Wednesday, December 31, 2014

On income inequality (and, vicious cycles)

Known for years but pretty well documented by calculations from the National Center for Fair & Open Testing.  I'm referring to a WSJ article titled 'SAT Scores and Income Inequality: SAT Scores and Income Inequality: How Wealthier Kids Rank Higher.  In the Sachs Sustainable Development course it is explained how education could be an equalizer but also a source of higher income inequality We talked about education in class within the context of development but we should keep in mind that we are not always or necessarily referring to or focusing on developing countries.  The following quotes are quite illuminating:
Family wealth allows parents to locate in neighborhoods with better schools (or spring for private schools). Parents who are themselves college educated tend to make more money, and since today’s high school seniors were born in the mid-1990s, many of the wealthiest and best-educated parents themselves came of age when the tests were of crucial importance.
When the SAT is crucial to college, college is crucial to income, and income is crucial to SAT scores, a mutually reinforcing cycle develops.
or,
the SAT is just another area in American life where economic inequality results in much more than just disparate incomes
Of course,
There are students from wealthy families who do very badly and students from poor families who do very well. Having wealthy parents gives a leg up. But parental income is not destiny.






Thursday, December 25, 2014

On the role of the government, trust and legitimacy

A very clear exposition of the role of government by Prof. Hausmann and what the focus should be in many countries (including my own):

Ronald Reagan’s dictum: “Government is not the solution to our problems; government is the problem"...is a great sound bite: short, recursive, and somewhat poetic.
Unfortunately, it is also dangerously misleading. After all, even if government were the problem, then changing what it does must be part of the solution.
The truth is that markets cannot exist without governments, and vice versa. Governments are essential to the establishment of security, justice, property rights, and contract enforcement, all of which are essential to a market economy.
Governments must also organize the provision of infrastructure for transportation, communication, energy, water, and waste disposal. They run and regulate health-care systems and primary, secondary, tertiary, and vocational education. They create the rules and provide the certifications that allow firms to assure their customers, workers, and neighbors that what they do is safe. They protect creditors and minority shareholders from miscreant managers (and managers from impulsive creditors).
Saying that governments should get out of the way and let the private sector do its thing is like saying that air traffic controllers should get out of the way and let pilots do their thing. In fact, governments and the private sector need each other, and they need to find better ways to collaborate.

...and, here, I can't help thinking of Greece:
The problem is that in many countries, both developed and developing, the current relationship between the private sector and the government is often dysfunctional. Not only is it characterized by deep distrust, but the broader society does not find a closer relationship to be either legitimate or in the public interest, and for good reason.
The private sector often engages with the government in order to make itself more profitable. After all, maximizing profits is what CEOs are supposed to do. And the government has ways to help: It can force suppliers to sell their inputs more cheaply, repress workers’ wage demands, protect the final market from competition by imports or new entrants, or lower their taxes.
But these schemes make firms more profitable by making their suppliers, workers, and customers poorer. Accepting such demands makes the government rightly illegitimate in the eyes of the rest of society, which cherishes higher priorities than redistribution in favor of the already rich.

and:
Outcomes would be very different if the focus of the relationship were productivity rather than profitability. Productivity improvements, by lowering costs, allow firms to pay their workers and suppliers better, reduce prices for consumers, pay more in taxes, and still make more money for their shareholders. A focus on productivity is win-win-win.
Governments can do many things, in a variety of areas, to raise productivity. Fresh produce requires a cold-storage logistic system, a green lane at customs, certification of good agricultural practices, and sanitary permits. Tourism depends on sensible visa requirements, convenient airports, road signs, hotel construction permits, and the preservation of cultural sites and coastlines. Manufacturing requires dedicated urban space that is adequately connected to power, water, transport, logistics, security, and a diverse labor force.
All of these productivity-boosting inputs require institutions that teach and extend industry-relevant knowledge and skills.
I think I'm quoting the whole article...
Why don't you just read it (and, if you are an IB economics candidate, take down some notes...):

The Productivity of Trust by Ricardo Hausmann, Professor of the Practice of Economic Development at Harvard and Director of the Center of International DevelopmentCenter for International Development.

Fossil fuels, green technologies and what to expect

Many interesting can be found in the article Please Steal Our Fossil Fuels by Adair Turner, a senior fellow at the Institute for Institute for New Economic Thinking (which it seems will provide plenty of great resources for our next IB Economics Syllabus).
2014 seems certain to be the warmest year on record, or at least the runner-up. International agreement on robust action to limit global warming remains inadequate: the just-completed Lima climate-change conference delivered some progress, but no major breakthrough. Away from the diplomatic circuit, however, technological advances make it certain that we can build low-carbon economies at minimal cost and great benefit to human welfare.
Or:
Solar energy reaching the earth’s surface provides 5,000 times humanity’s energy needs. The technology to capture it cost effectively and cleanly is available.
 Or
The price of lithium-ion battery packs has fallen from around $800 per kilowatt-hour in 2009 to $600 in 2014, and will likely be below $300 by 2020 and $150 by the late 2020s. Once the price is below $250, the total cost of owning and running an electric car will be less than for one with an internal combustion engine (assuming gasoline prices of $3.50 per US gallon).
And,
Total gas and coal reserves could support current demand for more than a hundred years, and technological progress – for example, hydraulic fracturing, which has unlocked shale energy – makes an ever growing share of these reserves economically attractive. Oil production may peak within the next few decades, but gasoline equivalents can be synthesized from gas or coal.
As 2014 draws to an end, falling oil, gas, and coal prices threaten to undermine investment in green energy and stimulate wasteful consumption. 
To believers in rational economic choice, of course, there is no waste. If people choose to drive enormous cars, they must derive some benefit from it; and if switching to green energy makes that choice uneconomic, human welfare must suffer.
This last paragraph is great as it questions the idea of a socially optimal level of production/ consumption that we use so often in all our market failure related (negative production - consumption externalities) analyses:
But economic theory based on real-world experience tells us that consumer preferences are neither given nor absolute. Rather, they are stimulated in a self-reinforcing fashion by group norms, trends, and advertising, and some increases in consumption deliver no permanent increase in life satisfaction.
(but permanent increases in the social costs we and our children face)...


A great one by Prof. Robert Skidelsky

A great article by Prof. Skidelsky can be found on the Project Syndicate site.



His last paragraph is the one to keep in mind in an IB P1 macro essay question on fiscal policy, deficit spending, austerity and their effects:

We can all agree that what happens to the budget affects the economy. But I would argue, as Keynes did, that “the boom, not the slump, is the time for austerity at the Treasury.” To try to cut spending in a slump, as Osborne is doing, is to prolong the slump. And, as he is learning, to his displeasure, that means postponing the day when the books will be balanced.

The whole article is very useful to read. Check out the way he explains the 'signalling effects' of announcing spending cuts:

A credible policy of fiscal consolidation, they might say, will have the same exhilarating effect on confidence as fiscal consolidation itself.
Economists call this the “signaling effect.” If you announce that you intend to balance the books over five years and pencil in a lot of spending cuts, consumers, relieved of their fears of future tax increases, will start spending more freely. This will cause national income to rise, and, with luck, the budget deficit will start shrinking, more or less according to plan, without requiring any, or much, retrenchment.
The article can be found here: Britain’s Closet Keynesian. Hiw page is here.

Friday, December 19, 2014

Inflation below but close to 2%

A most interesting article on how we ended up with the 'below, but close to 2%' target for inflation! Beyond this 'historical interest' the article is useful for IB HL and SL Economics candidates because it explains the problems a 1% target would entail and why the 2% target may have been a bit too low (and, perhaps, a 3% or 4% target better).  Janet Yellen's position is most interesting as well as Blanchard's of the IMF and Alan Blinder's of Princeton.

Ms. Yellen, who now runs the institution, worried that announcing an inflation target would make the Fed focus only on inflation and neglect its responsibilities to bolster growth and jobs. She worried that zero inflation could paralyze the economy, particularly during slumps, and felt that some inflation was necessary.
“To my mind the most important argument for some low inflation rate is the ‘greasing the wheels argument,’” Ms. Yellen said in a closed door meeting of Fed policy makers in July 1996. When businesses run into rough times, they may be inclined to cut workers’ pay. But in practice, that doesn’t happen much. Even in a severe downturn, businesses are more likely to cut hours, conduct layoffs or keep positions vacant than cut pay. That’s one reason recessions tend to lead to higher unemployment instead of lower wages.
Inflation helps deal with this problem. When there is a bit of inflation, employers can hold workers’ pay steady during a downturn yet have it decline in inflation adjusted terms. Inflation creates an adjustment mechanism: An assembly line worker may keep making exactly $20 an hour through a downturn, but in inflation adjusted terms that pay falls by 2 percent a year, which could make the factory less likely to resort to layoffs. 
In that 1996 debate, another argument that Ms. Yellen raised against a zero percent target was particularly prescient. The higher the level of inflation, the more that central banks can stimulate the economy during a downturn. Imagine that there is a severe recession and the Fed cuts interest rates to zero, so that when you put money in the bank you get no return. If there is no inflation, your money will retain its purchasing power and be worth the same when you withdraw it. But if there is inflation, the value of your money sitting in the bank becomes steadily less valuable, meaning that you have more incentive to spend or invest it. “A little inflation permits real interest rates to become negative on the rare occasions when required to counter a recession,” Ms. Yellen said in 1996. “This could be important.”

Interesting stuff... here's the link: Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel (NYT)

Wednesday, December 17, 2014

Examples for IB Economics HL and SL candidates

The Lima Accord

When discussing negative production externalities, the use of fossil fuels and the idea of sustainability, the syllabus explicitly states that 'effective responses require international cooperation'.

All well prepared candidates are aware of the Rio 1992 Summit, the 1997 Kyoto Protocol and the 2014 Rio +20 Summit.  The Lima Accord is the new kid on the block.  This December 14 article from the New York Times A climate accord based on peer pressure is an excellent (as usual) presentation of the basics on this interesting and important development.  Quoting some bits from the article:



The deal represents a breakthrough in the two decade effort to forge a significant global pact to fight climate change. The Lima Accord, as it is known, is the first time that all nations — rich and poor — have agreed to cut back on the burning oil, gas and coal.
The driving force behind the new deal was not the threat of sanctions or other legal consequences. It was global peer pressure.
The structure of the deal is what political scientists often call a “name and shame” plan. Under the Lima Accord all countries must submit plans that would be posted on a United Nations website and made available to the public. A requirement that all countries submit plans using identical metrics, for easy comparison, was deleted from the accord because of the objection of developing nations. 
But already, a number of research groups and universities expect to crunch the numbers of the plans, producing apples to apples assessments. The hope, negotiators said, is that as the numbers and commitments of each country are publicized, compared and discussed, countries will be shamed by the spotlight into proposing and enacting stronger plans.
It remains to be seen whether this development will translate into meaningful national policies.




Sunday, December 14, 2014

Articles useful for HL and SL IB Economics

Here are a couple of articles that seem useful for IB Economics students:


First one by Jeffrey Sachs titled 'The year of sustainable development'.  It can be found here.  

Some interesting points are quoted below:


  • Sustainable development implies inclusive and sustainable growth. This is growth that raises average living standards; benefits society across the income distribution, rather than just the rich; and protects, rather than wrecks, the natural environment.


  • The world economy is reasonably good at achieving economic growth, but it fails to ensure that prosperity is equitably shared and environmentally sustainable. The reason is simple: The world’s largest companies relentlessly – and rather successfully – pursue their own profits, all too often at the expense of economic fairness and the environment. Profit maximization does not guarantee a reasonable distribution of income or a safe planet. On the contrary, the global economy is leaving vast numbers of people behind, including in the richest countries, while planet Earth itself is under unprecedented threat, owing to human-caused climate change, pollution, water depletion, and the extinction of countless species.


  • Resources need to be channeled away from armed conflict, tax loopholes for the rich, and wasteful outlays on new oil, gas, and coal development toward priorities such as health, education, and low-carbon energy, as well as stronger efforts to combat corruption and capital flight.


  • 2014 is now likely to be the warmest year in recorded history, a year that has also brought devastating droughts, floods, high-impact storms, and heat waves.


  • Back in 2009 and 2010, the world’s governments agreed to keep the rise in global temperature to below 2° Celsius relative to the pre-industrial era. Yet warming is currently on course to reach 4-6 degrees by the end of the century – high enough to devastate global food production and dramatically increase the frequency of extreme weather events. To stay below the two-degree limit, the world’s governments must embrace a core concept: “deep decarbonization” of the world’s energy system. That means a decisive shift from carbon-emitting energy sources like coal, oil, and gas, toward wind, solar, nuclear, and hydroelectric power, as well as the adoption of carbon capture and storage technologies when fossil fuels continue to be used.


  • Goal: economic development that is technologically advanced, socially fair, and environmentally sustainable.

The second one is by Dani Rodrik on 'Good and Bad Inequality'.  
It can be found here.  Here are some points that may be useful to candidates:
  • The belief that boosting equality requires sacrificing economic efficiency is grounded in one of the most cherished ideas in economics: incentives. Firms and individuals need the prospect of higher incomes to save, invest, work hard, and innovate. If taxation of profitable firms and rich households blunts those prospects, the result is reduced effort and lower economic growth.
  • In recent years, however, neither economic theory nor empirical evidence has been kind to the presumed tradeoff. Economists have produced new arguments showing why good economic performance is not only compatible with distributive fairness, but may even demand it. For example, in high-inequality societies, where poor households are deprived of economic and educational opportunities, economic growth is depressed. Then there are the Scandinavian countries, where egalitarian policies evidently have not stood in the way of economic prosperity.
  • Economists at the International Monetary Fund found that greater equality is associated with faster subsequent medium-term growth, both across and within countries.
  • [Also] redistributive policies did not appear to have any detrimental effects on economic performance.


The first article can be used to produce examples on the concept of sustainability; on environmental issues; on issues pertaining to growth; on issues pertaining to income distribution and inclusiveness etc.

The second one is excellent on illustrating the learning outcome 'The relationship between
equity and efficiency'.