Archive for September, 2011

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macroeconomics in gaming

Friday, September 30th, 2011

Guest post by Christopher Willmore.

Fate of the World is an incredible macroeconomic simulator. You’re put in charge of a fictional, giant NGO that receives funding from most governments, and whose mandate it is to increase the global Human Development Index (HDI) while keeping an eye on the environment, scarce resources, political maneouvering, migration and natural disasters. The game is based on real research, uses standard models, and you’re given tons of statistics. Oh! And it’s currently on sale at 20% off (US$15.19). You can purchase the game at Steam, at the game’s own web site, and at many other sites.

The on-sale bundle of the game includes 126 pages of designers’ notes as a PDF file. These take you through the (often boring) process of how a small group of non-academics managed, in a short time, to put together a real-time interactive model of the world’s ecology and economy, using real-world data and incorporating state-of-the-art climate modelling.  I’m of the strong opinion that economists should include this kind of modelling in their toolkit – not as a replacement for more rigorous models, but as a way to quickly see the implications of their assumptions and directions.

There are neat discussions of how the designers chose the number and boundaries of regions to divide the world into, and numerous graphs showing how they built their model iteratively, based on features and assumptions as they popped up. They also spent a long time thinking of their target audience and how to make the game accessible for them. A lot of economics seminar presenters would do well to do the same!

Note: TdJ does not receive commissions on sales, nor does it have a horse (or friend) in this gaming race.

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Daron Acemoglu on the Arab Spring

Friday, September 30th, 2011

MIT economist Daron Acemoglu has a long interview in the current issue of The Region, a quarterly publication of the Minneapolis Federal Reserve.

This portion of the interview caught my eye. It was in response to the question “I wonder if you could share any thoughts you’ve had about how that research [with James Robinson] applies to the Arab Spring.”

The big question is, Is this going to be a political revolution in the same way as the Glorious Revolution in England, which unleashed a fundamental process of transformation in the political system with associated economic changes? Ultimately, such political revolutions are fundamental to the growth of nations. That’s one of the arguments we make.

Or is it going to be the sort of revolution like the Bolshevik Revolution or the independence movements in much of sub-Saharan Africa in the 1960s, where there was a change in political power, but it went from one group to another, which then re-created the same system and started the same sort of exploitative process as the previous one?

Douglas Clement, Interview with Daron Acemoglu, The Region (Federal Reserve Bank of Minneapolis), September 2011.

Daron Acemoglu (born 1967) is a Turkish economist of Armenian origin. He is co-author (with James Robinson) of Economic Origins of Dictatorship and Democracy (Cambridge University Press, 1995) and Why Nations Fail: Origins of Power, Poverty and Prosperity (forthcoming, Crown, 2012).

Acemoglu, though brilliant, is surprisingly humble. Douglas Clement, in the interview, recalls “In 2009, you [Acemoglu] gave a presentation at the International Monetary Fund/World Bank in which you answered the question, What should we do about the financial crisis? with a three-word answer: I don’t know.”

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Hong Kong maids

Friday, September 30th, 2011

Hong Kong’s High Court has ruled that a domestic helper from the Philippines should be allowed to apply for permanent residency in the city. ….

While other foreign nationals can obtain residency after working in Hong Kong for seven years, immigration rules exclude domestic helpers from seeking permanent residency. ….

[S]ome politicians and commentators warned that … permanent residency would allow them [domestic helpers] to bring their children and other relatives to the city, who would require education and housing. ….

There are more than 300,000 foreign domestic helpers in Hong Kong, mainly from Indonesia and the Philippines. It is thought that around 120,000 have lived here for more than seven years.

They are required to live with their employers and cannot accept other jobs.

Katie Hunt, “Philippine immigrant maid wins landmark Hong Kong case“, BBC News, 30 September 2011.

This is very interesting news. If these workers obtain permanent resident status, they become eligible for benefits, including subsidised housing (half of all Hong Kong residents live in public housing), education for their children, and a means-tested old age pension. The government plans to appeal the ruling. If the court decision stands, my prediction is that the government will limit work visas for domestic helpers to a maximum period of less than seven years. This happens in other countries. In Austria, where I reside, a friend recently ‘imported’ a helper from her native country (the Dominican Republic), and was granted permission to do so, on condition that the helper reside in Austria for no more than one year.

The article notes that Hong Kong’s foreign domestic helpers, even without permanent residence status, have better working conditions than they have in other countries of Asia. Their minimum wage is 3,740 Hong Kong dollars (US$480) a month, and employers are required to allow them at least one day of rest each week.

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Bayes’ Theorem

Thursday, September 29th, 2011

Here you will find an attempt to offer an intuitive explanation of Bayesian reasoning – an excruciatingly gentle introduction that invokes all the human ways of grasping numbers, from natural frequencies to spatial visualization.  The intent is to convey, not abstract rules for manipulating numbers, but what the numbers mean, and why the rules are what they are (and cannot possibly be anything else).  When you are finished reading this page, you will see Bayesian problems in your dreams.

And let’s begin.

Here’s a story problem about a situation that doctors often encounter:

1% of women at age forty who participate in routine screening have breast cancer.  80% of women with breast cancer will get positive mammographies.  9.6% of women without breast cancer will also get positive mammographies.  A woman in this age group had a positive mammography in a routine screening.  What is the probability that she actually has breast cancer?
What do you think the answer is?  If you haven’t encountered this kind of problem before, please take a moment to come up with your own answer before continuing.

Next, suppose I told you that most doctors get the same wrong answer on this problem – usually, only around 15% of doctors get it right.  (“Really?  15%?  Is that a real number, or an urban legend based on an Internet poll?”  It’s a real number. )

Continued at:

Eliezer S. Yudkowsky, “An Intuitive Explanation of Bayes’ Theorem“, 2003.

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Herbert Hoover, deficit spender

Thursday, September 29th, 2011

John Judis, in his October 6th New Republic cover story, mistakenly asserts that Herbert Hoover’s strategy, when he faced a financial crisis, was to cut spending and balance the budget. Timothy Taylor corrects this error. The truth is that President Hoover never cut spending, and ran increasingly large budget deficits as unemployment numbers rose. Franklin Roosevelt, in the 1932 election campaign, promised to end the Hoover deficits. When Roosevelt took office, he did attempt to pursue fiscal austerity, but quickly abandoned the idea.

At the end of this informative post, Taylor goes on to compare the size of Obama’s fiscal stimulus with that of Franklin Roosevelt.

Recent years have seen a far larger fiscal stimulus in response to a lower unemployment rate than in the 1930s. During the Great Depression, Franklin Roosevelt faced unemployment rates of 25% and continued the Hoover policy of budget deficits, running deficits no larger than 5.9% of GDP and more usually in the range of 3-4% of GDP through the 1930s. During the Great Recession, the U.S. economy experienced unemployment of nearly 10%, and has responded with fiscal stimulus on the order of 10% of GDP.

And the elephant in the room, which Judis doesn’t discuss, is the accumulation of debt. After all of the deficits of the 1930s, the total ratio of federal debt held by the public still totaled only 44.2% of GDP in 1940. Throughout the 1930s, the federal government had a lot of capacity to borrow–and could then still ramp borrowing much higher to finance the fighting of World War II. But in 2011, total federal debt held by the public is an estimated 72% of GDP. Looking ahead over the next decade, the federal government has a lot less capacity to borrow.

Timothy Taylor, “Herbert Hoover, Deficit-Spender: Correcting John Judis in The New Republic“, Conversable Economist, 28 September 2011.

An aspect of this elephant in the room, which Taylor does not mention, is the large public debt that President Obama inherited from G.W. Bush, the product of two unfunded wars, massive tax cuts, an unfunded Medicare drug benefit and other unfunded discretionary spending. This reduced – at least politically – the federal government’s ability to borrow and stimulate the economy. We do not know how much ‘wiggle-room’ is left, but federal government borrowing costs so far remain low and are falling.

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Martin Wolf on the euro crisis

Wednesday, September 28th, 2011

Martin Wolf, fresh from last weekend’s annual meetings of the World Bank and International Monetary Fund, is even more pessimistic regarding a solution for the eurozone crisis.

The financial crisis that broke upon the world in August 2007 has entered a new and, in crucial respects, more dangerous phase. …. What makes this process particularly frightening is that weaker sovereigns are unable to cope on their own, while the eurozone has nobody in charge. The eurozone may lack the capacity to address the crisis. ….

No good choices remain. The risks involved in the proposed actions are big. But the alternative of financial collapses and sovereign debt crises that ricochet across the globe is vastly worse. The need for such a rescue may be viewed as the price of having entered hastily into an indissoluble monetary marriage, tolerating the emergence of huge imbalances, failing to discipline the banks and then dealing with the emerging crisis so incompetently.

The eurozone has still to decide what it will be when it grows up. But first it needs to reach that stage. The costs of a meltdown would be too grave to contemplate. The members simply have to prevent that. They have no sane alternative.

Martin Wolf, “Fear and loathing in the eurozone“, Financial Times, 28 September 2011.

Update: Paul Krugman describes  Martin Wolf`s message with this diagram:

Note the complete lack of overlap between the two sets of proposals.

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Raghuram Rajan on the euro crisis

Tuesday, September 27th, 2011

Chicago economist Raghuram Rajan worries that there is not enough funding is to support weak countries in the eurozone:

In the short run, it is unlikely that Germany (and northern Europe in general) will put up more money. Germans are upset at being asked to support countries that do not seem to want to adjust – unlike Germany, which is competitive because it endured pain. It had years of low wage increases post-unification to absorb East Germany’s workers and deep labour market and pension reforms. The unwillingness of the Greek rich to pay taxes or of Italian parliamentarians to cut their own perks confirms their worst fears.

Raghuram Rajan, “Only the IMF can solve the eurozone crisis“, The A-List, Financial Times, 26 September 2011.

His solution? The IMF should “channel help” by setting up a special vehicle which would “borrow as needed from countries, including the US and China” and “offer large lines of credit to illiquid countries like Italy”.

Simon Tilford, chief economist at the London-based Centre for European Reform, disagrees.

IMF involvement, along the lines suggested [by Rajan] – additional firepower, but more of the same in terms of policy prescriptions – will not provide a long-term solution to the euro crisis ….

The eurozone needs debt mutualisation, not an IMF programme. But it also needs expansionary macroeconomic policies. There is no devaluation option for the likes of Spain and Italy, so if they are to cut their costs relative to Germany – without experiencing deflation and debt traps – German inflation will need to rise more quickly than the current projections of around one per cent. Aggressively expansionary fiscal policy (in those countries with the scope) … should not be feared. Without some inflation, the euro is not going to survive.

Simon Tilford, “Europe doesn’t lack funds, just political will“, The A-List, Financial Times, 26 September 2011.

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European reaction to Robert Lucas

Tuesday, September 27th, 2011

Via Mark Thoma, here is a European response to the Wall Street Journal‘s weekend interview of Nobel Laureate Robert Lucas.

When he [Lucas] is asked about Europe, he talks about the cost of high taxes. From the interview:

For the best explanation of what happened in Europe and Japan, he points to research by fellow Nobelist Ed Prescott. In Europe, governments typically commandeer 50% of GDP. The burden to pay for all this largess falls on workers in the form of high marginal tax rates, and in particular on married women who might otherwise think of going to work as second earners in their households. “The welfare state is so expensive, it just breaks the link between work effort and what you get out of it, your living standard,” says Mr. Lucas. “And it’s really hurting them.”

No doubt that (theoretically) high taxes could discourage effort but is this statement empirically relevant? Below is a chart of marginal tax rates … and the female employment to population ratio for the age range (25-54) for 2010 … (the chart looks similar if we look at a different age range or male participation rates).

Do we see more or less effort in countries with high tax rates? Not obvious. In fact, in the sample I have selected there seems to be a positive correlation, not a negative one. …. The US appears as a country with low taxes but also low levels of effort.

Antonio Fatás, “Macroeconomics: Evidence or Ideology“, Antonio Fatas and Ilian Mihov on the Global Economy, 26 September 2011.

Mr Fatás teaches economics at INSEAD, an international business school. He has an undergraduate degree (1987) from the Universidad de Valencia and a PhD (1993) from Harvard University.

This is yet another example of what I call “faith-based economics”: High taxes must discourage work, no matter what the evidence shows!

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Posted in Political Economy | 2 Comments »

Nick Rowe on the euro crisis

Tuesday, September 27th, 2011

Nick thinks all 17 eurozone countries should abandon the euro and restore national currencies.

I’ve written a lot of posts about the Eurozone. But they are “is” posts, about what I think will happen. And the things I think will happen are bad things. And I feel some sort of obligation to say at least something about what I think ought to be done to try to prevent some of those bad things happening, or at least make them less bad. This is as near as I can get to an “ought” post about the Eurozone.

Each country ought to restore its own national currency. I think this will happen anyway. But it would be better if they all did it at the same time, rather than one after the other. It will still be very nasty. But the nastiness won’t last as long. And what’s happening now while we wait for the break-up isn’t so great either.

Nick Rowe, “Is and ought for the Eurozone“, Worthwhile Canadian Initiative, 26 September 2011.

It is not easy to unscramble an omelette. But this might be less bad than the alternatives. I have to think about it, but not now. All this is too depressing.

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Wolfgang Münchau on the euro crisis

Monday, September 26th, 2011

FT columnist Wolfgang Münchau writes that the real problem of the eurozone “is not technical but political”. This, precisely, is what makes the crisis so intractable.

Berlin … is not the only source of uncertainty. Parliamentary majorities are melting in Helsinki, The Hague, Bratislava – and Athens. Do we really believe the Greek government can implement one austerity plan after another with a majority of five seats?

So even if Europe’s leaders were to come together tomorrow and agree on all the necessary steps to end the crisis, they would not have solved it until they could demonstrate that they enjoyed full political support. That is unlikely to be the case for a while yet. ….

I have never seen Europe’s policymakers as scared as I saw them in Washington last week [at the autumn meetings of the International Monetary Fund and the World Bank].

Wolfgang Münchau, “Zero hour for the euro“, Financial Times, 26 September 2011.

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