Never let a serious crisis go to waste

Paul Krugman's nice piece caught lots of attention. I think he is too rush to second Rahm Emanuel's comment, "Never let a serious crisis go to waste." He is too eager to resuscitate dead Keynesian economics to remember that you should make the call after the player slides into the home plate, not before. The crisis is coming to an end and monetary policy works.

Nevertheless, a good recount of the economic history.

Rich economists?

Fortune has a nice profile of the respected Yale professor Robert Shiller. The story again confirms my belief that, aside from writing books, to make a fortune as an economist, you need to be either a theorist or a financial economist. Unsurprisingly, I am moving myself into the second camp.

Impressive or persuasive

Prof. Colander of Middlebury College reviews a book in last September's Journal of Economic Literature. The book, Do Economists Make Markets? On the Performativity of Economics, gets thumbs-down from Prof. Colander. It is not surprising considering the impossibility of understanding the title of the book. What interests me most is Prof. Colander's attitude toward economists' policy work and the field's measurement misalignment of research contributions. He says,

This overformalization leads to policy analysis that looks impressive, rather than is persuasive to policymakers.

Yes, he is talking about complicated mathematical models. Math is good and important, but we have to get the story right before digging deep into math derivations. That is also my personal belief on economic research.

Prof. Colander also pokes fun at the sociologist writers. As economists use math to look impressive, sociologists use language to impress. He says,

Language-the medium of sociologists and science scholars-imposes fewer limits, which makes it easier for them to obfuscate.

Thus the obfuscating title of the book.

Seven Dirty Words

I was doing a research for a newspaper commentary and bumped into the list of "Seven Dirty Words" that you can never say on TV. Oops, I had used one of the words in my class. I won't tell you which it was though.

(Picture: reupmag.com)

This is just great

Mexicans are allegedly treated badly in China for the non-existent swine flu. For one, I don't remember Chinese were treated this way when SARS was spreading. For two, I don't think the Chinese will do the same to any Western countries.

So this is just great. Just when we are worried about protectionism and retaliation among countries in this crisis, the Chinese government just did such a reckless act. I am hoping at least they placate the people at home. Otherwise, all Chinese and Chinese-looking people are going to face a potential large-scale discrimination without getting any benefits out of it.

(Picture: AFP/Getty Images)

Something that is harder

Steven Levitt, in my opinion, sided with Angus Deaton on the recent debate on the direction of development economics. I like what he said here:

Given a question, of course you want a randomized experiment to give you the best answer possible. What I think has happened too much in economics recently is that the availability of experiments has trumped the asking of good questions. Or, put another way, anyone can do program evaluations based on true randomization, so why should some of the world’s best economists be devoting so much of their time to such exercises?

The great economists should be trying to do something that is harder.

Mahir and I always thought about doing a theoretical model to answer an important question, as opposed to running a pure empirical project. To be fair, not everyone can publish a nicely thought-after and executed paper in a decent journal. It takes hard working and lots of investment of time and resources. But our reasoning is closer to what Levitt said. We want to try something that is harder.

A side note: Levitt's Freaknomics, unfortunately, is often credited with helping the irreversible trend of economic research he himself is worried about here.

(Picture: Angus Deaton through NBER)

Save net neutrality?

I just polled my students on the net neutrality debate. Before I explained my take, unsurprisingly the majority of the class voted for saving net neutrality. ZERO supported ISP on this issue. I don't know how many switched sides after my discussion, but here was what I said to them:

Current net neutrality is unfair because senior citizens who only use the Internet for emailing subsidize young adults who use video downloading extensively. As long as there is a functioning market for the Internet service providers, we really do not need to worry much about censorship or choking of innovations. When Comcast wants to limit your access to iTunes, there will be competitors trying to differentiate themselves from Comcast by offering all-you-can-it Internet service. Just look at cellular plans. However, if the ISP market is not perfectly competitive, we are better off saving net neutrality. A couple of oligarpolies indeed will take advantage of consumers.

Hopefully, the message had gone through. After all, economic thinking, not the political ideas, is what we need to teach them in Economics Departments.

(Picture: current.com)

Give our money back

The whole AIG bonus debacle is not interesting to me, but apparently many people are greatly concerned and, of course, furious. Here is my take:

(1)If the government starts to renegade private contracts willy-nilly, it sets a very bad precedence. The Obama administration is already trying to extend the reach of the government to every possible corner of the society. It is only a tiny bit of the bailout money, but serves the purpose of the administration perfectly well. Who knows what the end is? You could only hope the hands of the government stop before your house, career, and life.

(2)While I don't like these stupid people taking huge bonuses at a time the public is not happy about the way Wall Street deals with the situation, I would have pocketed in the money at the drop of a hat, if I had gotten a bonus package like that. It has nothing to do with moral standard or anything. Just like PBS. I don't like the government spending anything on a public TV franchise, but that won't stop me from taping Sesame Street for my kid. In a way, I am like a speculator in the financial market. The very presence of speculators brings the market back to fundamentals much faster. In the PBS case, the more popular their programs are, the more rediculous PBS look, because people would have paid for the high quality programs like Sesame Street!

(Picture: Associated Press)

Opposing super majoity

The impasse of state budget negotiation had let many people wonder whether the super majority requirement is really necessary. Indeed, a few Democrats have called for the change of the state constitution.

I am not sure about the political science theory on this issue. The super majority requirement seems to give a small group of people too much power. In the California budget case, a mere couple of Republicans can hold the budget hostage. It does not sound right. If the majority of California put Democrats in control of the legislatures and a Republican in the governor mansion, the budget should be a compromise of the governor and the Democrats. Not the Republicans. In any case, the super majority requirement is wrong.

Unless there is a more pressing issue to the suicidal behavior of Californians.

Liberal-leaning Californians have made some irreversible changes to the great state that brought the country Ronald Reagan. I don't expect to see any Republican president coming from California in the foreseeable future. Hollywood and the Silicon Valley breed the type of liberals that not only want to tax and spend but also want us all to become vegetarians. No, they don't mean persuasion. They want to make you change by passing laws. Don't believe it? Check proposition 2. Believe me a humane treatment to farm animals is only a first step. They will illegalize eating animals all together if they get their hands on it. I will post another one about proposition 2 later.

Come back to the fiscal issue. Tax and spend is all good as long as the tax revenues are coming like manna falling from the sky. Unfortunately, even California has recessions. When recessions come, who get hurt the most? Not the ones protected by tenures. More likely those who cannot find a job now and were promised tons of benefits before. I don't know how long the Democrats can exploit the unique status of California for. The Wall Street Journal says California has become France. Trust me. That is not a compliment.

And if there is an irreversible process that make checking and balancing Democrats' power impossible, Californians are better off with the super majority requirement.

Options are valuable

Many people lost a great deal of money in their 401K accounts lately. Again, they cry for the return of traditional defined-benefit plans. In essence, they do not want to have options, do not want to bear the risk of investing their own money, and do not want to reap the fruit of investing their own money. I believe that people's limited capability of dealing with big amount of information is one of the reasons why the liberals think the government should intervene with people's daily life. We see this argument in many places, such as the choice of schools, the labeling of drugs, and the use of guns. We economists call this as the market failure. In some occasions, I think the argument is valid and government intervention is indeed needed. But more likely than not, it is only a disguised way for the government to extend its power. We should object to that. In the case of 401k, it is particularly obvious.

What is a defined-benefit plan? It is a retirement plan that gives you a fixed amount of pension when you retire, either through a lump-sum payment or monthly installments. It is just a annuity, for Christ's sake! If you really like the annuity so much, just put all your 401k in an annuity account. If there is not an annuity option available to your 401k plan, well, I see a business opportunity! No laws say that you can't put your 401k in annuities. If your company's financial adviser does not have annuities, just call them three times a day! Soon enough, you will get your traditional pension back.

Options are valuable. I'd said that to my students in my investment class. And you should always keep this in mind as well. A 401k plan is better than traditional pensions because it gives you options. If you don't like varieties, that is fine. Just pick the most conservative one from your 401k menu. But never give your valuable options away!

(Picture: samuelatgilgal.wordpress.com)

To my knowledge

I was reading a few job market papers from other schools. I couldn't help but notice that the phrase "to my knowledge" kept showing up. What does it mean? The method you use or the insight you have, to your knowledge, is not seen anywhere else? What if your knowledge is extremely limited? A third-grade can say, "to my knowledge, no one ever studied the planets beyond earth." Or what if yours is really petty and nobody would waste their time to take that approach? Like "I just discovered that when I step down the stairs, I always use my left foot first. To my knowledge, no one knows about this."

In either case, it really looks suspicious. This is what William Thomson says about "over-motivate it." My adviser loves to remind me of the value (or valuelessness) of my research. He would say, "What is your contribution and motivation? I don't see it." I think it was under such a continuous torture that most of the job market candidates over emphasize their contribution and motivation. Thus we have tons of "to my knowledge." It is an honest and harmless rookie's mistake. But to my knowledge, I haven't have any of it in my papers.

(Picture: The Pennsylvania Gazette)

Chicago strikes back

It has never been a better time for people like Paul Krugman. This is what he said in New York Review of Books.

The quintessential economic sentence is supposed to be "There is no free lunch"; it says that there are limited resources, that to have more of one thing you must accept less of another, that there is no gain without pain. Depression economics, however, is the study of situations where there is a free lunch, if we can only figure out how to get our hands on it, because there are unemployed resources that could be put to work.

Krugman is the leader of the movement of reviving Keynesian economics. The popularity of Keynes right now is very puzzling to me. Didn't the monetarists have the last laugh about the Great Depression already? Why people are still advocating big government spending, instead of focusing on monetary policy?

We all know that when nominal interest rates are at zero, the liquidity trap is not far. But does that mean we have to yield to fiscal policy? The defense offered by Mankiw is not very satisfying. In essence, he thinks that the Fed should work on creating moderate inflation to drive down the real interest rates. But how?

Fortunately, Robert Lucas came to the rescue. He said in the Wall Street Journal,

This expansion of Fed lending has not violated the constraint that "the" interest rate cannot be less than zero, nor will it do so in the future. There are thousands of different interest rates out there and the yield differences among them have grown dramatically in recent months. The yield on short-term governments is now about the same as the yield on cash: zero. But the spreads between governments and privately-issued bonds are large at all maturities. The flight to quality means exactly that many are eager to trade private paper for non-interest bearing (or low-interest bearing) reserves and with the Fed's help they are doing so every day.

Later I learned that what he described is called quantitative easing. Whew, what a relief. We have not reached the end of this whole mess yet, but we should never give up on the Chicago School.

(Picture: University of Chicago)

Condi the diplomat

You have to give it to the diplomats/politicians. Sometimes they can have a very interesting angle at things. In this interview with the Wall Street Journal, Secretary of State recounted the summer event in which Russians caused a major headache to the West. Here is the excerpt:

"I recently told [Russian Foreign Minister] Sergei Lavrov, 'You know, Sergei, you did something I could never have done. You made [Georgian President] Misha Saakashvili into the darling of the international community. The Georgians now have more money than they can spend. And your forces are in South Ossetia and Abkhazia with the resounding support of Nicaragua and Hamas. Congratulations.' Everybody is now questioning Russia's worthiness as a partner. Their economy is in very deep trouble. They've come out of this badly. And I think it could help deter them from trying something like that again."

I wish she and the president had such a calm nerve in summer.

(Picture: wsj.com)

Got to love Mankiw

I am always a big fan of Greg Mankiw, former White House CEA chairman and Harvard professor. Now there is one more reason to love him. In this interview with CNBC, John Snow, former Treasury Secretary, said, "Mankiw was the only CEA chairman in history to put an equation before the president." Way to go, Prof. Mankiw!

Milam-McGinty-Kaun

Warning: with bragging content.

I won this year's Milam-McGinty-Kaun Award, the divisional teaching award given to outstanding graduate students. I was extremely delighted when I first learned the news. Here is what I wrote in my thank-you note to Prof. Kaun.

I am honored and greatly encouraged by receiving the Milam-McGinty-Kaun Award. As one of Tony Soprano’s captains used to say, “Just when I thought I was out, they pulled me back in.” After being a TA for 11 consecutive quarters and teaching 2 summer sessions, I was burnt out. Were it not for Prof. Kaun’s generosity, my work would not have been recognized and I would have lost all the stamina needed to continue teaching. The encouragement of receiving the Milam-McGinty-Kaun Award will keep me going and propel me well into a flourishing teaching and research career in the future. For that, I am very grateful.

Development economics

I have been observing the distinct pattern of using the elevators in the department building. People from developing countries are the heavy users. Many of them like to take the elevators down from 4th floor to 2nd floor. On the other hand, people from developed countries tend to shun the elevators. I have noticed that a few professors even carry their bikes up the stairs. What does that tell you? I would conclude that we need to get everyone rich before we talk about the environment and all that. Or maybe people from the developed world should volunteer to carry those poor graduate students up and down the building.

(Picture: http://www.sandhyanankani.com/wordpress/?p=190)

A collection of reduced-form equations

I was attracted by the title of this article: A 21st-Century Bretton Woods, because our venerable Prof. Dooley is one of the few economists advocating the Bretton Woods II theory. I wanted to see if the media has caught up with this on-the-edge economic thinking.

It turned out that the author is nothing more than a wannabe prophet who is drawing incorrect analogy between history and current events. One of the examples in the article is comparing the succession of world dominance from the British Empire to the U.S. with the rising challenge from China to the U.S. these days. I really don't know how he gets such a conclusion. China in many ways is going to be a major power in the world, but to challenge the U.S. dominance now? Not a chance. I see the U.S. as the model of the future world. Every time I sit in a classroom, watch TV shows, shop in a mall, or simply browse the bookshelves at Borders, I can't stop saying to myself that this is such a vibrant, diversified and thus great country. It is good that China is catching up, but the U.S. is never in a static mode. The gap will shrink but the U.S. won't give away the throne in the next few centuries.

Just like most of the prophets, the author needs to say something alarming, something eccentric to get attention. The new order of global finance is determined right here in the U.S. It is good that the American President is inclusive in the sense that he consults with other world leaders, but I don't see why we need a nod from China to restore the order of international finance. Some cite the fact that the U.S. needs China and other countries to buy treasuries to finance the bailout plan. But do you really think that China, other Asian countries, and OPEC members buy dollar-denominated debts out of altruism? Judging by the current dollar spike, I would say those countries are voting with their money. They are more desperate than the media think. The U.S. is still the safest place to hide your piggy bank. I believe this is the essence of Prof. Dooley's Bretton Woods II theory- hooking up with the U.S. to grow the countries.

To paraphrase Prof. Dooley, the author's analysis is only a collection of reduced-form equations. In other words, meaningless.

(Picture: Time & Life Pictures/Getty Images through The Wall Street Journal)

My one-minute fame

I sent an email to Prof. Mankiw regarding his latest blog post. He quoted my email in the follow-up.

How to work like Krugman

From Krugman himself.

Who is the worst president?

I was on the treadmill yesterday. Larry King Live was on. At first, I did not know what Larry King and the guests were arguing about. Soon I was appalled at what Larry said. He was apparently challenging a Bush sympathetic. He said, "how many soldiers died under the Bush administration and how many died under the Clinton administration?"

If that was a proof of Bush's being a terrible president, FDR would have been the worst president ever. Close to half a million soldiers died in World War II. I never like the war in Iraq, but you need to come up with better arguments to convince people that Bush did a terrible job as a president.

In economics, we called Larry's misfire an identification problem. The fact that you observe two things happen together does not necessarily tell you they are caused by each other or even correlated. Unfortunately, talking heads on TV or in the radio make the mistake all the time.

(Picture: wikipedia)

Lobbing shells into enemy lines

I had had a busy summer this year. Two things I did in particular reinforced the idea that I had chosen the best possible career for myself. I taught two summer session classes back to back and wrote a few editorial pieces for the Apple Daily, Taiwan's leading newspaper. But what do they have in common?

The Ma administration in Taiwan is contemplating a tax system overhaul. What I wrote about was some tax reform concepts from the perspective of conservatives/classic liberals/libertarians. We need such voices to counter the ubiquitous left-leaning elites in the media. Though not a tax expert myself, I never hesitate to cry out loud what is wrong with the left (see my Chinese blog if you read characters.)

Meanwhile, the very first batch of students in my teaching career gave me very positive response to my teaching. Again, I am no teaching expert. In fact, I shall be called as a lousy public speaker with a thick accent. But I am very enthusiastic about instilling interesting and sometimes provoking ideas into them. I am very happy that I influence a few people already.

To paraphrase Arthur Seldon, the intellectual architect of Thatcherism, both my acts are "lobbing shells into enemy lines, but (they) would never be the infantry, engaged in the short-term face-to-face grappling." I enjoy doing it, and hopefully get to do it for the next thirty years.

(Picture: www.findgrave.com)

The real games

The other day I was flipping channels and came upon NBC's Olympics program. "Ah, Olympics reporting is actually more than still images!" was the first thought came to my mind. After watching so many still images in other channels, it was quite a feast to look at moving athletes.

I know NBC and other TV stations across the globe paid big money to get the exclusive right to broadcast Olympic games. I know they want to protect their investments by not letting other TV companies have any highlights. But the act also indicates that most of the games in Olympics are not so entertaining after all. Once you see the highlights, you don't need to watch the whole competition. For the 100m dash, the game is literally ended in 10 seconds. What an anti-climax! The real sports shows are the professional games. Those games whose owners/administrators/TV broadcasters do not sweat giving out the highlights to ESPN are the real ones.

(Picture: IOC)

However you say

I was seen by a registered nurse on campus the other day. The lady talked to me really slow as if I was her pupil in grade school. Because of my somehow thick accent and my Asian face, some people seem to think I don't have the capability of understanding what they say. It does not happen frequently, but definitely more often in this liberal town than in other places. I believe the nurse has the same problem as well. They think they are being considerate, when in fact they are condescending. That is exactly what happens when meritocracy gives way to counting on some stranger's good will. And that is why I am against all forms of affirmative actions.

Every time I encounter silly things like this, I always recall an episode of "30 Rocks" . In the show, a black rap singer was mistakenly believed to be illiterate. People started to be extremely nice to him. Having seeing the oddity, the guy found out but kept enjoying the perks associated with illiteracy, until he was caught reading the New York Times. I will keep enjoying strangers' slow talk, since I know I am not the one who has problems.

(Picture: patentpending.blogs.com)

Economists' Major League

I ran into this article and got this interesting figure. The salaries paid by the public universities to assistant professors are not much different from those given by private ones. The gap is much larger for full professors. Apparently, private universities cheery pick the economists when they are proven to be ripen. In a way, public universities are very much like major league's farm system - only the very best get to pitch in the big league. I deeply believe the trend will continue in the foreseeable future.

(Source: Ronald G. Ehrenberg, 2004, Prospects in the Academic Labor Market for Economists, The Journal of Economic Perspectives,
18-2, p227-38}

How does Jay sound?

I am contemplating adopting an American-friendly alias. The motivation is simple. I took up the advice given by Steven Levitt. This is what he said:

"When I have Asian Ph.D. students go on the job market in the United States, I tell them that I think there is rampant discrimination against non-English speakers and encourage them to adopt Americanized first names for the job market."

I will do whatever I can to improve my chance of getting a decent job and you don't just ignore the advice from someone who is well known in the trade and willing to give you the fair assessment of the situation. So, how does Jay sound?

(Picture: www.answers.com)

How to stop free trade?

Maxim, Mahir, and I marveled at the star-studded list of this summer work shop at Princeton. All the big names we know from our international trade sequence were there. If there had been a terrorist attack at the seminar room, the research frontier of international trade would have been set back by at least 10 years. And that is how you stop free trade...

Real linkage

One of the international finance puzzles is about the missing international consumption smoothing. Standard consumption theory predicts countries will trade with each other to drive out the problems associated with production fluctuations. A country with high output this year would want to have a trade surplus, which is effectively saving of the country, and reverse the course when the crop is not so good in other years. In reality, that is not the case observed by economists. A seminal paper by Backus, Kehoe, and Kydland is the standard literature in this regard.

To exacerbate the fluctuations, the world is now more linked together than before. Flood in the Midwest might just as well starves people in the South East Asia. With food riots all over the world, the real linkage is more evident than ever. Both Ken Rogoff and Joe Stiglitz argue that rising prices are not going to be tamed and that countries should start to allocate more resources to help the poor and the deprived.

I don't envy Bernanke's job at all. The cure for high inflation is written in macroeconomics textbook: just increase the interest rate. Yet, he doesn't have the luxury to do it. The linkage is real: if the U.S. economy is tanking, the world suffers. If the world suffers, it is bad for the U.S. Just imagine what would happen if food riots are spreading in China like the wildfire in California. The world cannot afford a breaking-down China.

Here is one little idea for research: the correlation among approval rates of politicians across countries might be a better indication of the real linkage than the output numbers can reveal.

(Picture: Washingtonpost.com)

P.S.D.

Wall Street firms are constantly looking for P.S.D.s- those poor, smart kids with desire to get rich. Ever since I heard the acronym, I have been thinking about coming up with a similarly catchy term for economists. After attending last week's department seminar, I finally settled on the three letters: persistent, smart, and different.

Persistent and smart are kind of self-explanatory. Different is the key here. Prof. Page's idea that diversification creates better societies is not new, but his efforts to build a theoretical foundation for such a concept is admirable. His story goes like the following. Everyone interprets noise-mixed signals differently. The diversification of interpretation is totally fine. It is the negatively correlated part of the interpretation that cancels out noises and delivers a better understanding of the real signal. Using the example of Goldman Sachs-ization of the Wall Street, Prof. Page told a very convincing story. When the bankers were trained differently and with diversified backgrounds, they might not get the correct answer individually. But collectively, they got it very close. Now every banker is trained at Goldman Sachs. Individually, they are much more close to the correct answer, but collectively, they are just like one another and their solutions are no better than the diversified group with lousy individuals. The Wall Street lost the valuable diversification by Goldman Sachs-ization.

I was totally sold on this idea. Being different is even more important in our business. We are a group of people who thrive on doling out opinions. Nobody will listen to you, the ten thousand and one economist, if you do not have innovative ideas. How do you get innovative ideas? Be different!

The results are in

2008's economics Ph.D. job market results have finalized in the past month. Let's applaud at those top programs (and some not as good but apparently even more applaudable ones) that are willing to post their placement results. I compile a list as following. I will add more schools in the future when their results are posted. The list is not in any particular order.

Harvard
Stanford
Yale
Columbia
Rochester
Duke
UCLA
Wisconsin
Minnesota

(The last four should have 2008 updates shortly.)

What happens to Chicago, MIT, Princeton, and Berkeley? Fear of comparison or lack of diligence?

(Picture: AEA logo)

Hard to look smart with bad numbers

Mark Hurd, the CEO of HP, told a story in this week's Fortune. He recalled an excellently delivered presentation in a meeting a long time ago. The boss at the meeting calmly said in the end, "Good story, but it's hard to look smart with bad numbers."

That shall be the first principle of everything everyone does. But sometimes, you need a good presentation to make your bad numbers look less bad. That comes back to the trend I am observing in economics seminars and conferences.

More and more academics are using LaTex and its associated Beamer to deliver presentations. Prof. McCalman, our PhD program director, is pushing everyone in the program to use LaTex and Beamer. I am all for the new policy, since I am sort of an early adopter of new technologies. But many people cite the first principle I mentioned in the beginning here to resist the trend.

Too bad that is not the right thinking people here should have. If you are from a top 5 program, people will listen to you in whichever way you present it. I bet you can present a job market paper in word file and excel tables and still get a decent job. But not here. We need to dress well, put some lipstick on the pig, and use LaTex to get people to listen to us. Substance is of course important. But you need to have both substance and presentations to get you a good talk if you are nowhere near the top 5. To make things worse, people in the top programs also know LaTex and have pretty good dresses. Life is hard, isn't it?

(Picture: HP)

And you thought everybody knew

I went to the SCCIE-RIE conference this weekend. While listening to the presentations, I was very puzzled by the style of most presenters. John Cochrane, a finance professor at the University of Chicago's business school, has a fine piece of advice for writing and presenting (click here). It was written a while ago and the principles in the article actually have been talked about for a long time. And you thought everybody in the trade knew...

Alas, nobody takes the advice by heart. For presentations, Prof. Cochrane urges the presenters to put the main results upfront. You don't spend your precious first 30 minutes on motivation and another 30 minutes on literature review. That, unfortunately, was what most of the presenters at the conference did.

How could this happen? There are many possibilities. First, those presenters have no idea what the best way to present is. That I cannot help. Secondly, they may intentionally ignore the advice. Either they believe it sucks or they have better ideas in their minds. Well, their "better ideas" didn't work--- I was so sleepy throughout the conference and got very little out of it.

My ass-kissing disclaimer: There were a few gems, though. I learned a lot from a discussant in our department and also from my adviser, even though my adviser told too many unappreciated jokes in his presentation.

(Picture: Prof. Cochrane, GSB, The University of Chicago)

Americans contribute to the world

I meant to write about this story long time ago.

I know "the plural of anecdote is not evidence", but what is happening in the U.K. is very likely to be what Americans will get if Mrs. Clinton gets elected as President. In any universal health care system, citizens are treated equally and expected to see doctors at their own convenience. But people react to incentives. When you can eat anything in a buffet by paying a fixed amount of admission fee, are you going to stop when your stomach is just slightly filled? Most of the people will choose to eat as much as they can physically take in. That buffet concept is exactly what a universal health care system is for.

You can imagine what can happen in such a system: expenses blow to the roof and eventually bureaucrats have to butt in.The first principle the bureaucrats operate on is to treat every body "equally". By equally I mean equally bad. That is why we see this New York Times story.

One of the reasons why Canadians and Brits can sustain their universal health care is they piggyback on Americans. Americans literally subsidize every one in the rest of the world by paying the big pharmaceutical companies big bucks for their prescription drugs. When the liberals yell at you that Americans don't help the world and are so selfish by not signing the Kyoto Protocol, tell them the story about prescription drug subsidies and shut them up.

It is silly to see the liberals both demand the U.S. help the poor in the world and want a universal health care system. I am not disdaining them for no reason. When Mrs. Clinton was put in charge of coming up with a universal health care plan when her husband was first elected to the White House, big pharmas saw the writing on the wall. The CEO of Eli Lilly, one of the bigger pharmas, once talked about their desperation of diverting money to buy up HMOs from R&D expenditures. That happened when the reform was only in the talks. What would have happened if the plan went through? Curing cancers? Fighting Alzheimer's? Tackling AIDS? In your dreams, maybe.

Not only the U.S. should not adopt a universal health care, but the rest of the developed world should begin to switch back to a market-based system. That is the only way we can see real progress in medicine.

(Picture: New York Times)

More Bernanke

The last post was purely the product of a rushing graduate student: trying to say something but nothing comes out. So this is a follow-up.

It is almost a consensus among economists that you need a Paul Volcker to tackle stagflation. By Paul Volker, I mean a hard-line central banker who can resist politicians ' pressure to "save the economy" and care only about inflation. However, the gradually accepted explanation of the cause of the Great Depression was that a tight monetary policy exacerbated and prolonged the Depression.

When Ben Bernanke was nominated as the chairman of the Fed, the media had quite a profile of the academic (Prof. Walsh, upon my request, spent a class discussing Bernanke's contribution as an economist). One thing The Wall Street Journal talked about Brenanke was his admiration of the great Milton Friedman and his great book on the American monetary history. Bernanke visited Prof. Friedman to pay his tributes and thanked him for correcting the long-held view that New Deal saved the U.S. from further slumping. In fact, both Prof. Bernanke and Frieidman believed the tightening credit of the Fed was the real culprit of the Great Depression.

Pulling the history class a little closer, we will find Bernanke's attitude toward the contemporary Great Depression-Japan's lost decade was no different: A central bank failed to pump the liquidity into the market when the economy was badly needing extra cash. Even when the Bank of Japan cried out loud that the nominal interest rate was zero and therefore BOJ was powerless, Bernanke still believed BOJ can depreciate yen to help the economy. He is very consistent on this aspect.

By examining his words and deeds, we can almost conclude that Bernanke believes he is fighting a severe recession in the making. Therefore, forget about the inflation for now and print more money! For me? I really hope he is wrong.

Are we in it already?

The Fed shocked the world again with the astonishing news of helping JP Morgan buy Bear Stearns. The Fed chairman has been criticized for intervening too much in this recession-bound economy. A 1970-styled stagflation has been forecast in the media for quite a while. I used to think like that, but now started to change my mind. Given his actions and knowledge of the Great Depression, I believe Ben Bernanke doesn't think the stagflation is coming. Instead, he is preparing for a 1930-styled depression. The question is how bad it is gonna be.

(Picture: princeton.edu)

Destabilizing speculators

A South Korea court found the Lone Star executive guilty last month. It is said to be a sign that South Korea's attitude to foreign capital has changed. Lone Star, a U.S. private equity firm, bailed out a South Korean bank right after the Asian financial crisis. But when the firm tried to cash out their investment with astonishing return, the Korean public ran afoul of the American savior. I have heard that Koreans are pretty xenophobic, but putting someone who helped you in jail? It is just unbelievable. I don't know how South Korea is going to have any foreign investment in the future.

The xenophobia is actually touching a very critical finance question. Are speculators stabilizing the financial market or destabilizing it? Milton Friedman believed that speculators stabilize the market because profit-seeking players will bring the market back to the fundamentals much faster. In addition, speculators provide liquidity when most of the market participants are squeezed. I personally like this view very much, but to be fair, some researchers also find the irrational behavior of speculators may drive the market farther away from the fundamentals.

Academics aside, most of the politicians in developing countries talk about the speculators in a manner of demagogue. Speculators are bad; foreign speculators are even worse. We should protect our country, etc. For me, picking on foreigners is often a sign of a people lack of self-confidence. Only when your country can absorb the shocks of speculative attacks with grace, like U.K. did when Soros attacked Bank of England, can you proudly call her a developed one.

(Picture: Convicted Lone Star executive, Paul Yoo. Yonhap News)

Giffen goods must be......

While the professor in the class I am TAing discussed Giffen goods, she wrote, "Normal goods must be ordinary." It meant that the goods that you purchase more when you have more income must be the goods whose quantity demanded increases when the price drops. Then she wrote, "Giffen goods must be ?" She then asked for answers from the audience.

A student was very quick to respond and said, "Extraordinary!". That made my day.

(Picture: Prof. Nolan Miller at Harvard's Kennedy School of Government. He and Prof. Robert Jensen at Brown are said to find the first real-world Giffen goods.)

Becoming a master

The life of a junior researcher is not easy at all. The closure of Econoclasm sadly supports that fact. The harder part for me, however, is in getting the navigation when sailing in this vast ocean. I remember when I first tried to get started with my prospectus, I set out with an ambitious title, "Dissecting XXX". Not long after that, I had toned down a bit to "Understanding XXX". Now I probably can only say, "Can we say something about XXX?"

It is not that we, graduate students and junior faculty alike, don't have the ability or the potential to do something great. We just don't know how receptive the audience will be and probably don't know what obstacles we will face when we progress along. A guiding or whipping hand is what we desperately need at this juncture. To be honest, I don't mind the struggle, as long as I know I am moving forward.

Having said that, I am still pretty upset every time I read an article by some big name only to find the stupidity behind it. How can they publish an article that is only a collection of meaningless regressions? Just because he is ZZZ?

Unless I cross over to the other side and become a master myself, I will always be rancorous toward that.

(www.art.com)

Quote of the day

My adviser said, "Why so humble? You are not that great anyway." Fortunately, he was not talking about me, or anyone specific.

What do Jay Leno and I have in common?

The Tonight Show host Jay Leno is a serious comedian (quite an oxymoron, don't you think?). In his spare time, he is said to be busy writing up jokes (quite a job, don't you think?). Every time he saw his nemesis, presumably Dave Letterman, hanging out with celebrities in Knicks games, he felt even more motivated. "Ha, I caught you having fun when I am busy working. I beat you!" That is the attitude when you want to do something serious. Remember, when Leno took over the host from retiring Johnny Carson and replaced the 2nd-in-line Letterman, almost no one believed Leno would beat Letterman, who fled to CBS later. Now, The Tonight Show is constantly having better rating than the Late Show with Dave Letterman.

So, what did you do over the break? I hope you didn't go out and have too much fun because your competitors were working really hard.

(Picture: tv.yahoo.com)

We don't hate you

During the storm-caused blackout, we turned to radio for information and entertainment. To my surprise, there is actually a right-wing talk radio in this liberal town. From then on, I have tuned in once in a while. The other day I was listening to some guy sitting in for Rush Limbaugh when I was driving to school. Suddenly I realized why the ideologically right do not hate the left, while the opposite is often the case.

It is very much like pre-2004 Yankees and Red Sox. The Red Sox nation talked about Evil Empire all the time, but Yankee fans didn't care a bit. If you are winning perennially, will you care who is behind you? So the libertarians never hate anyone simply because we are winning.

But exactly what have we won? Proudly, we have won in the contest of understanding how this world works. Time and again, we have shown people that the world is converging to what the libertarians believe in: free market and free people.

Therefore, we don't hate you. We just think you are stupid.

Disclaimer: I do not think Rush Limbaugh is more libertarian than conservative. And I never like the characters of those right-wing talk show hosts. To paraphrase Obama, unlike Hillary, neither Rush Limbaugh nor Bill O'Reilly is likable enough.

(Picture: www. rushlimbaugh.com)

The danger facing Chinese elites

I follow Guo Kai's Chinese blog closely, but his recent post worries me. There hides a real danger for the young Chinese elites in his thoughts. His post reflects his unease of seeing the turmoil in Kenya and Pakistan. Guo thinks as long as the regime is democratically elected, the country has democracy, be it in the U.S or in Kenya. He then deducts that democracy is irrelevant. The success of America makes him and many other Chinese to overrate democracy. The underlying reason for the U.S. to succeed is the people. Because Americans are rather homogeneous, disputes are easy to resolve. Therefore, if the U.S. is under some dictatorships, it will still enjoy the super power status it has now. Chinese are pretty homogeneous, too. China will be successful no matter what kind of regime it has.

Well, I don't see the homogeneity in either the U.S. or China. You can call Japan or Korea a homogeneous society, but never the U.S. Just walk around downtown in any big city in America and you won't call the U.S. a homogeneous society. I have never been to China, but heard about Tibet quite often. Homogeneous in Tibet? Yes, it will be when the Han people drive out all the native Tibetans.

As someone from a country in transition to democracy, I can assure you that the democracy in the U.S. and the one in Kenya are very different. To have a fully functioning democracy, you need to have many complementing institutions and a fairly educated and wealthy people. We don't see those ingredients in those so-called third world democracies. In fact, I don't dare to say Taiwan has a fully functioning democracy, either.

The real issue that gets on my nerves is the success of Chinese communists' propaganda. A well educated elite like Guo buying into the democracy irrelevancy theory peddled by the communists really worries me. I suspect the economic success of China has blurred the Chinese elites' vision. There is a silver lining in his post, though. He puts up a disclaimer on top of the post. Guo himself does not 100% endorse the idea he writes. It is just a brain exercise for him. I sincerely hope all the Chinese elites can also just treat it as a brain exercise because when the economy slows down and the real test for the communists comes, they will need more understanding of how a democratic society works.

(Picture: bbc.co.uk)

The Economic Man

Macroeconomists are constantly looking for micro-foundations in their models. However, there is always a debate on how far the Economic Man should go. Here are two quite different views:

Paul Krugman said, "The question, however, is how far to push it. Keynes didn't make an all-out assault on Economic Man, but he often resorted to plausible psychological theorizing rather than careful analysis of what a rational decision-maker would do. Business decisions were driven by "animal spirits," consumer decisions by a psychological tendency to spend some but not all of any increase in income, wage settlements by a sense of fairness, and so on."

Yet, Thomas Sargent countered, "One of the first reviews of Keynes' book was written by an economist named Wassily Leontief. He deplored the fact that Keynes was departing from the older tradition of attributing rationality and optimality to people. Ever since then there's been a persistent call to put microeconomic foundations underneath macroeconomics. And if you try to build micro foundations, you're going to get back to the elements of classical economics.

These elements give us a set of methods for trying to study how people behave basically using Optimization Theory. Optimization Theory was something that was created by mathematicians, and that constitutes our main tool. The simplest example of a micro model is the supply and demand model for determining the price and quantity of a commodity produced, where demand is a reflection of preferences of people for various goods in their income level and supply is a reflection of the costs of production and the technology".

I believe the New Keynesian school has somehow reconciled the difference between the two sides. In fact, I suspect they should be the flip side of each other. Suppose there was a planet populated with some aliens that do not maximize their own utility. The aggregate economic behavior on that planet would be very different from Keynes' macroeconomics, though they might have gone into extinction a long time ago (or have become our god already?).

(Picture: Economic Sophisms)

My house is burning down

I had to proctor the final exam with other TAs because the professor was away. Well into the exam, a student came in and asked for the professor's whereabout. He didn't look very disappointed when he learned that the professor was not in. When he said he wanted to do TA evaluation, I had to stop him and ask him whether he had taken or is planning to take the makeup exam since he was not sitting there writing. He said to me, "My house is burning down." I said, "Oh, did you tell the department and make an arrangement for the makeup?" After learning the arrangement, I tried to close the conversation by saying, "If you want to do the eval, you will have to talk to the department."

"My house is burning down," he said it again with tears welling up in his eyes. Right at the moment, I realized what a cold-hearted bitch I had just become. I rushed to ask him, "Are you alright?" He seemed to be physically OK, but not emotionally.

What'd happened to me? The only reason I can come up with is that I am fed up with excuses. Students have all sorts of excuses when the homework is due or when he/she argues for exam points. My house is burning down? Dude, you just broke the excuse record! That must have come to my mind at the conversation. Why can 't they just be adults and suck it up if they just don't have time for homeworks or exams? These spoiled kids. They want to have fun in college and also good grades. Haven't they learned trade-offs in life?

Just when I thought I understand the psychology of college kids and begin to lose any sympathy for them, this guy with a burned down house reminds me again that "innocent before proven guilty" applies to college kids, too.

(Picture: treehugger.com)

Math intense

Just when I decided to do more math-intense research, I bumped into this profile of a highly talented woman. The story of Franziska Michor is actually quite inspiring. Don't miss it.

(Picture: Esquire.com)

A secret society?

I have a habit of browsing job market candidates from other economics program. I do that because I want to know how I compare with those people in the top programs. One thing I don't understand about their c.v. is that people love to put the membership of AEA on it. Don't you become a member just by paying fees? How is that an achievement? For me, that membership means less on c.v. than saying you have subscribed to The Wall Street Journal. Of course, you don't tell people about your newspaper subscription on the resume.

Or there is something I don't know about AEA membership? AEA is a secret society maybe?

We're always on the losing side

The Wall Street Journal today has the interview with director Ang Lee. His words probably explain why many Taiwanese have the defeatist mentality. Here are some excerpts:

Mr. Lee tells me that growing up in Taiwan influenced his career in other ways as well. He says that in his films, he always takes "the losing side." ("Somebody dies, somebody loses, well, gay cowboys -- they're not going to win," he explains.)

You might be wondering what all this has to do with Taiwan. "I grew up in Taiwan, we always lose," Mr. Lee says. He laughs good-naturedly. "Nobody wins anything, that's just how I grew up. We're always on the losing side. My parents get beat by the communists, they escape to Taiwan. Taiwan's a small island, hardly anybody pays attention. Up until the late '80s I still get this: I come here, 'Where are you from?' I say, 'Taiwan.' People say, 'Oh, I love Thai food!'"

Taiwan, of course, also has more serious dilemmas. "You live in fear that communists will take over . . . China's so big and Taiwan is a small island . . . . We look at America as the big brother, the protector, the good guys. So after the Vietnam War it's very frightening, [America's] . . . in trouble and you feel very insecure. So I think Taiwan needs Americans to be the good guys."

It is no surprise that we Taiwanese are more likely to succeed in gray areas where nationality matters the least. In science and business (arts to a lesser degree), Taiwanese have more share in the world stage than the size of population indicates. It also reminds me of why many of my classmates want to be Chinese or Indian economists while all I can be is a good economist.

(Picture: wsj.com)

Strunk and White

You don't know the importance of writing until you seriously write something. That was my first thought when I began to write up the prospectus for my Ph.D. dissertation. Although I am far from being a good writer, I collect good tips of how to write well. Therefore, I can share some writing advice with you.

1. Read a lot. If you don't know how other good writers write, it is very likely that you are not going to be one. Newspapers and magazines are the best sources. You should not only rely on reading blogs and academic papers. Sometimes they can be very poorly written, though being extremely informative.

2. Use adverbs. The veteran Fortune journalist, Carol Loomis, is the mastermind behind Warren Buffett's fantastic writing. If you love reading annual reports, Buffett's Berkeshire Hathaway is an incredible source. One piece of advice from Loomis to Buffett is to use adverbs. It will enrich the whole article. Of course, you need to know lots of adverbs.

3. Read Strunk and White's The Elements of Style. So many people talk about it that I have to have one by this holiday season. Greg Mankiw mentioned it in his blog. Bob Flood talked about it when he was in town. I will probably talk about it more when I have it.

4. Write often. Starting a blog yourself?

After writing all these, I checked again the advice from Mankiw. Nothing can top his. Check it out: How to write well by Greg Mankiw.

Never stop believing

Dallas Fed recently released a videotaping of the interview with Milton Friedman. Although I am pretty familiar with what the great economist had said in all sorts of interviews, he never stopped surprising me. In this particular interview, he called the social security system a Ponzi scheme. The sustainability of the system relies on recruiting new members to pay off retirees. There is no asset accumulation in the system used by the U.S. If you think it carefully, it is indeed the case. How can Paul Krugman look at this fact and still think we don't have a crisis? Once again Prof. Friedman proved to me: we should not stop believing in him.

(Picture: Dallas Fed)

Fire Mike Nolan

There is a reason why 49ers have more flags than any other team in NFL this season. Players are lack of discipline. When that happens, it is always the coach to blame. That sums up this disappointing season. Fire Mike Nolan and make him take Alex Smith with him.

(Picture: sf49ers.com)

Robert Flood is in town

Robert Flood was in the department to give a couple of talks this week. One was about advice for graduate students. I am just so happy to learn that I am doing most of the things he suggested. Can I say, "great minds think alike?" Maybe it is too early to tell if I will be as big as he is, but I am really inspired.

Having seen the unusual high attendance to Dr. Flood's talk, I want to say something about seminar attendance in general. I have decided to commit myself to one of the department seminars since I cleared field exams. Commitment means attending every week without questioning what the topic is. Most of my peer selectively go. Make no mistake, I did struggle sometimes because the talk was so boring or too difficult. But my take on this is that going to seminars is like taking vitamins. You won't see the immediate benefits, but in the long run, it sure helps. Besides, you know what happens if you take vitamin only once in a while: eventually you will stop taking it for good.

(Picture: worldbank.org)

How to tell something is over heating

A while back when we were still in L.A., we lived in a large apartment complex very close to Disneyland. Because I stayed home quite often during that time, I knew most of the maintenance crew. The head of handymen once talked to me about buying a house through a broker that could hook him up with low down payment and low interest payment mortgage. When I pressed him for more details, he shrugged, "I don't know. I can give you a card and you can call him. He is really nice."

Some day before we moved to Santa Cruz, he told me again that he bought a second house because he made a fortune on the first one. "Jesus," I told him, "you need to be more careful." He didn't seem to care even after I told him I was an investment adviser. He still held on to the first one. I don't know if he had cashed out before the subprime crisis hit. (Good luck, Gus!) But here we have two lessons to learn.

First, as Prof. Ravenna pointed out, bubbles can be rational. As long as there are buyers with higher offer than your purchase price, your buying high is rational. I doubt Gus knew about the theory, but he made a fortune on the first house.

Second, when a handyman is going all in and not hesitating to brag about it, the market is probably over heating. It is only a matter of time to see the bubble burst.

(Picture: www.bconnex.net)