 billion, South Korea $200 billion, Taiwan $300 billion, and China more than $2,000 billion.

JS Mill on growth and distribution

Wednesday, December 9th, 2009

The new AEA 2010-2011 Economists Calendar, which just arrived, highlights a dead economist each month, with selected quotations from his published works. (Only one of the featured economists – Joan Robinson – is a woman.) This quote from John Stuart Mill, for May 2011, caught my attention:

It is only in the backward countries of the world that increased production is still an important object; in those most advanced, what is economically needed is a better distribution.

Mill, Principles of Political Economy, 1848.

Is it not remarkable that more than a century and half ago, Mill saw no reason for economic growth – increased production – to be a priority in economically advanced countries? The compilers of this calendar have done a splendid job, and remind us that Mill’s “Principles of Political Economy (1848) was the standard text in economics at Oxford until 1919, when it was replaced by Marshall’s Principles”. All the selected quotes, due to space constraints, are necessarily brief. It helps to place this one in context, so I provide a longer, more complete quote below.

It is only in the backward countries of the world that increased production is still an important object: in those most advanced, what is economically needed is a better distribution, of which one indispensable means is a stricter restraint on population. Levelling institutions, either of a just or of an unjust kind, cannot alone accomplish it; they may lower the heights of society, but they cannot, of themselves, permanently raise the depths.

On the other hand, we may suppose this better distribution of property attained, by the joint effect of the prudence and frugality of individuals, and of a system of legislation favouring equality of fortunes, so far as is consistent with the just claim of the individual to the fruits, whether great or small, of his or her own industry. We may suppose, for instance (according to the suggestion thrown out in a former chapter), a limitation of the sum which any one person may acquire by gift or inheritance, to the amount sufficient to constitute a moderate independence.

John Stuart Mill, Principles of Political Economy (1848), book 4, chapter 6.

Mill was an outstanding political economist, and his prose does not seem dated even today. Note the influence of Malthus, however, in his call for restraint on population growth.

how big pharma prevents competition

Wednesday, December 9th, 2009

The Wall Street Journal‘s Health Blog has an article explaining how Abbott is able to prevent generic competition in its sales of TriCor, a cholesterol-reducing drug first marketed in Europe in 1975. The reason:

Abbott licensed the compound to sell in the U.S. in 1998, and has been jockeying to keep it patented ever since ….

In 1999, a generic drug company that was later acquired by Teva applied to market a generic version of TriCor. Abbott sued for patent infringement, changed the dosage of TriCor and changed it to a tablet from a capsule. Then the company filed for a patent on the slightly modified form of the drug and bought back the capsules that pharmacies still had on their shelves.

Because the company had changed the type of pill and the dosage, pharmacists couldn’t swap in the generic capsules Teva planned to introduce, because they were no longer identical to the tablets Abbott was selling. In 2002, Teva asked the FDA for permission to sell a generic version of the tablets, and Abbott again altered the dosage and formulation.

Jacob Goldstein, “How a Decades-Old Drug Is Still a Patented Blockbuster”, WSJ Health Blog, 1 December 2009.

In March 2011, Abbott’s new patent runs out, which might be good news for Teva and for patients. But don’t get your hopes up, since “last year, the FDA [Food and Drug Administration] approved a new Abbott drug called Trilipix, which is similar to TriCor but which is approved for use in combination with statins, a popular class of cholesterol drug. Now Abbott is busy trying to get patients to switch from TriCor to TriLipix before TriCor goes generic.” The generic name for TriCor, by the way, is fenofibrate.

Thanks to “Mike the Actuary” for the pointer.

the poverty of international GDP estimates

Tuesday, December 8th, 2009

UPDATE: My suggested robustness check has been done! Two European researchers, from ICREA-Universitat Pompeu Fabra and the European Central Bank, ran tons of regressions, and report

the PWT 6.2 revision of the PWT 6.1 1960-96 data lead to substantial changes regarding the role of government, international trade, demography, and geography. Overall, our findings suggest that margins of error in the available income data are too large for empirical analysis that is agnostic about model specification.

Antonio Ciccone and Marek Jarocinski, “Determinants of Economic Growth: Will Data Tell?”, September 2009.

HT to Bill Easterly for the pointer.

Domestic prices differ from country to country. Services, especially, are much cheaper in poor countries compared to rich countries. Market exchange rates will thus understate the real GDP of a poor country relative to that of a rich country. Prices are the weights used to add up GDP, so GDP growth rates are also biased when prices differ from country to country. Successive versions of the Penn World Table (PWT), continuing work begun by Irving Kravis, Alan Heston, and Robert Summers (1978), adjust national GDP by measuring it with common international prices, known as purchasing power parity (PPP) prices.

Four economists from distinct institutions (three US universities and the IMF) in joint research examine PWT versions 6.1 and 6.2, “two seemingly minor revisions in the Penn World Table mark 6″, and find huge differences between the two sets of data. This raises doubts concerning the quality of the PWT data, so they urge researchers instead to use national accounts data – at least for comparative analysis of annual growth rates – even though they are not PPP-adjusted.

A puzzling feature is that data – especially for GDP growth but also for the level of GDP and the PPPs – for the same country at the same point in time change across successive versions of the PWT. A stark example of this relates to Equatorial Guinea’s growth rate. According to PWT (version 6.2), it was the second-fastest-growing country among 40 African countries during the two-and-a-half decades beginning in 1975. However, according to the previous version (PWT 6.1), Equatorial Guinea was the slowest-growing country. ….

The rationale for the PWT is to come up with GDP level and growth data that are at common international (the so-called PPP) prices so that the data are comparable across countries. The methodology, however, leads to the construction of GDP growth estimates that are based not on common international prices but on a mixture of international and domestic prices. In this case, it is not obvious that the data are comparable across countries.

Simon Johnson, Will Larson, Chris Papageorgiou and Arvind Subramanian, “Is newer better? The Penn World Table growth estimates”, VoxEU, 7 December 2009.

PWT version 6.3 is now up and running, no doubt with even more changes to PPP-adjusted GDP. Sadly, these data are used widely, and uncritically, to ‘explain’ why some countries grow faster than others. As a robustness check, it might be wise to run growth models on subsequent versions of the PWT. The makers of PWT from the very beginning attached warning labels to the data, but these warnings have largely been ignored. It is so much easier to run regressions than to do the hard work of examining with a critical eye the underlying data and, for that matter, to question the underlying theory – or absence thereof. On the latter, see my 7-part series on “economics as faith” beginning here.

Copenhagen

Monday, December 7th, 2009

Today, as negotiations on climate change begin, the Financial Times publishes a strongly-worded, lead editorial. The editorial begins and ends with the following two paragraphs.

As the biggest environmental meeting in history opens in Copenhagen, the scientific case for a global agreement to fight man-made climate change remains overwhelming. The furore over alleged data manipulation, following the theft of e-mails from the University of East Anglia , has stirred up the sceptics (and shaken some scientists) but Climategate does not alter the real issue – that, despite many uncertainties, the risks of catastrophic change justify decisive global action to cut carbon emissions. ….

The forces of negativity and scepticism, whether self-interested or naive, must not prevail if we are to reduce the threat to the planet’s future without sacrificing future economic growth.

“Copenhagen: we can’t risk failure”, Financial Times, 7 December 2009.

The middle paragraphs are equally sensible and well-written.

One of these climate sceptics the editorialist worries about is Regent University economist Doug Walker, a close friend and former colleague. He might be self-interested (Aren’t we all?), but is certainly not naive. Douglas is very articulate and writes, in part:

The United Nations Climate Change Conference is scheduled to begin tomorrow, 7 December, in Copenhagen, Denmark, for two weeks of talks aimed at concluding an agreement that would enter into force after the first phase of the Kyoto Protocol expires in 2012.  The meeting will bring together 15,000 delegates and officials, 5,000 journalists and 98 world leaders, 1,200 limos and 140 private jets.  The extraordinary carbon footprint of the meeting (roughly, Morocco’s annual carbon emissions) is likely to be its most lasting legacy to the world.

In his most foolish promise, President Obama has said he will pledge the United States to lower its emissions of carbon to a level 85 per cent below those of 2005.  This would bring the level of American emissions to those of 1910, which, given the much higher expected level of population in 2050, means the per capita U.S. emissions would be about those of 1875.

Douglas O. Walker, “A fable for Copenhagen”, group email message circulated on 6 December 2009.

If Douglas posts the entire e-mail to his blog – as he often does – I will provide the link in an update. It is important to read all views, even those of sceptics.

big business and the environment

Sunday, December 6th, 2009

Has Jared Diamond sold out, or has he become enlightened? You be the judge, after reading this essay, which begins

There is a widespread view, particularly among environmentalists and liberals, that big businesses are environmentally destructive, greedy, evil and driven by short-term profits. I know — because I used to share that view.

But today I have more nuanced feelings. Over the years I’ve joined the boards of two environmental groups, the World Wildlife Fund and Conservation International, serving alongside many business executives.

As part of my board work, I have been asked to assess the environments in oil fields, and have had frank discussions with oil company employees at all levels. I’ve also worked with executives of mining, retail, logging and financial services companies. I’ve discovered that while some businesses are indeed as destructive as many suspect, others are among the world’s strongest positive forces for environmental sustainability.

Jared Diamond, “Will Big Business Save the Earth?”, New York Times, 6 December 2009.

Professor Diamond goes on to cite positive examples from the work of Wal-Mart, Coca-Cola and Chevron – three companies “that many critics of business love to hate, in my opinion, unjustly”.

Jared Diamond is an environmental activist who teaches in UCLA’s geography department. He is author of Guns, Germs, and Steel: The Fates of Human Societies (W.W. Norton, 1997) and Collapse: How Societies Choose to Fail or Succeed (Viking Books, 2005). For a critical review of these books, see the essay written by journalist Gregg Easterbrook and noted by Thought du Jour back in January, 2005:

They are magnificent books: extraordinary in erudition and originality, compelling in their ability to relate the digitized pandemonium of the present to the hushed agrarian sunrises of the far past. I read both thinking what literature might be like if every author knew so much, wrote so clearly and formed arguments with such care. All of which makes the two books exasperating, because both come to conclusions that are probably wrong.

Gregg Easterbrook, “‘Collapse’: How the World Ends”, New York Times, 30 Janaury 2005.

What is important is that Jared Diamond continues to think clearly about important issues, and is willing to change his mind when necessary. Jared Diamond’s words are always worth reading, regardless of whether we agree or disagree with the conclusions he reaches. Indeed, I find his work to be most valuable – because it causes me to question my own beliefs – when I disagree.