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!