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.

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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.

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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!

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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!

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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.

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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)