The structural transformation in China (...what it means and why it's important to all)

An easy to understand piece in project-syndicate by Stephen S. Roach on the structural transformation that the Chinese machine is (perhaps) undergoing and what it means for sustainability (an all time favorite IB economics topic), the resource rich exporters, the US and job creation with slower growth:

Long live China's slowdown 

The price tag of a shirt: with or without the tax?

Well, for a rational consumer, it shouldn't make a difference if a shirt became more expensive because A&F decided to up the price or as a result of a higher indirect tax.  Guess again!  It does make a difference!  This is what  Raj Chetty, the 2013 John Bates Clark award winner found in his paper Salience and Taxation: Theory and Evidence:

In Chetty’s most cited study, “Salience and Taxation: Theory and Evidence,” he hypothesizes that sales taxes are less salient to consumer behavior than the posted price, and provides two examples.  First, he shows using state-level data on beer sales that sales tax changes have smaller effects than posted prices.  Second, the authors convinced a large retail store to post the sales-tax-inclusive prices of selected relatively high-cost items, alongside other products posted with the pre-tax price.  Using a difference-in-difference-in-difference design, they found that posting final tax-inclusive prices led to lower sales.  Randomly selected individuals were aware of the existence (and magnitude) of the sales tax, so ignorance of the tax cannot explain the results.  Finally, Chetty shows that because of this salience effect, customers bear far more of the burden of the sales tax than conventional public finance formulas predict. (quoted from the AEA link above)

This is a New York Times piece on Chetty worth checking out: Raj Chetty Wins the John Bates Clark Medal (photo from article)

Green GDP and China's epic pollution

Green GDP is a 'new kid on the block' in the IB economics syllabus.  The key phrase is '...environmental degradation and natural resource depletion...'!  But it would be nice to be aware of some real world examples as the issue is closely related to negative externalities of production and sustainability.

This article is from the New York Times:  Cost of Environmental Damage in China Growing Rapidly Amid Industrialization. Quoting an economist from the article the issue China has is '...how to transform from the explosive growth of the past 30 years to the sustainable growth of the next 30 years...'.

And this is another quote that illustrates the size of the problem:

'The discovery of at least 16,000 dead pigs in rivers that supply drinking water to Shanghai has ignited alarm there. This week, China Central Television reported that farmers in a village in Henan Province were using wastewater from a paper mill to grow wheat. But one farmer said they would not dare to eat the wheat themselves. It is sold outside the village, perhaps ending up in cities, while the farmers grow their own wheat with well water.'

You could also read this article from the Guardian China's 'cancer villages' reveal dark side of economic boom where this video is found:

ΣΤΕΛΙΟΣ ΡΑΜΦΟΣ ΧΡΗΣΤΟΣ ΠΙΣΣΑΡΙΔΗΣ

Homo Economicus Homo Hellenicus | ΣΤΕΛΙΟΣ ΡΑΜΦΟΣ

Bob Solow on Ben Bernanke, the art of Central Banking, bank runs and the 2008 crisis

This is a great piece by Bob Solow for IB economics students  on Ben Bernanke, the art of Central Banking, bank runs, the 2008 crisis and why financial intermediaries must be regulated. It is very clear and very informative (of course it is.  It's written by Bob Solow...!)

Click here How to Save American Finance from Itself: Has financialization gone too far? and enjoy.

Greece entering deflation territory...

The latest report from ELSTAT (the Greek Statistical agency) clearly indicates that in Greece the average price level fell.  Prices in March decreased by 0.2% compared to March 2012.  This was the first recorded decrease in the CPI in almost 50 years.

A detailed account of what is going on can be found here.  It is the April 9th press release of ELSTAT (if you happen to be an IB Economics student please also read the methodological notes at the bottom of the page - they are pretty illuminating on how the CPI is constructed).

This was something widely expected as Greece is in a deep-deep-deep recession.  Output has been contracting for more than 5 years, official unemployment is over 27%, youth unemployment is over 50%, money wages are cut and it is more of a surprise that deflation is happening now and not a lot earlier..  The answer lies in the very concentrated and still over-regulated product markets where collusive behavior seems to have been the norm.  It is in the service sector where prices are now dramatically falling pulling the average price level down (see the ELSTAT press release above).  We shouldn't also forget the successive increases in indirect taxes as well as the role of energy prices.

These articles are good for anyone interested in the issue:
Deflation takes hold in Greece (from the FT)
Greece enters deflation for first time in 45 years

(photo is from the Telegraph article)

Catastrophic consequences if average world temperatures rise more than 4 degrees Celsius...

An article on the dire effects of global warming caught my eye today.  It can be found here:
World Bank warns of ‘4 degree’ threshold

It comes with some amazing (and scary pictures) that are worth looking at.  Makes me feel how limited (albeit analytically correct) our analysis of negative production externalities is (sure...it's just a matter of slapping a tax equal to the external cost or to determine the maximum acceptable level of pollution and hand out tradable permits - and presto, there goes global warming...yeah, sure). For the more ambitious of IB Economics students here is the executive summary of the World Bank research:
Turn down the heat: why a 4 degree warmer world must be avoided

You can always just look at the gallery of pictures here.

Shifts in demand and maximum price Prezi presentations by my students

Another student of mine in my HL year 1 class has prepared a presentation on the factors shifting a demand curve.  An improved version of the previous one on maximum price is also here to click (it works this time).

I am providing the links for whoever interested to enjoy.  Many thanks to Dimitris Th. and Alexis S.!

Prezi on why demand for a good or service shifts

Prezi on maximum price (price ceiling))

Editorial from the New York Times on Greece

The NYT published the other day an editorial on the current situation Greece which I found very interesting, sad, true and useful for my IB year 2 IB economics sections.

Quoting (almost all) the article:

Greece’s Parliament did what it had to do on Thursday. Despite some defections from the ruling centrist coalition, lawmakers narrowly approved a $23 billion package of new austerity measures, including further spending cuts to social services, pensions and public salaries, as well as tax increases demanded by Greece’s European lenders. In return, the troika of official creditors — the European Commission, the European Central Bank and the International Monetary Fund — promise to consider, but not guarantee, reducing the punitive interest rates they charge Greece for bailout loans and unlocking a $40 billion aid payment Athens needs to avoid a default on its debts. No responsible Greek lawmaker could have ignored the terrible consequences of voting no. But no one can dismiss the threat to social stability from these cuts. 

The fact is, just about everything in this austerity package has been tried before and failed disastrously. These unpalatable steps will do nothing to make Greece’s debts more payable, bring its budgets closer to balance or help make the structural reforms Greece needs to revive its economy. Instead they will almost certainly further shrink an economy that has already shrunk by an astounding 25 percent over the past few years, making fiscal improvement nearly impossible. 

Greek lawmakers know this but feel compelled to do as their European creditors ask. And, we suspect, many of those creditors also know that more austerity is not the answer. But so far, they have been unwilling to challenge the leader of Europe’s biggest economy, Chancellor Angela Merkel of Germany, who continues to believe that only economic punishment will push Greeks to reform.

It may be a winning political formula in Germany, where Ms. Merkel stands for re-election next year. But it is a profound, and profoundly unnecessary, tragedy for Greece. 

The article can be found here... 

On maximum prices (price ceilings)

This is another prezi created by another student, Alexis Syriopoulos, on price ceilings!  Prezi seems a fun way to engage IB economics students and to organize the structure of a lecture.  I'm sure as we become more and more proficient the end result will be more and more stunning and more and more useful.

Here it is:

http://prezi.com/ot71hwqzolor/maximum-price/

Enjoy!

My first prezi...ahh! (on indirect taxation)

This is a prezi presentation I created to use in my IB economics higher level year 1class this week.  It's on indirect taxation:

An Analysis of Indirect Taxation on Prezi

(special thanks to Myrto Z. for her invaluable help...)

The Role of the Price Mechanism in Resource Allocation...

My students and I have (re)discovered Prezi and they are working small wonders preparing sweet and short presentations on IB economics topics.  I found this jewel (by Danai Michalakaki) on the role of the price mechanism in resource allocation.  Enjoy it!

The role of the price mechanism on Prezi

Which European Union do you belong to?

Which European Union do you belong to?

The future of Economics

A couple of days ago in Big Think there was an interesting post with the views of 'Eight of the world's top young economists' on where the field is or should be heading.

Here are some quotes which may make you curious to read the full post:

NICHOLAS BLOOM, 39 years old at Stanford

'…Why are developing countries poor?  In terms of impact on mankind globally, this strikes me as probably the biggest and most important current economic question.  I think the answer is complex and linked to a combination of factors around history, geography, luck, etc.  I am personally working on management practices: people in developing countries are poor because wages are low, and wages are low because firms are very unproductive, and firms seem to be unproductive in large part because of bad management.  An Indian worker makes in one week what an average U.S. worker makes in a half a day.  One big factor seems to be that factories in India are frankly very badly managed: equipment is not looked after, materials are wasted, theft is common because inventory is not monitored, defects keep occurring, etc…'

RAJ CHETTY 32 years old at Harvard

'…Many economists are concerned with two broad questions: how can we increase the rate of economic growth and overall well-being, and how can we reduce the rate of poverty?  Countless policies—taxation, education, healthcare, etc.—have been implemented in an effort to achieve those objectives.  One of our biggest challenges is to distill each policy’s unique impact so that we can understand which ones actually work and which ones do not. '

XAVIER GABAIX, 40 years old at NYU

'…The most central open question in economic theory, as I see it, is how to model realistic economic agents.  Traditionally, economists have relied on the rational-actor model, but it is clear that it is just a rough caricature.  It has been greatly enriched by behavioral economics in the past 30 years.  Still, we are far from a unified, versatile, believable alternative to the rational-actor model.  I am hopeful, though, that this might be overcome—in part because of progress in the sister disciplines (psychology and neuroscience) and basic modeling, and also because empirical anomalies are forcing the economic profession to be more open-minded.  Contributions by computer scientists and physicists will help inject new perspectives into economics.

The largest concrete questions in economics are, arguably, how to increase growth—particularly in developing countries—and how to avoid economic disasters and financial crises…'

Peter Leeson, 32 years old at George Mason University

'…My candidate for the biggest unanswered question in economics is the status of the rationality postulate: the decision to analyze actors as utility maximizers with consistent preferences.  If we view economics as an “engine” for understanding the world, the rationality postulate was that engine in nearly all of economics until quite recently.  The rise of behavioral economics has challenged the usefulness and, in a more subtle but radical way, the legitimacy of the rationality engine.'

Glen Weyl, 27 years old at the University of Chicago

'…In his famous 1945 article, “The Use of Knowledge in Society,” F. A. Hayek argued that despite their inequity and inefficiency, free markets were necessary in order to allow the incorporation of information held by dispersed individuals into social decisions.  No central planner could hope to collect and process all the information necessary for social decisions; only markets allowed and provided the incentives for disaggregated information processing.  Yet, increasingly, information technology is leading individuals to delegate their most “private” decisions to automated processing systems.  Choices of movies, one of the last realms of taste one would have guessed could be delegated to centralized expertise, are increasingly shaped by services like Netflix’s recommender system..'

Justin Wolfers, 39 at UPenn

'…Economics is in the midst of a massive and radical change.  It used to be that we had little data, and no computing power, so the role of economic theory was to “fill in” for where facts were missing.  Today, every interaction we have in our lives leaves behind a trail of data.  Whatever question you are interested in answering, the data to analyze it exists on someone’s hard drive, somewhere…'

Poverty and development issues, the limitations of rationality, huge disaggregated data sets and vast computing power.....

Read it all here: Empirics and Psychology: Eight of the World's Top Young Economists Discuss Where Their Field Is Going. 

What do you make of this?

...and I'm quoting Alan Blinder (click here for who Blinder is and for some interesting and accessible WSJ contributions):

'...Our teaching about monetary policy must be completely revamped. Specifically, students must now learn something about “unconventional” monetary policies. Remember “conventional” monetary policy? The Federal Reserve shortens recessions by creating more bank reserves (“printing money”), which fuels a multiple expansion of the money supply and credit because banks don’t want to hold excess reserves. So they get rid of them making more loans and deposits, which also lowers short-term interest rates. Compare that to current reality: Banks are content to hold over $1.6 trillion in excess reserves, short-term interest rates are stuck near zero, and Fed policy often works on long-term interest rates instead. No, this is not your father’s monetary policy, and the old ways of teaching about it simply won’t do....'

You will find his short contribution (Not Your Father’s Monetary Policy) in a roundtable hosted by the New York Times on 'Rethinking how we Teach Economics' here. You will also find there An Open Letter to Greg Mankiw written by some of his Harvard Econ 10 students and published in the Harvard Political Review.

The opening piece by Mona Chalabi is also interesting (and those against the HLP3 will rejoice but will be missing the point):

 '...An economist must be a "mathematician, historian, statesman, philosopher, in some degree." So, promisingly, begins the sixth edition of "Macroeconomics" by Greg Mankiw, a key reading for my introductory economics class at the University of Edinburgh (and still a key reading six years on). Unfortunately, the book, like the course that prescribed it, delivered on only one of those claims: to be a mathematician.What began as eloquent and logical graphs and formulas quickly spiraled out of control and I soon found myself reading that “economics is not only a social science, it is a genuine science. Like the physical sciences” and that financial crises can bepredicted by using the following formula:

 

I was not persuaded. The over-reliance on mathematical modeling and its subsequent abstraction, together with a near-disdainful attitude toward other social sciences, left me feeling entirely disillusioned with economics in the U.K. So much so that I decided to leave the university and study abroad at Sciences Po in Paris, which took a broader approach to the field of economics.'

All contributions are of interest.  Click away!

Development Thread (3):

Summer is almost over and it is time to get back to serious work as the academic year has begun or is about to begin.

I have to admit that development issues have been in my mind over the past few months as I will soon start to  teach the development section proper from the new syllabus.  For the first time, IB Economics candidates will be forced to answer one of two development related data response questions.  In other words, for the first time, an IB Economics candidate cannot avoid studying this most interesting (but also, in my opinion, demanding) section of the syllabus.  And judging from my (senior) examining experience, examiners have not been easy to satisfy in this area, at least in the past.  High marks require a solid understanding and background that is not that easy to achive in a matter of months.

In any case, I'd like to bring to your attention a site and a great talk/ slide presentation.

The site is the Center for Global Development.  It seems to have usefull information for us.  In it I found this excellent in my opinion talk and slide presentation by Owen Barder (Senior Fellow and Director for Europe at the Center for Global Development) on the evolution of development economics (very easy to understand) as well as a thought provoking presentation of development as a complex adaptive system that borrows much from physics and biology which, if nothing else, may help IB economics students realize the high degree of interconnectivity of the items in the development section of the syllabus and why 'simple recipes' that students like to propose (e.g. spend more on education and health and reform institutions) are unlikely to work.  It is not an easy to follow presentation as it is chock full of ideas but Barder manages to use great examples to drive his points home.

This talk seems to me as a great way to start discussions on development and that's why I'm thinking of using it this year.  The link from the Center is here but I will use repost from youtube:

Development thread (2)

On the Millennium Development Goals

This is the last subsection of section 4.1 of our new syllabus:

'Outline the current status of international development goals, including the Millennium Development Goals'

MDG #1 is to eradicate extreme poverty and hunger. The targets within this goal include:

1. Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day
2. Achieve full and productive employment and decent work for all, including women and young people
3. Halve, between 1990 and 2015, the proportion of people who suffer from hunger

Click here to read the factsheet on MDG #1. Check the 'where do we stand' points and the 'what has worked' section (take down notes).

Please watch this video on Vietnam's growth and poverty reduction effort and jot down the key points in a word file (to be saved in your development folder as agreed).

Enjoy!

Growth and the importance of institutions

The other day in both my Higher Level and Standard Level Economics sections we discussed issues on growth and I found the opportunity to mention the work of Daron Acemoglu and the importance of institutions in the growth process.  It makes a big difference, as he argues, whether  institutions are inclusive or extractive.

Please watch these videos where Prof. Acemoglou explains his work:

(longer presentation)


This is a much shorter presentation:

Mr Stiglitz...

This is an interview of Joe Stiglitz in the Rolling Stone magazine: 'The Price of Inequality'

click here: http://www.rollingstone.com/politics/blogs/national-affairs/the-price-of-inequality-interview-with-joseph-e-stiglitz-20120625

A must as income inequality is part of the new 2013 syllabus (section 2.3 Equity in the Distribution of Income).  It's the one with the Lorenz curve and the Gini coefficient that we discussed only a few days ago.

(On Joe Stiglitz: check out his 62 (!) page CV here :http://www2.gsb.columbia.edu/faculty/jstiglitz/download/Stiglitz_CV.pdf 

Another interview on the same new book/ topic can be found here:

http://www.vanityfair.com/online/daily/2012/06/joseph-stiglitz-innovation-fallacy-reagan

(many thanks to my colleague and friend Marcus DeBaca for bringing this to my attention)

Development Thread (1)

In this thread I will be bringing to your attention resources (sites/ files/ articles/ videos) that my (and any) IB Candidates 13  students should check out, save and try to make summary notes in a development dedicated notebook (electronic or conventional).  These resources aim at helping us  understand and learn issues from the development section of our syllabus.

The first resource is about Burkina Faso and cotton ('white gold').  The issue is about the detrimental effects of US/EU cotton subsidies on the livelyhoods of millions of poverty stricken West African farmers and the expected benefits from a cotton subsidy reform (click on links)
Burkina Faso: Cotton Story

A couple of more resources on Western cotton subsidies can be found here:
West's billions in subsidy shut out African cotton growers

Cotton subsidies costing west African farmers £155m a year, report reveals

...and this video (which features a bit of Victoria's Secret in it - an additional non-academic incentive to the guys in my class to watch it...) is also about Burkina Faso cotton with a twist:

Enjoy!