Tuesday, December 27, 2011

Capitalism is dead; long live capitalism

Financial Times
December 27, 2011

The market economy is the most successful mechanism for creating prosperity humanity knows. Allied to modern science, it has done more than transform the world economy; it has transformed the world. For the first time in history, the world’s principal states rely on the market economy to develop their economies. Almost as important, they rely on a global market economy. Contemporary states are destined to co-operate with one another if they are to prosper.

Yet the market economy is not as unchangeable as the laws of the Medes and the Persians in the book of Daniel. It is successful not because it stays the same, but because it does not. The driving force is the desire of all human beings to work for the betterment of themselves and their families. The mechanism is the equally natural search for a better deal. But institutional settings and relationships with political institutions have always been open to change. This very adaptability has ensured the survival of market economies.

Two centuries ago there was no limited liability, no personal bankruptcy, little central banking, no environmental regulation and no unemployment insurance. All these changes occurred in response to economic or political pressures. All brought with them new solutions and new challenges. At a time of ongoing financial shocks, this need for adaptation has not ended. On the contrary, it is as important as ever.


Sunday, December 25, 2011

Larry Ribstein (1946-2011)


Italy Tries Raising the Social Stigma on Tax Evaders

New York Times
December 24, 2011

On a recent morning, Maurizio Compagnone, an employee of Italy’s internal revenue service, stood before a classroom of middle school students in a leafy neighborhood here, preaching the virtues of paying taxes.

“You may think, ‘I’m 13, why should I care about taxes?’ ” he said with earnest enthusiasm as the students looked on, slightly bored. “But you can take a step in the right direction. You can change the behavior of the people around you, your parents and friends.”

Mr. Compagnone is one soldier in a battle — often uphill — to persuade Italy’s famously tax-evading citizens to pay up. Such efforts, along with a new blitz of public service announcements trying to raise the social stigma on tax evasion, have become crucial as Italy struggles to reduce its $2.5 trillion public debt and fend off speculative attacks.

The tax authorities say Italy loses an estimated $150 billion a year in undeclared revenues, while the national statistics authority places the underground economy to be about 17.5 percent of gross domestic product — the third highest in Western Europe after Malta and Greece but before Spain. Other experts place the percentage much higher.

To tackle the issue, Prime Minister Mario Monti’s new $40 billion austerity package, which received final approval on Thursday in the Senate, includes tougher measures that will allow tax officials to peer into Italians’ bank accounts to check declared income against bank deposits — not to mention yacht, car and home ownership — under a new cross-referencing initiative.

The measures also prohibit cash transactions above $1,300 — common in Italy, where low credit-card use keeps private debt low but evasion high — and lower the threshold for which tax evasion becomes a criminal offense. The government has also set an additional 1.5 percent tax on assets repatriated under an earlier tax amnesty, raising the levy for those requesting anonymity.


Saturday, December 24, 2011

12 Μύθοι για την Αγορά

του Αριστείδη Χατζή

24 Δεκεμβρίου 2011

Στο δημόσιο διάλογο ακούει και διαβάζει κανείς πολλές ανοησίες. Μερικές από τις χειρότερες όμως αφορούν τις διαβόητες «Αγορές». Στο συλλογικό φαντασιακό έχουν αναλάβει τον ρόλο του μπαμπούλα που τρομοκρατεί τους πολίτες, τις κυβερνήσεις ακόμα και τους διεθνείς οργανισμούς. Η εικόνα που κυριαρχεί είναι ότι οι Αγορές είναι σαν τα Τρολς, τα μυθικά τέρατα της σκανδιναβικής μυθολογίας: πανίσχυρες, ανορθολογικές, ασύδοτες, κινούνται ανεξέλεγκτα και απρόβλεπτα με ένα μόνο σκοπό, να καταστρέψουν τα πάντα στο πέρασμά τους. Για τους λίγο πιο εύπιστους είναι απαραίτητο και ένα ανθρωπομορφικό στοιχείο - πίσω από τις Αγορές υπάρχουν συγκεκριμένοι άνθρωποι και οργανώσεις που κινούν τα νήματα: η λέσχη Bilderberg, η Τριμερής, οι τραπεζίτες, οι Εβραίοι, οι Αμερικάνοι - τώρα και οι Γερμανοί.

Πάντα οι άνθρωποι προσπαθούσαν να εξηγήσουν φαινόμενα που αδυνατούσαν να κατανοήσουν καταφεύγοντας στη μεταφυσική. Η πολυπλοκότητα ενός κοινωνικού φαινομένου όπως η Αγορά, η άγνοια βασικών οικονομικών εννοιών, η δυσκολία αποδοχής του τυχαίου και η ευκολία αποδοχής απλοϊκών μύθων, η τάση για συνωμοσιολογία και, γιατί να το κρύψουμε άλλωστε, η ευήθεια, οδηγούν αναπόφευκτα σε μεταφυσικού τύπου κατασκευές με κυρίαρχο το ανθρωπομορφικό στοιχείο. Όσο δύσκολο είναι να κατανοήσει ο απλός άνθρωπος το μηχανισμό της Εξέλιξης άλλο τόσο είναι δύσκολο να κατανοήσει τους μηχανισμούς της Αγοράς.

Στο υπόλοιπο αυτού του κειμένου θα προσπαθήσουμε να καταρρίψουμε εν συντομία 12 μύθους για την Αγορά και να απαξιώσουμε τις αντίστοιχες λανθασμένες κυρίαρχες αντιλήψεις.

Μύθος 1: Η Αγορά είναι ένα μυθικό τέρας που μπορεί και να σας φάει ζωντανούς.

Ναι, μη σας φαίνεται υπερβολικό. Για πολλούς ανθρώπους η Αγορά είναι ένα από τα πολλά τέρατα που δεν τους αφήνουν να κοιμηθούν. Φαντάζομαι ότι αν ποτέ κατανοήσουν τι πραγματικά είναι η Αγορά, θα σοκαριστούν: η Αγορά είμαστε εμείς. Εσείς, εγώ, οι φίλοι σας, οι γονείς σας, τα αδέλφια σας, οι συνάδελφοί σας, το αφεντικό σας, ακόμα και οι εχθροί σας. Άτομα, νοικοκυριά, επιχειρήσεις μικρές, μεσαίες και μεγάλες. Οι τράπεζες, οι πολυεθνικές επιχειρήσεις, ο Bill Gates, ο George Soros, ο Νίκος Αλέφαντος, ο Αρχιεπίσκοπος Ιερώνυμος, η Έλενα Παπαρίζου, η κομμώτριά σας, ο μανάβης σας αλλά και ο μπατζανάκης σας. Oι αγορές και οι πωλήσεις, η παραγωγή προϊόντων, η παροχή υπηρεσιών, η κατανάλωση, η ζήτηση και η προσφορά, οι επιθυμίες και οι προτιμήσεις, οι προσδοκίες μας, το ρίσκο, η αβεβαιότητα, οι ζημιές, τα κέρδη, οι ευκαιρίες, οι ιδέες, τα λάθη. Όλες οι αποφάσεις μας, όλες μας οι συνήθειες, το σύνολο σχεδόν της δραστηριότητάς μας αποτελεί μέρος αυτής της Αγοράς.


Friday, December 23, 2011

Snakes and Ladders

by Amartya Sen

Financial Times

December 23, 2011

Like all good boys and girls, the readers of beyondbrics deserve their Christmas presents. So here for our loyal followers – and for those dipping into the site for the first time - is a seasonal gift from Nobel prize-winning economist Amartya Sen.

For those taking a break, it is something to savour over the holidays. For those tied to their desks, it is something for a quiet moment. Best wishes from all at beyondbrics.

Like many board games that were developed in India, of which chess is perhaps the most important and famous, the game of “snakes and ladders” too emerged in this country a long time ago. With its balancing of snakes that pull you down and ladders that take you up, this game has been used again and again as a metaphor for life, telling us about our fortunes and misfortunes, and going further, about the consequences of good deeds and bad actions. Good decisions yield handsome rewards – taking us rapidly up a ladder – and bad moves yield severe penalties – making us suffer a precipitate decline through the mouth of a long snake, all the way down to its distant tail.

Britain too found in this board game from their colony a good way of expressing their traditional ethical tales, illustrating, for example, the simple moralistic world of what was called “Virtue Rewarded and Vice Punished” – a game that became very popular in early 19th century. The English version used the graphic illustrations of the snakes and ladders to depict traditional English moral tales that made this old Indian game popular first in England and then in the British-dominated global world of the nineteenth century. The Indian names – from Sanskrit, Hindi, Urdu and other subcontinental languages – for the qualities that respectively yielded rewards and punishment were replaced in the English version into the names of classical English virtues such as penitence, pity, obedience and self-denial yielding ascent up the ladders, while time-honoured vices of depravity, cruelty, dandyness made one slip rapidly down through the body of a snake.

The diagnosis of virtues and vices is, of course, adaptable, and the richness of the analogy of snakes and ladders can be put to use today in discussing modern problems as well – even the contemporary challenges of economic and social policies. We can well ask: what are the nasty snakes we face today in thinking about economic policies in our troubled world, and what helpful ladders we should try to climb up in moving an economy and society forward – in a world full of opportunities as well as serious dangers. The distinctions are quite important for the emerging economies which are trying to decide where to emerge. We do not want to emanate from the bottom end of snakes, and would rather emerge at the top of elevating ladders. How can we do this?


Socioeconomic differences in the impact of smoking tobacco and alcohol prices on smoking in India

by Frank J Chaloupka, Emmanuel Guindon, Prabhat Jha and Arindam Nandi


December 23, 2011

In India, 1 in 5 of all adult male deaths and 1 in 20 of all adult female deaths at ages 30-69 are due to smoking. This column estimates that raising the price of cigarettes by 1% would decrease smoking by about 1.1% and even more so for poorer households.

“Sugar, rum, and tobacco, are commodities which are no where necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation”

—Adam Smith, The Wealth of Nations, 1776
Tobacco smoking and chewing are both common in India (Government of India 2010, Rani et al 2003), but the individual risks from smoking are markedly greater (Gajalakshmi et al 2003, Jha et al 2008). A large, nationally-representative study of mortality in over 1.1 million homes indicates that already 1 in 5 of all adult male deaths and 1 in 20 of all adult female deaths at ages 30-69 are due to smoking and India will soon have a million smoking deaths a year (Jha et al 2008). The study also suggests that the relative risk of death from any medical cause does not depend on educational level, but does depend on whether bidis or cigarettes were smoked, and the amount smoked (Figure 1). The risk ratio for a given number of bidis or cigarettes smoked was greater for cigarettes than for bidis. For example, compared to non-smokers, the risk of dying as a result of smoking 1-7 bidis per day was 30% higher compared to an increase in risk of 80% from smoking the same number of cigarettes per day.

Figure 1. Relative risk of death by amount and type of smoking, men aged 30-69


The Darwin economy

Robert H. Frank interviewed by Romesh Vaitilingam

December 23, 2011

Robert Frank of Cornell University talks to Romesh Vaitilingam about his book, "The Darwin Economy: Liberty, Competition and the Common Good." He argues that Charles Darwin's understanding of competition – in which individual and group interests often diverge sharply – describes economic reality far more accurately than Adam Smith's. They discuss the implications of this view for current debates about inequality, taxation, and policies to get out of economic stagnation. The interview was recorded in London in November 2011.

Listen to the Interview

Europe's Single Market Isn't a Free Market

by Philip Booth

Wall Street Journal

December 23, 2011

Twenty-five years ago, the Conservative establishment in Britain welcomed proposals for the European Union's single market as a step forward for free enterprise in Europe. The single market had many Tory opponents, but most in the party used the terms "free market" and "single market" interchangeably. Former Prime Minister Ted Heath pointed out this error in a parliamentary debate 20 years ago, suggesting, perhaps with a note of triumphalism, that the single market was not a free market.

Heath's prediction seems to have borne out. In many sectors of the economy, the single market has undoubtedly promoted free trade and, at the very least, made markets freer in those countries that were the most dirigiste. The guiding principle in these industries has been "mutual recognition," or regulatory competition. EU directives required some minimal harmonization of EU law but also banned restrictive regulation in some countries. This meant, for example, that a U.K. insurance company could do business anywhere in the EU while still regulated by the U.K. insurance regulator. The U.K. had to regulate a little more, but other countries had to deregulate hugely. This was how the British Tory establishment envisaged the single market developing.

But more recently, advancing the single market has taken the form of imposing uniform regulation across member states. In insurance, a huge superstructure of regulation is being created through the Solvency II program, which replicates, to a large degree, the failures of the Basel banking accords. For example, Solvency II will require very similar regulation across all member states and determine very precisely how much capital insurance companies should hold to deal with known risks. In other areas of financial regulation, the EU is now using the powers it gained under the Single European Act to increase regulation. This compounds the errors of the various financial-markets directives such as MiFID and the Prospectus Directive.


Thursday, December 22, 2011

Is Fear of Divorce Keeping People from Getting Married?

by Belinda Luscombe


December 22, 2011

Marriage, it is sometimes argued, is a feminist institution, put in place to offer legal protection to women from being abandoned by men who wish to sow their seed in ever greener pastures. It’s a slightly antique (and misandrist) view, formulated at a time when home and hearth were a woman’s horizons. Plus, as a new study suggests, it is often women, rather than men, who view marriage as a trap.

In a survey of 61 cohabiting couples ages 18 to 36 in Columbus, Ohio, researchers from Cornell and the University of Central Oklahoma found that women, particularly lower-income women, were concerned about being trapped in marriage and having no way out if things went awry. The survey respondents also revealed that they had serious concerns about divorce: about 67% said they were worried about the potential social, emotional and economic fallout of splitting up. The researchers suggest that this is one of the reasons the couples had chosen to live together without getting married. While that sounds a little bit like choosing to stick with the shrimp appetizers for fear that the main dish will give you food poisoning, these young couples tended to think the legal and financial upheaval caused by a divorce wasn’t worth the risk.

The study, which was published in the December issue of Journal of Family Relations, is one of several in recent weeks to examine the diminishing rate of marriage in the U.S. According to a Pew Research Center analysis last week, just over half of adult Americans are married, the lowest rate in decades. Some of the rollback is because people are getting married later, and some of it is because cohabitation rates are rising. The new study suggests that divorce is also a very real presence in couple’s minds.

Divorce is not an equal-opportunity specter, however. Middle-class couples were less spooked by it — and by marriage — than low-income couples. For poorer women who tended to feel that marriage was a trap, many reported fearing that a legal union would lead to extra work and responsibilities on their part, without any additional benefits. “Middle-class respondents disproportionately asserted that marriage meant commitment, something they viewed as a positive feature of the institution,” the authors write. “When working-class women referenced commitment, on the other hand, they did not view it in a particularly positive light.”


Sunday, December 18, 2011

Reframing the Debate Over Using Phones Behind the Wheel

New York Times
December 17, 2011

For years, policy makers trying to curb distracted driving have compared the problem to drunken driving. The analogy seemed fitting, with drivers weaving down roads and rationalizing behavior that they knew could be deadly.

But on Tuesday, in an emotional call for states to ban all phone use by drivers, the head of a federal agency introduced a new comparison: distracted driving is like smoking.

The shift in language, in comments by Deborah Hersman, the chairwoman of the National Transportation Safety Board, opened a new front in a continuing national conversation about a deadly habit that safety advocates are trying desperately, and with a growing sense of futility, to stop.

Her new tack also echoes a growing consensus among scientists that using phones and computers can be compulsive, both emotionally and physically, which helps explain why drivers may have trouble turning off their devices even if they want to. In effect, they are saying that the running joke about BlackBerrys as “CrackBerrys” is more serious than people think.

“Addiction to these devices is a very good way to think about it,” Ms. Hersman said in an interview. “It’s not unlike smoking. We have to get to a place where it’s not in vogue anymore, where people recognize it’s harmful and there’s a risk and it’s not worth it.”

She added: “If you can’t control your impulses, you need to lock your phone in the trunk.”


See the video

Wednesday, December 14, 2011

Regulation for Dummies

Wall Street Journal
December 14, 2011

The White House is on the political offensive, and one of its chief claims is that it isn't the overregulator of business and Republican lore. This line has been picked up by impressionable columnists, so it's a good time to consider the evidence in some detail.

Jan Eberly, an Assistant Treasury Secretary, kicked off the Administration campaign with a white paper in October that purported to debunk the "misconceptions" that "uncertainty is holding back business investment and hiring and that the overall burden of existing regulations is so high that firms have reduced their hiring." Then the Administration mobilized some of the worst offenders, such as Kathleen Sebelius of HHS ("There has been no explosion of new rules") and Lisa Jackson of the EPA (her opponents are "using the economy as cover").

To answer the most basic question—has regulation increased?—we'll focus on what the government defines as "economically significant" regulations. Those are rules that impose more than $100 million in annual costs on the economy, though there are hundreds if not thousands of new rules every year that fall well short of that.

According to an analysis of the Federal Register by George Mason University's Mercatus Center, the Cabinet departments and agencies finalized 84 such regulations annually on average in President Obama's first two years. The annual average under President Bush was 62 and under President Clinton 56.

Cass Sunstein, the director of the White House Office of Information and Regulatory Affairs, has been shopping around lower numbers that selectively compare Mr. Obama's first two years favorably with Mr. Bush's last two. Administrations are typically most active on the way out, and in any case the Bush regulatory record is nothing to crow about. But Mr. Sunstein's numbers are even more misleading because they only include the rules that his office reviews while excluding the prolific "independent" agencies such as the Federal Communications Commission.


Tuesday, December 13, 2011

Supply & Demand: A Thug Story

This song was created by George Mason University students to enter the Supply and Demand Video Contest sponsored by Fayetteville State University's Hackley Endowment.

Sunday, December 11, 2011

The Effect of Succession Taxes on Family Firm Investment: Evidence from a Natural Experiment

by Margarita Tsoutsoura

University of Chicago Booth School of Business
Chicago Booth Research Paper No. 12-15

December 11, 2011

This paper exploits a natural experiment to study the effect of succession taxes on firm succession and investment decisions. The experiment is made possible by the Greek government’s decision to abolish its high tax on intra-family transfers of businesses in 2002. This change in tax policy is used to identify the effect on investment using two methodologies: 1) A difference-in-difference-in-differences (DDD) methodology, and 2) an instrumental variables (IV) approach, which exploits the gender of the first-born child of the departing entrepreneur as an instrument for family successions. Both the DDD and the IV estimates show that in the presence of high succession taxes firms undergoing an intra-family transfer of ownership experience a more than 40% drop in investment around succession. High succession taxes are also associated with lower propensity for intra-family succession, slow total asset growth and a depletion of cash reserves (presumably used to pay taxes) for firms experiencing family successions. To identify the mechanism through which taxes affect investment, I collect data on the income of the entrepreneurs from sources other than the firm undergoing succession. I find that the investment effects are much stronger for family firms owned by entrepreneurs with relatively low income from other sources. This suggests that the observed effect of the succession tax on investment is driven by financial constraints.

Read the Paper

Thursday, December 8, 2011

Debit-Fee Cap Has Nasty Side Effect

Wall Street Journal
December 8, 2011

Jason Scherr had a lot on his mind the day after he opened his fifth Think Coffee shop in Manhattan last week. The fan was blowing too hard, the classical music was playing a little too loudly—and he was trying to figure out how to get more customers to pay with cash.

A new law that was supposed to reduce costs for merchants that accept debit cards has instead sent Mr. Scherr's monthly processing bills much higher and forced him to reassess the way he does business.

"My choice is to raise prices, discount for cash or get an ATM," says Mr. Scherr, a lawyer who has been in the coffee-shop business for more than a decade.

Just two months after one of the most controversial parts of the Dodd-Frank financial-overhaul law was enacted, some merchants and consumers are starting to pay the price.

Many business owners who sell low-priced goods like coffee and candy bars now are paying higher rates—not lower—when their customers use debit cards for transactions that are less than roughly $10.

That is because credit-card companies used to give merchants discounts on debit-card fees they pay on small transactions. But the Dodd-Frank Act placed an overall cap on the fees, and the banking industry has responded by eliminating the discounts.


See also

Consumers Are Paying for New Debit-Card Law

Wall Street Journal
December 7, 2011

A new debit-card law that was supposed to reduce costs for merchants is taking a bite out of consumer wallets instead. Robin Sidel has details on The News Hub.


See also

Tuesday, December 6, 2011

The long and winding road to cannabis legalisation

by Jan van Ours


December 6, 2011

In many Western countries, between one quarter and one third of the population admit to having used cannabis at least once in their lives – according to the official statistics. This column provides an in-depth review of existing economic, social, and media evidence for and against legalisation. It concludes that although there is of course uncertainty surrounding the long-term implications, prohibition is not working and it is time to legalise.

Although some countries have quasi-legalised cannabis use (the Netherlands), made cannabis available for medical purposes (California), or allowed the growing of a small number of cannabis plants for personal use (Australia), in most countries – the Netherlands included – cannabis supply, distribution, and use is prohibited (Reuter 2010). Nevertheless, in 2009, between 2.8% and 4.5% of the world population aged 15-64, corresponding to between 125 million and 203 million people had used cannabis at least once in the past year (United Nations Office on Drugs and Crime 2011).

Table 1 presents cannabis use statistics for a number of countries, distinguishing between lifetime use (ever), recent use (last year) and current use (last month). The range in lifetime use is substantial from a low 21% in Sweden to a high 42% in the United States. The range in recent cannabis use is also substantial from a low 1% in Sweden to a high 14% in Italy. Finally, current use ranges from 1% in Sweden to 7% in Spain and the United States. What is also striking is the big difference between lifetime use and recent use. In the Netherlands for example 25% of the population aged 15 to 64 has ever used cannabis but only 7% has done so in the last year. Apparently, for a substantial part of the users, cannabis is not very addictive (see also Van Ours 2006 for details).


Boosting growth in high-debt times: The role of service deregulation

by Guglielmo Barone and Federico Cingano


December 6, 2011

Many European countries face the challenge of credibly reducing their debt-to-GDP ratios. Boosting output growth is therefore an urgent and key political and economic priority. This column argues that increasing competition in the market for key upstream service activities – in particular, energy and professional services – could have sizeable effects on growth by improving the performance of downstream manufacturing industries.

Many European countries face the challenge of credibly reducing their debt-to-GDP ratios. Boosting output growth is therefore an urgent and key political and economic priority. Given the existing constraints to demand-side measures, most observers see structural (supply-side) reforms as the main policy tool such countries have at their disposal to “grow out” of their debt problems (e.g. Ivanova et al. 2011, Fernandez-Villaverde and Rubio-Ramirez 2011, Amato et al. 2010). The specific measure they should focus on and the gains to be expected from such reforms are, however, less clear.

Based on recent research on OECD data, this column argues that increasing competition in the market for key upstream service activities – in particular, energy and professional services – could have sizeable effects on growth by improving the performance of downstream manufacturing industries.

In many countries, key inputs such as professional services, energy, transportation, and telecommunication services are not only scarcely traded internationally, but also sheltered from domestic competition by substantial administrative restrictions, including:
  • monetary and non-monetary barriers to market entry;
  • the integration of a priori competitive activities with natural monopolies (as in the case of energy); or
  • the existence of restrictions to market conduct (as in professional services).
Such restrictions have negative effects on growth in services, in particular because they reduce investments (Alesina et al. 2005). This direct negative effect is only part of the story, however. Combining service-regulation indexes with data on growth in manufacturing industries for a sample of OECD countries, we have shown that there are also sizeable indirect effects, from service regulation to the performance of downstream activities (Barone and Cingano 2011). Interestingly, similar findings are obtained by other works investigating the same issue with different approaches (see Bourlès et al. 2010, Arnold et al. 2011).


Saturday, December 3, 2011

Corrosive corruption

December 2, 2011

The use of public office for private gain benefits a powerful few while imposing costs on large swathes of society. Transparency International's annual Corruption Perceptions Index, published on December 1st, measures the perceived levels of public-sector graft by aggregating independent surveys from across the globe. Just five non-OECD countries make the top 25: Singapore, Hong Kong, Barbados, Bahamas and Qatar. The bottom is formed mainly of failed states, poor African countries and nations that either were once communist (Turkmenistan) or are still run along similar lines (Venezuela, Cuba). Comparing the corruption index with the UN's Human Development Index (a measure combining health, wealth and education), demonstrates an interesting connection. When the corruption index is between approximately 2.0 and 4.0 there appears to be little relationship with the human development index, but as it rises beyond 4.0 a stronger connection can be seen. Outliers include small but well-run poorer countries such as Bhutan and Cape Verde, while Greece and Italy stand out among the richer countries.


Friday, December 2, 2011

The price of children and fertility responses: Evidence from the Israeli Kibbutz

by Avraham Ebenstein, Moshe Hazan and Avi Simhon


December 2, 2011

For years, policymakers trying to influence the decisions of would-be parents have tried to change the ‘price’ of having children. In France they have made it cheaper; in China more expensive. This column looks at whether such policies are likely to have their desired effect. It examines unique evidence of a shock to the cost of having a child in Israeli communities between 1990 and 2000.

To what extent does economics affect fertility decisions? Ever since Gary Becker’s seminal work on the economics of the family in the 1960s (Becker 1960), economists have argued that money weighs heavily on the minds of would-be parents, and policymakers throughout the world have been heavily influenced by such research. For instance, French policymakers looking to combat an ageing population have not only implemented generous maternity-leave benefits at almost full pay, they have also provided special support for women who have a third child and reduced mortgage payments on larger apartments. China, meanwhile, has tried to push fertility in the opposite direction. In a bid to stem its growing population, China’s One Child Policy has imposed heavy costs on parents who have unsanctioned births, with fines often representing several years of household income for parents who have a second or third child. For policymakers, the relationship between fertility and financial incentives has tremendous relevance.

In recent research (Ebenstein et al. 2011), we try to test the effectiveness of such policies. To conduct a reliable study, we would require data on a large population who experienced a dramatic and sudden change (‘an exogenous shock’) to the cost of raising children. To a large extent, this is precisely what occurred in many collective communities (kibbutzim) in Israel during the 1990s and 2000s, as a result of a wave of “privatisation” where kibbutzim began to require members to bear the costs of children privately. Traditionally, in kibbutzim the cost of raising children was borne fully by the collective, with all costs of daily life shared equally among members. The collective funded food, medical care, day care, clothing, and education. Parents with more children were allocated larger housing units by the kibbutz, insulating parents from virtually any (financial) marginal cost of having an additional child. Beginning in 1996, however, kibbutzim began to change their economic organisation by paying differential wages and charging their members the full price for services that had previously been provided at no cost to the member. Privatisation transferred the costs of food, day care, clothing, and housing from the collective to the individual parents. Between 1996 and 2005, 166 of the 237 kibbutzim were privatised. For economists, this provides an ideal opportunity to examine how changes in the cost of childbearing affect fertility.


Read the Paper

The Spirit of Enterprise

by David Brooks

New York Times

December 1, 2011

Why are nations like Germany and the U.S. rich? It’s not primarily because they possess natural resources — many nations have those. It’s primarily because of habits, values and social capital.

It’s because many people in these countries, as Arthur Brooks of the American Enterprise Institute has noted, believe in a simple moral formula: effort should lead to reward as often as possible.

People who work hard and play by the rules should have a fair shot at prosperity. Money should go to people on the basis of merit and enterprise. Self-control should be rewarded while laziness and self-indulgence should not. Community institutions should nurture responsibility and fairness.

This ethos is not an immutable genetic property, which can blithely be taken for granted. It’s a precious social construct, which can be undermined and degraded.

Right now, this ethos is being undermined from all directions. People see lobbyists diverting money on the basis of connections; they see traders making millions off of short-term manipulations; they see governments stealing money from future generations to reward current voters.

The result is a crisis of legitimacy. The game is rigged. Social trust shrivels. Effort is no longer worth it. The prosperity machine winds down.

Yet the assault on these values continues, especially in Europe.

Over the past few decades, several European nations, like Germany and the Netherlands, have played by the rules and practiced good governance. They have lived within their means, undertaken painful reforms, enhanced their competitiveness and reinforced good values. Now they are being brutally browbeaten for not wanting to bail out nations like Greece, Italy and Spain, which did not do these things, which instead borrowed huge amounts of money that they are choosing not to repay.


Thursday, December 1, 2011

Italy, Greece Among Worst Euro Nations in Corruption Ranks; N.Z. Cleanest

December 1, 2011

Italy and Greece scored the lowest among euro-area countries in a global corruption ranking as their inability to tackle graft and tax evasion exacerbated the debt crisis, watchdog group Transparency International said.

Italy came in 69th and Greece placed 80th, down from 67th and 78th respectively in the 2010 ranking, the Berlin-based group’s Corruption Perceptions Index showed today. Ireland dropped five places to 19th, earning a score of 7.5 out of 10, a drop from 8 points in last year’s ranking, Transparency said.

“Euro-zone countries suffering debt crises, partly because of public authorities’ failure to tackle the bribery and tax evasion that are key drivers of debt crisis, are among the lowest-scoring EU countries,” the group said in the report.

Europe’s engulfment in the sovereign-debt crisis has exposed the failure of indebted governments to raise revenue and tackle reforms, prompting crowds of protesters to fill the streets to demand their ouster. Italy’s Silvio Berlusconi resigned as prime minister last month, two days after his Greek counterpart, George Papandreou, was forced out.

New Zealand maintained its top position in the ranking, alongside Denmark and Finland. North Korea debuted on the list with a score of 1, ranking last with Somalia, a rung lower than Afghanistan and Myanmar, according to Transparency.

The U.S. dropped two spots to 24, though the world’s biggest economy retained its 7.1 score. The index, which measures the perception of corruption in the public sector, showed that two-thirds of the 183 nations reviewed scored below five on a 0-to-10 scale, with 10 indicating the least corrupt, Transparency said.


Tuesday, November 29, 2011

A wise man knows one thing – the limits of his knowledge

by John Kay

Financial Times

November 29, 2011

John Maynard Keynes, who never tried to conceal that he knew more than most people, also knew the limits to his knowledge. He wrote “about these matters – the prospect of a European war, the price of copper 20 years hence – there is no scientific basis on which to form any calculable probability whatever. We simply do not know.”

And Keynes was right. He published these observations in 1921, and 20 years later Britain was engaged in a desperate, and unpredictable, struggle with Germany.

But lesser men find prognostication easier. I have been looking at some of the models people use, in both the public and private sectors to predict events.

The models share a common approach. They pose the question: “How would we make our decision if we had complete knowledge of the world?” With such information you might make a detailed assessment drawing together many different pieces of relevant information on matters such as costs, benefits, and consequences.

But little of this knowledge exists. So you make the missing data up. You assume the future will be like the past, or you extrapolate a trend. Whatever you do, no cell on the spreadsheet may be left unfilled. If necessary, you put a finger in the air.


Γκαζώνω και δεν πληρώνω

του Στράτου Παπαδημητρίου

Τα Νέα

29 Νοεμβρίου 2011

Αν υπάρχει ένας χώρος όπου καθρεφτίζεται ανάγλυφα η παθογένεια της ελληνικής κοινωνίας, αυτός είναι ο δρόμος και το πεζοδρόμιο. Το πώς οδηγούμε, πώς συμπεριφερόμαστε ως οδηγοί και πώς η πολιτεία αντιμετωπίζει τις σχετικές παραβατικές συμπεριφορές είναι ενδεικτικά για το τι συμβαίνει και στους άλλους τομείς της κοινωνίας.

Κατ' αντιστοιχία με το χρέος και τα ελλείμματα, είναι γεγονός ότι κατέχουμε μία από τις πρώτες θέσεις, αν όχι την πρώτη, στην Ευρώπη στα τροχαία δυστυχήματα σε σχέση με τον πληθυσμό μας, παρά τον ισχυρισμό ότι είμαστε πολύ καλοί οδηγοί. Ακόμη και η σημαντική μείωση κατά 15% των ατυχημάτων του πρώτου εξαμήνου του 2011 σε σχέση με το αντίστοιχο του 2010 οφείλεται περισσότερο στη μείωση των διανυόμενων χιλιομέτρων.

Για την κατάσταση στους δρόμους και στα πεζοδρόμια ευθυνόμαστε όλοι μας. Την πιο σημαντική ευθύνη έχει βέβαια η πολιτεία και η τοπική αυτοδιοίκηση, με την απουσία συστηματικής εκπαίδευσης από τα σχολικά χρόνια, την παραβίαση βασικών κανόνων σήμανσης και συγκοινωνιακής τεχνικής, την πλημμελή συντήρηση, τη διαχρονική ελλιπή αστυνόμευση... Αλλά εξίσου σημαντική ευθύνη έχουμε και όλοι εμείς ως οδηγοί και ως πολίτες.

Στον δρόμο οφείλουμε να συμβιώνουμε όλοι αρμονικά τηρώντας τους κανόνες που εμείς έχουμε θέσει. Δυστυχώς, αντί γι' αυτό, συνήθως ισχύει το δίκαιο του ισχυροτέρου (κατά σειρά: φορτηγά, λεωφορεία, αυτοκίνητα, μοτοσικλέτες, ποδήλατα, πεζοί). Είναι εξάλλου αξιοπερίεργο το ότι, ενώ σε διάφορες χρονικές στιγμές οι ρόλοι μας αλλάζουν - οδηγός τη μία, πεζός την άλλη -, όταν επιστρέφουμε στον ρόλο του ισχυροτέρου ξεχνάμε τις αρνητικές εμπειρίες που είχαμε με την προηγούμενη ιδιότητα. Μπορεί δηλαδή να διαμαρτυρόμαστε για την έλλειψη πεζοδρομίων, αλλά αυτό δεν σημαίνει ότι δεν θα παρκάρουμε μπροστά σε στάση λεωφορείων αν δεν βρίσκουμε χώρο αλλού. Ομοίως φερόμαστε και στο πλαίσιο της οικονομίας. Μπορεί, π.χ., ως πελάτες να μη μας αρέσει όταν κάποιος εστιάτορας δεν μας δώσει απόδειξη, αλλά αυτό δεν σημαίνει ότι οι περισσότεροι θα είχαμε πρόβλημα να διαπραγματευτούμε την τιμή χωρίς απόδειξη με τον ηλεκτρολόγο αν αυτό μας ωφελούσε ή να αποκρύψουμε κάποιο δικό μας εισόδημα αν ήταν δυνατό.


Elected Dirty Dealers

by Luigi Zingales

Project Syndicate

November 29, 2011

Imagine that you are an elected member of the United States House of Representatives in the middle of the debate on the health-care reform act that was passed in 2010. In a House committee meeting, you learn before anyone else that a proposed public-insurance option – a program that would compete with private insurance, – will not be included. This information will have a large impact on health-care companies’ stock prices. Can you trade these companies’ shares before it is made public?

Morally, it is difficult to separate this example from traditional cases of corporate insider trading. Yet no law prohibits the practice. The US Congress – the legislative branch of the country’s government – effectively exempts itself from the normal rules of insider trading. Congress and the US Supreme Court are the only federal agencies whose employees may, without restrictions, trade stocks based on non-public information. All other US government employees who traded on privileged information of the type described above would be acting illegally.

Not only can members of Congress legally trade on confidential information; they do, despite the potential cost to their reputations. The US television program 60 Minutes recently reported that several current members of Congress allegedly used confidential information that they acquired on the job for personal gain. While the nexus between the privileged information and the trading is difficult to prove (as it is in most insider trading cases), the timing is highly suspicious.


Can education policy be used to fight crime?

by Randi Hjalmarsson, Helena Holmlund and Matthew Lindquist


November 29, 2011

How should society fight crime? This column argues education policy should be part of the answer. Exploiting a Swedish education reform as a source of exogenous variation in years of education, it suggests that one additional year of schooling decreases the likelihood of conviction by 7.5% for males and by 11% for females.

How should society fight crime? Should we adopt tough-on-crime policies that increase monitoring and lengthen prison sentences? Or should we adopt a softer strategy aimed at alleviating poverty and combating discrimination?

In the past decade, economists have entered this ongoing debate in earnest. An excellent example of this new engagement is Cook and Ludwig (2011), which proposes three concrete policies for fighting crime:
  • Increasing mandatory schooling
  • Encouraging private self-protection initiatives; and
  • Raising alcohol taxes.
Their approach is not based on the rhetoric of soft versus hard strategies, but rather a rational choice framework in which effective policy makes crime less attractive and law-abiding behaviour more attractive and helps citizens make better-informed decisions. Furthermore, their suggestions are the by-products of the policy evaluation literature aimed at determining which policies actually work.

Here, we focus solely on their first suggestion – increasing mandatory education – and report a more detailed account of the research underlying the idea that education policy can, in fact, be used to fight crime.


Read the Paper

Sunday, November 27, 2011

Market-economy status for China is not automatic

by Bernard O’Connor


November 27, 2011

Is China a market economy? This legal question matters as antidumping and anti-subsidies laws apply differently to market economies. This column deconstructs the myth that China will automatically get market-economy status at the WTO in 2016 and argues that if China wants the EU to recognise it as a market economy it should comply with the explicit criteria in EU law.

In EU trade-defence law (antidumping and anti-subsidies), there is provision for different treatment between those exporting countries which are considered to have the status of being a market economy and those which are not. If a country does not have market-economy status it is easier to construct the normal value of the exported goods. The constructed normal value will normally be based on costs and prices from outside the exporting country and thus are likely to be higher. This means that when the comparison is made between the normal value and the export price the level of dumping is likely to be higher.

China therefore has a strong interest in arguing that it is a market economy. However China goes further. It argues that it is automatically entitled to market-economy status on the basis of the protocol it signed to become a member of the WTO.

There is nothing in the WTO rules, or elsewhere, to provide that China automatically gets market-economy status in 2016. The idea that it will is a misunderstanding shared by many in China, the EU and the US.


Saturday, November 26, 2011

The growing international campaign against tax evasion

by Bruce Blonigen, Lindsay Oldenski and Nicholas Sly


November 26, 2011

The most recent G20 summit led to a multilateral agreement to facilitate information sharing between tax agencies, with the US currently negotiating bilateral tax treaties with the tax havens of Switzerland and Luxembourg. But before celebrations begin, this column points out that cracking down on tax evasion comes at a cost. International investment may well suffer.

One of the few solid agreements that came out of the latest G20 summit in Cannes was that governments will increase their cooperative efforts to curb tax evasion. The agreement, called the Convention on Mutual Administrative Assistance in Tax Matters, allows national tax agencies to request greater amounts of information from foreign governments on the activity of multinational enterprises and private citizens that are otherwise outside their authority to monitor. Under the new agreement, countries can choose voluntarily to transmit tax information about foreign parties in bulk to their resident country’s tax agency. There are also provisions of the convention that will require nations to assist in the recovery of foreign tax claims if a business or individual is in noncompliance.

Several leaders of G20 nations cited reports from the OECD that recent efforts to reduce tax evasion have resulted in more than $14 billion of additional tax revenue being collected, with hints that there are much greater amounts of offshore tax liabilities yet to be collected. With mounting government debt in most nations, the incentives for them to reduce tax evasion are clear. But if we take a closer look, this may be just the next step in the ongoing efforts of developed countries to recapture lost revenues by multinational firms. In particular, most bilateral tax treaties include similar requirements for cooperation in sharing of tax information between the two governments. The signing and renegotiation of tax treaties has proliferated in recent decades and Easson (2000) reports that there are nearly 2,500 treaties in force worldwide. The current US activity on tax treaties is also telling. The US Senate has pending agreements with Switzerland and Luxembourg, two countries that are typically on lists of tax havens, and in June of this year the US Treasury Department announced a plan to renegotiate its tax treaty with Japan, where provisions for information sharing are relatively weak. Deterring tax evasion has long been a priority for governments in coordinating the international tax system.


Wednesday, November 23, 2011

Οικονομία και ηθική

του Νίκου Κυριαζή

Το Βήμα

23 Νοεμβρίου 2011

Η σχέση οικονομίας και ηθικής έχει τονισθεί ουσιαστικά από τη δημιουργία της οικονομικής επιστήμης ως ανεξάρτητης επιστήμης το 1776 από τον Ανταμ Σμιθ, που ο ίδιος ήταν καθηγητής « Ηθικής». Στην σύγχρονη επιστήμη αναλύεται όλο και πιο συχνά στα πλαίσια της θεσμικής προσέγγισης. Η ηθική είναι πολύ σημαντική για την καλή λειτουργία της οικονομίας γιατί δημιουργεί εμπιστοσύνη μεταξύ των συναλλασσόμενων που με την σειρά της μειώνει το «κόστος συναλλαγής» (transaction cost) όπως το όρισε ο νομπελίστας R. Coase, που όσο μικρότερο τόσο καλύτερη είναι η κατανομή των πόρων και βέλτιστη «απόδοση» τους, άρα αυξάνεται και η συνολική ευημερία της οικονομίας. Κόστη συναλλαγής είναι πχ τα κόστη πληροφόρησης, εξασφάλισης των όρων της κλπ.

Ένα παράδειγμα το κάνει κατανοητό: αν δυο άτομα έχουν απόλυτη εμπιστοσύνη ο ένας στον άλλο, ο πρώτος μπορεί να συνδιαλλαγεί με τον δεύτερο (πχ σύναψη εμπορικής πράξης, δανείου κλπ) μόνο με προφορική συμφωνία ή ένα γραπτό ιδιόχειρο σημείωμα (όπως γινόταν συχνά στον Μεσαίωνα μεταξύ μελών εμπορικών συντεχνιών (guilds)). Αν δεν υπάρχει εμπιστοσύνη, τότε πρέπει αν γραφούν συμβόλαια από συμβολαιογράφους, δικηγόρους κλπ που συνεπάγεται κόστος συναλλαγής για τους συμβαλλόμενους.

Ο Μιλ (το 1848) και ο Σέντορ (το 1936) θεωρούν πως η εμπιστοσύνη απορρέει ως ηθική υποχρέωση, ενώ ο νομπελίστας Αρροου την ονομάζει το «γράσο» (lubricant) των κοινωνικών επιστημών.

Ιδιαίτερα σημαντική είναι η ηθική ως δημιουργία εμπιστοσύνης στις σχέσεις κράτους πολίτη. Κι εδώ η φορολογική πολιτική έχει τον πρώτο ρόλο. Σύγχρονοι οικονομολόγοι, όπως ο νομπελίστας Τζέιμς Μπουκάναν (σε άρθρο του το 1986 «Τα ηθικά όρια της φορολογίας») έχουν επιχειρηματολογήσει πως υπάρχουν σαφή ηθικά όρια στην φορολόγηση, που αν το κράτος τα υπερβεί, κατακρημνίζεται η εμπιστοσύνη με καταστροφικές συνέπειες για την λειτουργία της οικονομίας.

Τα πρόσφατα φορολογικά μέτρα στην Ελλάδα υπερβαίνουν αυτά τα όρια. Η πρώτη στάθμιση της ηθικής της φορολογίας έχει ως μέτρο την ανταποδοτικότητα. Κάθε φορολογία που δεν είναι πλήρως ανταποδοτική, δεν είναι «ηθική» και η ανταποδοτικότητα της φορολογίας στην Ελλάδα είναι μικρή. Το κράτος δήθεν προσφέρει αγαθά στους πολίτες του «δωρεάν υπηρεσίες» (δηλαδή που έχουν πληρωθεί από τη φορολογία) αλλά στην πραγματικότητα όχι, πχ: δωρεάν παιδεία με πληρωμή για φροντιστήρια, δωρεάν περίθαλψη με φακελάκια για τους γιατρούς, δωρεάν πολεοδομικές άδειες με μίζες κλπ.


Tuesday, November 22, 2011

The dynamics of firm lobbying

by William Kerr, William Lincoln and Prachi Mishra


November 22, 2011

Lobbying is a primary avenue through which firms attempt to change policy. But only a few big firms lobby and lobbying is highly persistent over time. This column argues that entry costs to the political process help explain these facts. It provides evidence from a change in immigration policy that induced firms that were already lobbying and were sensitive to the policy changes to switch from lobbying on other issues towards immigration while other firms did not enter the lobbying process.

Lobbying is a primary avenue through which firms attempt to change policy. In the US, probably the only country with systematic disclosure of lobbying activities, lobbying expenditures outnumber other forms of politically-targeted activities like campaign contributions by a factor of nine. Examples of important recent contributions to our understanding of this area are Bertrand et al (2011) and Blanes i Vidal et al (2011). While lobbying by businesses is a frequently debated issue in popular discourse, there is little systematic empirical evidence on these behaviours at the firm level.

In new research (Kerr et al 2011) we investigate firm-level determinants of lobbying participation with particular attention to the role that up-front costs may have in shaping firm behaviour. Empirical work on firm participation in the policymaking process is small, due in many cases to data constraints. Most of the available evidence comes from data on campaign contributions. These contributions often come from political action committees, which can be set up and organised by firms but which must raise money from voluntary donations from individuals.1 Recent exceptions have used firm-level data to analyse lobbying in particular sectors or activities, eg lobbying by financial services firms (Igan et al 2011), the link of lobbying to performance among large publicly traded firms (Chen et al 2010), and trade-related lobbying by Ludema et al (2010).


Monday, November 21, 2011

The Neuroeconomics Revolution

by Robert J. Shiller

Project Syndicate

November 21, 2011

Economics is at the start of a revolution that is traceable to an unexpected source: medical schools and their research facilities. Neuroscience – the science of how the brain, that physical organ inside one’s head, really works – is beginning to change the way we think about how people make decisions. These findings will inevitably change the way we think about how economies function. In short, we are at the dawn of “neuroeconomics.”

Efforts to link neuroscience to economics have occurred mostly in just the last few years, and the growth of neuroeconomics is still in its early stages. But its nascence follows a pattern: revolutions in science tend to come from completely unexpected places. A field of science can turn barren if no fundamentally new approaches to research are on the horizon. Scholars can become so trapped in their methods – in the language and assumptions of the accepted approach to their discipline – that their research becomes repetitive or trivial.

Then something exciting comes along from someone who was never involved with these methods – some new idea that attracts young scholars and a few iconoclastic old scholars, who are willing to learn a different science and its different research methods. At a certain moment in this process, a scientific revolution is born.

The neuroeconomic revolution has passed some key milestones quite recently, notably the publication last year of neuroscientist Paul Glimcher’s book Foundations of Neuroeconomic Analysis – a pointed variation on the title of Paul Samuelson’s 1947 classic work, Foundations of Economic Analysis, which helped to launch an earlier revolution in economic theory. And Glimcher himself now holds an appointment at New York University’s economics department (he also works at NYU’s Center for Neural Science).


Critics of credit default swaps have got it wrong

by Conrad Voldstad

Financial Times

November 21, 2011

There has been so much criticism of credit default swaps (CDS) of late that you would think no one was using them any longer. Yet today we see net open positions of $2,900bn, up from $2,400bn at this time last year. This simple fact belies the inordinate amount of misperceptions surrounding the CDS market. In spite of all the rhetoric, CDS remain a robust and effective financial tool for hedging risk or taking on exposures.

The most recent strain of criticism focuses on sovereign CDS and started with the unproven notion that CDS prices dictate the prices of sovereign bonds. In the case of Greece, this was imagined to have an adverse impact. One need only to note that net open positions in Greek CDS are $3.6bn – while the Greek bond market is about $450bn – to understand the lack of logic of this argument. How can the minuscule CDS tail wag the mighty Greek Cerberus?

In addition, have the critics ever heard of arbitrage? If one market is mispriced relative to another, it is simple to buy one and sell the other. This eventually brings prices into alignment and promotes market transparency and efficiency. But despite numerous findings by the European authorities, it looks like so-called naked sovereign CDS will be banned soon. As we all know, this will certainly not be a silver bullet for Europe’s debt problems.


Saturday, November 19, 2011

Make or break? Social networking tames cheats

November 19, 2011

How people collaborate, in the face of numerous temptations to cheat, is an important field of psychological and economic research. A lot of this research focuses on the “tit-for-tat” theory of co-operation: that humans are disposed, when dealing with another person, to behave in a generous manner until that other person shows himself not to be generous. At this point co-operation is withdrawn. Fool me once, in other words, shame on you. Fool me twice, shame on me.

When he encounters such a withdrawal of collaboration, the theory goes, the malefactor will learn the error of his ways and become a more co-operative individual. And there is experimental evidence, based on specially designed games, that tit-for-tat does work for pairs of people. Human societies, though, are more complex than mere dyads. And until recently, it has been difficult to model that complexity in the laboratory. But a paper published this week in the Proceedings of the National Academy of Sciences by Nicholas Christakis and his colleagues at Harvard has changed that. Dr Christakis arranged for a collaboration-testing game to be played over the web, with many participants. As a result, he and his team have gained a more sophisticated insight into the way co-operation develops.

Dr Christakis used what is known as a public-goods game for his experiment. At the beginning of such a game, points are doled out to each participant. During every round, players are given the opportunity to donate points to their neighbours. Points so donated are augmented by an equal number from the masters of the game. If everyone co-operates, then, everyone ends up richer. A “defector” who refuses to donate to his co-operating neighbours will, however, benefit at the expense of those neighbours. At the game’s end, the points are converted into real money, to ensure that proper incentives are in place.


Read the Paper

Thursday, November 17, 2011

Is light-touch regulation passé?

by Lucia Dalla Pellegrina and Donato Masciandaro


November 17, 2011

Following the crisis of 2008–09 a period of banking-sector vulnerability occurred in many countries. To what extent did this vulnerability result from light-touch banking regulation? This column examines the ‘unpleasant nexus’ between volatility and light-touch regulation and argues that the crisis proved that such regulation may not be able to reduce systemic risk to acceptable levels.

During the Great Moderation stable growth was associated with a high level of certainty with regard to the general framework in which economic agents were operating, both cyclically and structurally. At the structural level, an important role was given to improving market regulation, which was itself part of a more effective system of public governance (Kaufmann et al 2002). The regulation paradigm was clear: the more market-friendly – ie, the more light-touch – the better. Regulation should foster an environment that makes individual risk-taking easier, by contributing directly to the efficient allocation of resources at the microeconomic level which, in turn, leads to steady growth at the aggregate level. The relationship between stable growth and well-designed rules was supported by theory and by empirical research (see, for example, Acemoglu et al 2005, Barth et al 2004 and Levine 2005a).

How the crisis called light-touch regulation into question

The crisis shattered this prevailing framework, to the extent that light-touch regulation – designed in order to optimise individual risk-taking – can be seen to have produced a negative externality by creating greater systemic risk and, therefore, a cost in terms of the volatility of growth itself. If there were robust clues to the existence of a correlation between light-touch regulation and the fall in growth, we could infer that such regulation does not automatically warrant optimal risk-taking, at least from a systemic point of view, as it had previously been assumed until 2007.

The issue of country vulnerability to the crisis has only recently entered the arena of economic analysis and has been conducted, until now, at a purely empirical level. A number of cross-section studies covering a large number of economies (see Dalla Pellegrina and Masciandaro forthcoming) reveal that regulation appears to be robustly associated with resilience. But this result is rather surprising, given that light-touch regulation appears to be inversely correlated with resilience.


Monday, November 14, 2011

Ugly People Prejudice

The Daily Show with Jon Stewart
November 14, 2011

Jason Jones reports on the injustices uglo-Americans suffer due to their below-average looks.

Tuesday, November 8, 2011

The Reach of 'Prospect Theory'

The Chronicle of Higher Education
November 8, 2011

Based on thousands of citation records from Thomson Reuters, this chart shows the scholarly influence of "Prospect Theory: An Analysis of Decision Under Risk," written by Daniel Kahneman and Amos Tversky, and published in Econometrica in 1979. The theory has turned up as a reference for an increasing number of journal articles and book chapters (nearly 8,000 items in all), and it has spread into a diverse range of disciplines. Thomson Reuters makes an effort to classify the major scholarship within journals and books into 280 categories; this representation of the paper’s influence condenses these classifications even further.


Read the Paper

Sunday, November 6, 2011

Thinking, Fast and Slow: Why even experts must rely on intuition and often get it wrong

by William Easterly

Financial Times

November 5, 2011

There have been many good books on human rationality and irrationality, but only one masterpiece. That masterpiece is Daniel Kahneman’s Thinking, Fast and Slow.

Kahneman, a winner of the Nobel Prize for economics, distils a lifetime of research into an encyclopedic coverage of both the surprising miracles and the equally surprising mistakes of our conscious and unconscious thinking. He achieves an even greater miracle by weaving his insights into an engaging narrative that is compulsively readable from beginning to end. My main problem in doing this review was preventing family members and friends from stealing my copy of the book to read it for themselves.

Kahneman presents our thinking process as consisting of two systems. System 1 (Thinking Fast) is unconscious, intuitive and effort-free. System 2 (Thinking Slow) is conscious, uses deductive reasoning and is an awful lot of work. System 2 likes to think it is in charge but it’s really the irrepressible System 1 that runs the show. There is simply too much going on in our lives for System 2 to analyse everything. System 2 has to pick its moments with care; it is “lazy” out of necessity.

Books on this subject tend to emphasise the failings of System 1 intuition, creating an impression of vast human irrationality. Kahneman dislikes the word “irrationality” and one of the signal strengths of Thinking, Fast and Slow is to combine the positive and negative views of intuition into one coherent story. In Kahneman’s words, System 1 is “indeed the origin of much that we do wrong” but it is critical to understand that “it is also the origin of most of what we do right – which is most of what we do”.


Saturday, October 29, 2011

How the Death Tax Hurts the Poor

by Steven E. Landsburg

Wall Street Journal

October 29, 2011

I'm sure there's a lot to be said for rich people, but they sure do consume a lot of resources. I wish they'd leave more for the rest of us. That's why I oppose the death tax.

The death tax sends a powerful message to rich people: "You can't leave everything to your heirs, so spend now, before it's too late. Burn more fuel. Demand more timber for your mansions, more steel for your private planes, and more fiberglass for your yachts.''

Then all those resources—the fuel and timber, the steel and fiberglass—become unavailable to build factories, so the rest of us get worse jobs at lower wages. Those resources are unavailable to build farm equipment, so we all pay higher food prices. They're unavailable to build roads and schools and hospitals.

I don't begrudge anyone the fruits of his labor. But the death tax encourages people to pick extra fruit, leaving the trees a little barer for the rest of us.


Friday, October 28, 2011

Fighting violent gang crime with math

by Stuart Wolpert

UCLA Newsroom

October 28, 2011

UCLA mathematicians working with the Los Angeles Police Department to analyze crime patterns have designed a mathematical algorithm to identify street gangs involved in unsolved violent crimes. Their research is based on patterns of known criminal activity between gangs, and represents the first scholarly study of gang violence of its kind.

The research appears today on the website of the peer-reviewed mathematical journal Inverse Problems and will be published in a future print edition.

In developing their algorithm, the mathematicians analyzed more than 1,000 gang crimes and suspected gang crimes, about half of them unsolved, that occurred over a 10-year period in an East Los Angeles police district known as Hollenbeck, a small area in which there are some 30 gangs and nearly 70 gang rivalries.

To test the algorithm, the researchers created a set of simulated data that closely mimicked the crime patterns of the Hollenbeck gang network. They then dropped some of the key information out — at times the victim, the perpetrator or both — and tested how well the algorithm could calculate the missing information.

"If police believe a crime might have been committed by one of seven or eight rival gangs, our method would look at recent historical events in the area and compute probabilities as to which of these gangs are most likely to have committed crime," said the study's senior author, Andrea Bertozzi, a professor of mathematics and director of applied mathematics at UCLA.

About 80 percent of the time, the mathematicians could narrow it down to three gang rivalries that were most likely involved in a crime.


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Thursday, October 27, 2011

Greece Default Swaps Failure to Trigger Casts Doubt on Contracts as Hedge

October 27, 2011

The European Union’s ability to write down 50 percent of banks’ Greek bond holdings without triggering $3.7 billion in debt insurance contracts threatens to undermine confidence in credit-default swaps as a hedge and force up borrowing costs.

As part of today’s accord aimed at resolving the euro region’s sovereign debt crisis, politicians and central bankers said they “invite Greece, private investors and all parties concerned to develop a voluntary bond exchange” into new securities. If the International Swaps & Derivatives Association agrees the exchange isn’t compulsory, credit-default swaps tied to the nation’s debt shouldn’t pay out.

“It will raise some very serious question marks over the value of CDS contracts,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “For euro sovereigns in particular, the CDS market is likely to remain wary.”

Politicians and central bankers came to a last-minute agreement after banks, the biggest private holders of Greece’s government bonds, were threatened with a full default on their debt, according to Luxembourg Prime Minister Jean-Claude Juncker. ISDA General Counsel David Geen said his organization considered the agreement to be voluntary, even if there may have been “a lot of arm twisting.”


Saturday, October 22, 2011

The Wild Ride of the 1%

by Robert Frank

Wall Street Journal

October 22, 2011

Jacqueline Siegel paces the floor of her unfinished 7,200-square-foot ballroom. The former beauty queen, with platinum-blond hair, blue eye shadow and a white minidress, clacks along the plywood construction boards in her high heels trailed by a small entourage of helpers and staff.

"This is the grand hall," she says, opening her arms to a space the size of a concert hall and surrounded by balconies. "It will fit 500 people comfortably, probably more. The problem with our place now is that when we have parties with, like, 400 people, it gets too crowded."

The Siegels' dream home, called "Versailles," after its French inspiration, is still a work in progress. Its steel-and-wood frame rises from the tropical suburbs of Orlando, Fla., like a skeleton from the Jurassic age of real estate. Ms. Siegel shows off the future bowling alley, indoor relaxing pools, five kitchens, 23 bathrooms, 13 bedrooms, two elevators, two movie theaters (one for kids and one for adults, each modeled after a French opera theater), 20-car garage and wine cellar built for 20,000 bottles.

At 90,000 square feet, the Siegels' Versailles is believed to be the largest private home in America. (The Vanderbilt family's Biltmore house in North Carolina is bigger at 135,000 square feet, but it's now a hotel and tourist attraction). The Siegels' home is so big that they bought 10 Segways to get around—one for each of their eight children.

After touring the house, Ms. Siegel walks out to the deck, with its Olympic-size pool, future rock grotto, three hot tubs and 80-foot waterfall overlooking Lake Butler. Her eyes well up with tears.

Versailles was supposed to be done by now. The Siegels were supposed to be living their dream life—throwing charity balls and getting spa treatments downstairs after a long flight on their Gulfstream. The home was the culmination of David Siegel's Horatio Alger story, from TV repairman to chief executive and owner of America's largest time-share company, Westgate Resorts, with more than $1 billion in annual revenue and $200 million in profits.

Yet today, Versailles sits half-finished and up for sale. The privately owned Westgate Resorts was battered by the 2008 credit crunch and real-estate crash. It had about $1 billion in debt—much of it co-signed by the Siegels.

The banks that had loans on Versailles gave the Siegels an ultimatum: Either pay off the loans or sell the house. So it's now on the market for $75 million, or $100 million if the buyer wants it finished.

As she stands on her deck in the Florida sun, Ms. Siegel wipes away her tears. "Maybe it will still work out," she says. "It always does, right?"

The Siegels' Versailles may be the nation's most extravagant monument to the debt-fueled, status-crazed real-estate binge of the past decade. Like many Americans, the Siegels borrowed too much, spent too much and bet that values could only go higher. Even in the age of excess, Versailles was excessive.