Tuesday, July 21, 2009

On externalities

Try correcting this one:

Kids' lower IQ scores linked to prenatal pollution

Researchers for the first time have linked air pollution exposure before birth with lower IQ scores in childhood, bolstering evidence that smog may harm the developing brain. The results are in a study of 249 children of New York City women who wore backpack air monitors for 48 hours during the last few months of pregnancy. They lived in mostly low-income neighborhoods in northern Manhattan and the South Bronx. They had varying levels of exposure to typical kinds of urban air pollution, mostly from car, bus and truck exhaust.

At age 5, before starting school, the children were given IQ tests. Those exposed to the most pollution before birth scored on average four to five points lower than children with less exposure.

And along with other environmental harms and disadvantages low-income children are exposed to, it could help explain why they often do worse academically than children from wealthier families, Breysse said.

On Joseph Stiglitz

Read this interesting Newsweek article on Joseph Stiglitz (which I noticed at free exchange, the economist.com blog):The Most Misunderstood Man in America.
Just to get an idea:
...Stiglitz is perhaps best known for his unrelenting assault on an idea that has dominated the global landscape since Ronald Reagan: that markets work well on their own and governments should stay out of the way. Since the days of Adam Smith, classical economic theory has held that free markets are always efficient, with rare exceptions. Stiglitz is the leader of a school of economics that, for the past 30 years, has developed complex mathematical models to disprove that idea. The subprime-mortgage disaster was almost tailor-made evidence that financial markets often fail without rigorous government supervision, Stiglitz and his allies say. The work that won Stiglitz the Nobel in 2001 showed how "imperfect" information that is unequally shared by participants in a transaction can make markets go haywire, giving unfair advantage to one party. The subprime scandal was all about people who knew a lot—like mortgage lenders and Wall Street derivatives traders—exploiting people who had less information, like global investors who bought up subprime- mortgage-backed securities. As Stiglitz puts it: "Globalization opened up opportunities to find new people to exploit their ignorance. And we found them."

Stiglitz's empathy for the little guy—and economically backward nations—comes to him naturally. The son of a schoolteacher and an insurance salesman, he grew up in one of America's grittiest industrial cities—Gary, Ind.—and was shaped by the social inequalities and labor strife he observed there. Stiglitz remembers realizing as a small boy that something was wrong with our system. The Stiglitzes, like many middle-class families, had an African-American maid. She was from the South and had little education. "I remember thinking, why do we still have people in America who have a sixth-grade education?" he says.

Those early experiences in Gary gave Stiglitz a social conscience—as a college student, he attended Martin Luther King's "I Have a Dream" speech—and led him to probe the reasons why markets failed. While studying at MIT, he says he realized that if Smith's "invisible hand" always guided behavior correctly, the kind of unemployment and poverty he had witnessed in Gary shouldn't exist. "I was struck by the incongruity between the models that I was taught and the world that I had seen growing up," Stiglitz said in his Nobel Prize lecture in 2001. In the same speech he declared that the invisible hand "might not exist at all." The solution, Stiglitz says, is to move beyond ideology and to develop a balance between market-driven economies—which he favors—and government oversight....

Sunday, July 19, 2009

The State of Economics

Must reading for IB1 to IB2 students of Economics as well as for any of my recent graduates (if you are ever checking out this blog...-I know that you are, Dimitri K.!!). A-level Economics candidates will also greatly benefit from reading it.

Reproducing from The Economist:

...Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same. Others advocate it with passionate intensity.

Among the passionate are Mr DeLong and Mr Krugman. They turn for inspiration to Depression-era texts, especially the writings of John Maynard Keynes, and forgotten mavericks, such as Hyman Minsky. In the humanities this would count as routine scholarship. But to many high-tech economists it is a bit undignified. Real scientists, after all, do not leaf through Newton’s “Principia Mathematica” to solve contemporary problems in physics.

They accuse economists like Mr DeLong and Mr Krugman of falling back on antiquated Keynesian doctrines—as if nothing had been learned in the past 70 years. Messrs DeLong and Krugman, in turn, accuse economists like Mr Lucas of not falling back on Keynesian economics—as if everything had been forgotten over the past 70 years. For Mr Krugman, we are living through a “Dark Age of macroeconomics”, in which the wisdom of the ancients has been lost.

What was this wisdom, and how was it forgotten? The history of macroeconomics begins in intellectual struggle. Keynes wrote the “General Theory of Employment, Interest and Money”, which was published in 1936, in an “unnecessarily controversial tone”, according to some readers. But it was a controversy the author had waged in his own mind. He saw the book as a “struggle of escape from habitual modes of thought” he had inherited from his classical predecessors.

That classical mode of thought held that full employment would prevail, because supply created its own demand. In a classical economy, whatever people earn is either spent or saved; and whatever is saved is invested in capital projects. Nothing is hoarded, nothing lies idle.

Keynes appreciated the classical model’s elegance and consistency, virtues economists still crave. But that did not stop him demolishing it. In his scheme, investment was governed by the animal spirits of entrepreneurs, facing an imponderable future. The same uncertainty gave savers a reason to hoard their wealth in liquid assets, like money, rather than committing it to new capital projects. This liquidity-preference, as Keynes called it, governed the price of financial securities and hence the rate of interest. If animal spirits flagged or liquidity-preference surged, the pace of investment would falter, with no obvious market force to restore it. Demand would fall short of supply, leaving willing workers on the shelf. It fell to governments to revive demand, by cutting interest rates if possible or by public works if necessary.

The Keynesian task of “demand management” outlived the Depression, becoming a routine duty of governments. They were aided by economic advisers, who built working models of the economy, quantifying the key relationships. For almost three decades after the second world war these advisers seemed to know what they were doing, guided by an apparent trade-off between inflation and unemployment. But their credibility did not survive the oil-price shocks of the 1970s. These condemned Western economies to “stagflation”, a baffling combination of unemployment and inflation, which the Keynesian consensus grasped poorly and failed to prevent.
In the first months of the crisis, macroeconomists reposed great faith in the powers of the Fed and other central banks. In the summer of 2007, a few weeks after the August liquidity crisis began, Frederic Mishkin, a distinguished academic economist and then a governor of the Fed, gave a reassuring talk at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. He presented the results of simulations from the Fed’s FRB/US model. Even if house prices fell by a fifth in the next two years, the slump would knock only 0.25% off GDP, according to his benchmark model, and add only a tenth of a percentage point to the unemployment rate. The reason was that the Fed would respond “aggressively”, by which he meant a cut in the federal funds rate of just one percentage point. He concluded that the central bank had the tools to contain the damage at a “manageable level”.

Since his presentation, the Fed has cut its key rate by five percentage points to a mere 0-0.25%. Its conventional weapons have proved insufficient to the task. This has shaken economists’ faith in monetary policy. Unfortunately, they are also horribly divided about what comes next.

Mr Krugman and others advocate a bold fiscal expansion, borrowing their logic from Keynes and his contemporary, Richard Kahn. Kahn pointed out that a dollar spent on public works might generate more than a dollar of output if the spending circulated repeatedly through the economy, stimulating resources that might otherwise have lain idle.

Today’s economists disagree over the size of this multiplier. Mr Barro thinks the estimates of Barack Obama’s Council of Economic Advisors are absurdly large. Mr Lucas calls them “schlock economics”, contrived to justify Mr Obama’s projections for the budget deficit. But economists are not exactly drowning in research on this question. Mr Krugman calculates that of the 7,000 or so papers published by the National Bureau of Economic Research between 1985 and 2000, only five mentioned fiscal policy in their title or abstract
Read the whole article here.

Friday, July 10, 2009

I just happenned to check out this and it's a bit shocking vis a vis Greece. Number 18? Above Italy, the UK, Germany? There's something very wrong with the HDI... It's not only the averages issue but also the question of data quality and reliability.

Human Development Indices: A statistical update 2008 - HDI rankings

15.United States
20.New Zealand
21.United Kingdom
22.Hong Kong, China (SAR)
25.Korea, Rep. of
27.Brunei Darussalam
31.United Arab Emirates

Saturday, July 4, 2009

A July post - will any IB students read it?

Well, tomorrow is the big day - the day results are out for all May candidates. Less than 24 hours away for my kids at 0346. So, what am doing with a 4th of July IB economics post? I just started reading the Economist debate on 'Sustainable development'. The motion: 'this house believes that sustainable development is unsustainable'. Defending the motion is David G. Victor, Law Professor at Stanford & Prof. of International Relations, University of California at San Diego. Against the motion is Dr. Peter Courtland Agre, M.D., University Professor and Director, Duke University (2003 Nobel prize in Chemistry).

You will find this most interesting discussion here.

I will only copy one paragraph from Dr Agre's opening remarks:
Our situation is indeed exceedingly grim—increasing release of toxins into the environment, energy gluttony and the appearance of epidemic obesity. Compounding these problems is the nearly total lack of thrift among Americans whose uncontrollable consumerism is sufficient to support multiple shopping channels on the television 24 x 7 x 365 at a time of unprecedented debt.

To have the world's biggest economy is irrelevant if we squander our wealth on fluff. Popular television advertising revenues alone could sustain significant educational reform in the US. Consider for example that one second of advertising during the Super Bowl retails for $100,000—twice the annual salary of a beginning schoolteacher. The wisdom behind the rising economy in China must be questioned, since they now have 3% of the world's paved roadways but 21% of the world's highway fatalities. If this truly reflects giving the public what it wants, we are most certainly doomed.

And, also:
Achievement of sustainability can only occur if the public demands it. My view is that a populist revolt for sustainability must be initiated, and it must include the young. Jefferson claimed that "Every generation needs a new revolution," and Franklin that "Many people die at 25 but are not buried until they are 75." Our younger generation will determine if the right decisions are undertaken by becoming engaged in the most important issue of our time.
Any questions, IB graduating class of 2009?