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”.