Monday, December 28, 2009

Paying to Work: The Minnesota College Savings Plan Matching Grant

Most government subsidy programs are badly designed, and the Minnesota College Savings Plan Matching Grant Program is no exception. The use of a means-tested matching grant means that, depending on your salary, you end up paying to work.

Example: suppose that during 2009 you contributed $4,000 to your child's College Savings Plan and had a family adjusted gross income of $80,000. You'd receive a matching grant from the State of Minnesota of $400. Now, if you were unlucky enough to have had a salary raise of just $1 during 2009, your government subsidy would have fallen from $400 to zero. In other words, an extra dollar of revenue would have led to an increase in your net tax liabilities of a little bit less than $400!

This is not an uncommon problem. At the federal level one can find many examples of poorly designed government programs. More interestingly, governments could eliminate these distortions by simply discarding stepwise income criteria for benefit concession. For example, since the Minnesota Matching Grant Program is capped at a relatively low value, it automatically becomes irrelevant as the income of a family increases. Furthermore, simplifying the program would reduce bureaucratic costs.

Given that the solution is so simple, why is it that governments insist in creating these public finance monstrosities? The explanation is given by public choice theory: the politician goal is not to maximize social welfare, but to maximize political power. Higher levels of control can be achieved by creating rules that increase the size of government bureaucracies and their effects on people's lives. The real solution to the problem, even if an uphill battle, would be to universally restrict the power of politicians to create programs that imply high marginal tax rates.

Wednesday, December 23, 2009

Can Smoking Bans Lead to More Passive Smoking?

The answer is yes according to this article in the AEA Applied Economics by Adda and Cornaglia. It's a perfect example of the unintended consequences of heavy-handed government regulations and of the principle that incentives matter. Here's the abstract:
We evaluate the effect of smoking bans and excise taxes on the exposure to tobacco smoke of nonsmokers, and we show their unintended consequences on children. Smoking bans perversely increase nonsmokers' exposure by displacing smokers to private places where they contaminate nonsmokers. We exploit data on bio-samples of cotinine, time use, and smoking cessation, as well as state and time variation in anti-smoking policies across US states. We find that higher taxes are an efficient way to decrease exposure to tobacco smoke.

Monday, December 21, 2009

Sorman on Revel's Last Exit to Utopia

Guy Sorman has an article in the City Journal about one of Jean-François Revel's books titled Last Exit to Utopia: The Survival of Socialism in a Post-Soviet Era (La grande parade, Essai sur la survie de l'utopie socialiste). Here's an extract:

French public intellectuals have a reputation—well-deserved—for being socialists, Marxists, or Trotskyists. One thinks in this regard of popular figures like Jean-Paul Sartre, Pierre Bourdieu, Jacques Derrida, and Simone de Beauvoir, all with fan clubs on American campuses. Some French thinkers, however, have carried forward another intellectual tradition, that of classical liberalism—pro-democracy and pro-market—and running from the work of Alexis de Tocqueville to Albert Camus to the philosopher and journalist Jean-François Revel, who died at 82 in 2006. ...

Revel tried to explain this [leftist] utopian yearning through Rousseau’s influential doctrine: man was inherently good, society bad. Therefore, as Rousseau had it, reforming society—starting with the suppression of private property—would allow man’s fundamentally good nature to shine forth. Another source of the utopian fantasy, he believed, came from the European Catholic canon: good intentions count most. Even after learning that the Soviet Union and the Third Reich killed approximately the same number of their own citizens, leftist intellectuals rejected any comparison between the two regimes; after all, the Soviets’ intentions were better than the Nazis’, and intentions trump results. Revel could barely contain his ire at leftist scholars who refused to discuss the matter honestly.

Friday, December 18, 2009

Content Control in the Blogosphere: The Lockdown of Incentives Matter by Blogger

Some of you may have noticed that my blog was unreachable during the last three days (you'd get the screen above instead of my posts). Here's what happened: on December 15 around 4:00 AM Blogger locked down my blog, apparently because some splogs were capturing my posts and monetizing them. It may not have helped me that I had been posting frequently at 12:01 AM (what could flag for use of a robot poster) and also because, as most bloggers do, I frequently link to posts in my favorite blogs. Blogger robots use some of these behaviors as flags for splogs, what leads to a significant level of false positives and frustration among bloggers, as represented by the roll of discontented bloggers in this Blogger Forum.

I followed Blogger procedures to reinstate my blog, as documented in this thread, but it took them 3 days to get it fixed! Fortunately to me, my sources of revenue don't depend on my blog. I know however that more and more people have been relying on blogs as business helpers. Not only that: such an inordinate amount of control over public discourse reveals the fragility of blogs as repositories of ideas.

Here are my tips in case you're not willing to see your hard work destroyed by Blogger robots: first, make sure that you backup your blog by downloading its contents periodically (you can eventually recover your latter posts that were not included in the backup by using Google's cache tool). Second, make sure that you choose a blog service that doesn't have a track history of lockdowns (at this point, I wouldn't use Blogger if I'd be starting from scratch). And third, if the blog is important as a revenue tool, think seriously about using a paid service, or by hosting it yourself.

Unfortunately, Gordon's Tech summarized the problem with Blogger well by saying this:

Google's honeymoon period is over. They've developed Microsoft's arrogance without Microsoft's monopoly power. This does not bode well for their future.

PS: Ennyman tells me that Blogger's export function doesn't export pictures and apparently doesn't export older posts too. It means that you need to keep old backups around. Also, as it can be seen in the comments to this post, transferring blogs from one service to another can be a frustrating experience.

An alternative is to use Blogger Backup. It'll allow you to download all your posts, each one in a different xml file. It'll not download images however. You'll need to use a download tool to get your pictures, for example, DownThemAll. See more instructions in this post.

Tuesday, December 15, 2009

Professor Arthur Goldberger Dies at 79

The world lost another great economist with the recent passing of Professor Arthur S. Goldberger on December 11 (HT Marginal Revolution's Cowen).

I've never had the pleasure of being a student of Professor Goldberger. We used however his wonderful texbook at UW-Madison, and I've had the opportunity to benefit from his insights during our econometrics workshops and to talk to him a few times about my own research.

I've never met anyone that didn't like him as a person and as a teacher. He was the most intuitive and yet analytically precise econometrician that I've ever met.

As a homage to Professor Goldberger I'll reproduce below his definition of micronumerosity, a tongue-in-cheek concept that he used to raise awareness of common misunderstandings regarding the problem of multicollinearity (see also Bryan Caplan on the topic in this post):
Econometrics texts devote many pages to the problem of multicollinearity in multiple regression, but they say little about the closely analogous problem of small sample size in estimating a univariate mean. Perhaps that imbalance is attributable to the lack of an exotic polysyllabic name for "small sample size." If so, we can remove that impediment by introducing the term "micronumerosity." ...
If micronumerosity proves serious in the sense that the estimate of [the mean] has an unsatisfactorily low degree of precision, we are in the statistical position of not being able to make bricks without straw. The remedy lies essentially in the acquisition, if possible, of larger samples from the same population.
But more data is no remedy for micronumerosity if the additional data are simply "more of the same." So obtaining lots of small samples from the same population will not help. ...
Multicollinearity is no more (or less) serious than micronumerosity. Exact multicollinearity (R2 = 1) is a close analogue of exact micronumerosity (n=0).

Monday, December 14, 2009

Paul Samuelson: Form and Function in Economics

Paul Samuelson (1915-2009), economics titan, died Sunday. He was the first American to win a Nobel Prize in Economics.

Early in my life I was exposed to economics thanks to the celebrated textbook that he wrote with Nordhaus. My father had an old two-volume Brazilian edition of 1975 (cover on the right). I was just a kid and yet loved to flip through its pages, searching for colorful maps, graphs and tables that illustrated economic concepts.

Samuelson's influence in economics is extraordinary, but especially unique in methodology. All his contributions were based on the strict logic of mathematics and after him it became clear that any further development in the field wouldn't be achieved without the help of rigorous analytical thinking.

I always wondered however how was it that an intellectual giant like Samuelson could have ignored so blatantly the failures of socialism and communism, as described by Beichman:
World-class economist Paul Samuelson, a Nobel laureate, wrote in the tenth edition of his textbook Economics: “It is a vulgar mistake to think that most people in Eastern Europe are miserable.” This, mind you, in the aftermath of the 1953 East German uprising, the 1956 Hungarian uprising and the Poznan protests in Poland, the 1968 revolution in Czechoslovakia— all suppressed with bloodshed by Soviet tanks. In the eleventh edition, he took out the word “vulgar.” In the 1985 twelfth edition, that entire passage had disappeared. Instead, he and his coauthor, William Nordhaus, substituted a sentence asking whether Soviet political repression was “worth the economic gains.” This non-question was identified as “one of the most profound dilemmas of human society.” After 70 years of Leninism, Stalinism, and Maoism that took at least 100 million lives, this was still a dilemma?
Naturally, intellectuals of the time tended to have pro-Soviet views, but Samuelson was not your run-of-the-mill social thinker. So what was Samuelson thinking when he wrote (or reviewed) those passages?

My favorite explanation comes from my early training as an engineer. Mathematicians are entranced by theoretical elegance, while engineers are fond of intellectual achievements that are physically and economically robust. I believe that economists like Samuelson tend to think more like mathematicians than like engineers. This is to me the main reason why he (and many that followed on his steps) may have put too much emphasis on theoretical form in detriment of economic function. The cleanliness and elegance of central planning as an intellectual construct for example, despite its incompatibility with human nature, was probably very attractive to the mathematician living inside Samuelson's mind.

Sunday, December 13, 2009

Tax Cuts Are More Effective than Government Spending

According to this NYT article by Mankiw, were the government really serious about using fiscal policy to stimulate the economy, then it would be using tax cuts instead of increased government spending as a tool. Here's the evidence:

One piece of evidence comes from Christina D. Romer, the chairwoman of the president’s Council of Economic Advisers. In work with her husband, David H. Romer, written at the University of California, Berkeley, just months before she took her current job, Ms. Romer found that tax policy has a powerful influence on economic activity.

According to the Romers, each dollar of tax cuts has historically raised G.D.P. by about $3 — three times the figure used in the administration report. That is also far greater than most estimates of the effects of government spending.

Other recent work supports the Romers’ findings. In a December 2008 working paper, Andrew Mountford of the University of London and Harald Uhlig of the University of Chicago apply state-of-the-art statistical tools to United States data to compare the effects of deficit-financed spending, deficit-financed tax cuts and tax-financed spending. They report that “deficit-financed tax cuts work best among these three scenarios to improve G.D.P.”

My Harvard colleagues Alberto Alesina and Silvia Ardagna have recently conducted a comprehensive analysis of the issue. In an October study, they looked at large changes in fiscal policy in 21 nations in the Organization for Economic Cooperation and Development. They identified 91 episodes since 1970 in which policy moved to stimulate the economy. They then compared the policy interventions that succeeded — that is, those that were actually followed by robust growth — with those that failed.

The results are striking. Successful stimulus relies almost entirely on cuts in business and income taxes. Failed stimulus relies mostly on increases in government spending.

Thursday, December 10, 2009

Easterly on the Growthgate

Easterly writes on what would be the economics equivalent of the Climategate, with equal or worse consequences: too much politicking and misguided use of data in economic growth research, or what he calls the Growthgate.

The problem here, as with climate change, is that science has also been captured by governments and interest groups. In his own words:
Of course, the policy world abhors the great Vacuum of Ignorance, which opens the door to empty pontificators like a certain bestselling writer of books about Flat Worlds, in which You Cannot Have Growth Unless You Do Precisely What I Tell You.

Carden extends Easterly's point to the recent successful discrediting of previously accepted but biased minimum wage research:

Climategate is going to make a lot of scholars across disciplines think very, very hard about what they're doing. The reaction to the Card & Krueger minimum wage paper is a feather in the cap of the economics profession. C&K appeared in the American Economic Review and was subjected to thorough examination and criticism before the bulk of the evidence came down on the side of competitive models of the labor market (cf. Neumark and Wascher).

Some have been suggesting that this kind of scientific corruption is expected, that politics inevitably affects the scientific method, so we shouldn't bother. I don't like the argument. As it's the case with corruption in any human action, the response shouldn't be leniency, it should be instead a critique of existing incentives and institutions and a cry for ethical behavior, Cato the Younger style. After all, the latter two are perfectly acceptable self-regulatory social interaction mechanisms.

The Colbert Report on the Fed

Stephen Colbert on the Federal Reserve (HT Mankiw). Not as funny as my Money and Banking classes, but funny anyway (just kidding)... Enjoy!

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Wednesday, December 9, 2009

Baby You Can Drive My Car in Copenhagen

I feel really comfortable criticizing: I ride the bus every workday, even during snowstorms, as I did today. I have absolutely no problem with that.

These folks in Copenhagen on the other hand appear to be enjoying the ride in those chauffeured Mercedes. Let's not forget that it's all paid with your money (HT Cafe Hayek's Boudreaux)... Enjoy!

Tuesday, December 8, 2009

Plus ça change...

Planned economy or planned destruction? The question appeared in the Chicago Tribune Cartoon of 1934 seen below (HT Dan, click on the image to magnify).

As the French say: plus ça change, plus c'est la même chose...

Salvador Allende's Star Trek Fantasy


What's the connection between a bad Star Trek episode and Chile's 1970-1973 Soviet-backed president Salvador Allende? The answer is Cybersyn, a make-believe project by British "visionary" Stafford Beer. Cybersyn (control room seen above) was supposed to replace free markets with totalitarian central planning, but ended up as nothing more than an expensive joke. According to Marginal Revolution's Tabarrok:
It is no accident, say Axelrod and Borenstein, that the control room looks like the bridge of the Starship Enterprise because the whole purpose of the room was to exude a science-fiction fantasy of omniscience and omnipotence. The fantasy naturally appealed to Allende who had the control room moved to the presidential palace just days before the coup.
The control room is like the bridge of the Starship Enterprise in another respect--both are stage sets. Nothing about the room is real, even the computer displays on the wall are simply hand drawn slides projected from the other side with Kodak carousels.
Ironically, when rumors of the project began to circulate, the illusion of omniscience and omnipotence that Beer had created, the same illusion that so appealed to Allende and that had funded Beer's visions and experiments, this illusion caused fear that an all-knowing big brother was on the way--and such fear may even have encouraged the coup.
Indeed, Cybersyn is nothing more than an excellent inner mind portrait of Messianic politicians. If Beer was for Allende what Friedman was for Pinochet, than it's easy to understand why Beer's Chile resulted in economic failure while Friedman's Chile resulted in economic success.

Sunday, December 6, 2009

A Lucid Summary of the Climategate Aftermath

Here's Mike Hammock on a lucid summary of the Climategate aftermath (HT Division of Labour's Carden, italics are mine):

I’m certainly not qualified, and ideologues won’t resolve the issue. I expect this to play out in the literature as it would in any other science. I will still defer to the collected expertise of climatologists, which, for the moment, still supports the AGW hypothesis.

I also expect climatologists to defer to economists when it comes to the question of "what to do about it". ... I also think the odds of getting a well-designed regulation out of the political system are low. The question of whether a real-world regulation would create benefits greater than costs isn't yet clear to me. I'm not an advocate of the "we must do something, this is something, therefore we must do this" position on global warming.

The problem with the climate change debate is that it has clearly become politicized to the point of acquiring millennialist tones and the status of religious dogma on both sides of the divide. It has also been captured as a rallying cry by disenfranchised socialists and communists in search of an anti-free market unifying cause. The irony here is that the current state of the politics of climate change only confirms the absolute dominance of economics as a social science: if you want to discredit free market capitalism, better to use sound economic theory and find a negative externality of gigantic proportions, and that's exactly what activists believe they've found.

For me, AGW is just another mainstream scientific theory, one that may be further validated or rejected along the track. Right now, and let's be clear about it, things are not looking good for the main AGW large-scale models. Their out-of-sample predictive power is so low that they should be considered useless for policy making (and I hope the data hasn't been meddled with to produce acceptable in-sample fit). Consider for example this peer-reviewed article (abstract below available here, italics are mine):

In their new paper in a special section of the International Journal of Forecasting on decision making and planning under low levels of predictability ... Kesten Green, Scott Armstrong, and Willie Soon asked whether it is possible to make useful forecasts for policy makers about changes in global climate up to 100 years ahead. Using evidence-based forecasting principles, they chose the "no-change" forecast as their benchmark and found that, with mean absolute errors of 0.18C for 20 years ahead and 0.24C for 50 years ahead, even if perfectly accurate forecasts of global mean temperature were possible they would not be more useful for policy makers.

They nevertheless demonstrated the use of benchmarking by assessing the relative performance of the Intergovernmental Panel on Climate Change's medium projection of +0.03C per year against historical data from 1851 to 1975. The errors from the IPCC projections were more than seven times greater than the errors from the simple benchmark that assumed no change in temperatures.

As a time-series econometrician, the argument strikes me as powerful, so I wonder: why arguments like these, based on strict scientific methodology, and published in respected journals, have been mostly ignored or downplayed in the climate change debate? The failure of mainstream large-scale models by the way is not a new phenomenon: economists once made the mistake of trusting such models, with dire economic consequences. As a result, I was taught at graduate school to always be skeptical about large-scale models. The same could easily apply to the current state of climate change research, so the question is: why is it that I don't see more skepticism and dissent in that field, particularly given evidence like the one presented above?

To make things worse, policy making in climate change has been based until now on insufficient research or poor economic understanding of the problem. It looks sometimes as if the debate is rigged to not allow for serious economic considerations or to marginalize dissenting voices - see for example what happened to Steven Levitt (undoubtedly an influential scholar) for speaking out his mind.

Things like these shouldn't be happening. By allowing activists, celebrities and politicos to act as bullies and speakers in their fields, climate researchers are steadily losing scientific credibility. I've become increasingly dismayed by the climate change scientific community as they've failed to clearly dissociate themselves from the massive use of political propaganda in their field (the movie poster on the right is a good example of propaganda that went mostly unquestioned by climate change scientists, and by the way, the movie sucks). Should I hope that the Hadley CRU scandal will serve as a wake up call for them?

Saturday, December 5, 2009

Jon Stewart on Minarets and Swiss Neutrality

Very, very funny... Enjoy!

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Anti-Free Trade Hypocrisy and the NBA

Here's Boudreaux on anti-free trade hypocrisy:

Sen. Charles Schumer (D-NY) is upset that Adidas will shift its manufacturing of National Basketball Association jerseys from New York to Thailand, and he menacingly calls upon the N.B.A. to terminate its contract with Adidas ...

I don’t know Mr. Schumer personally, but I’ll bet my pension that his everyday consumption consists of countless products containing such large quantities of non-American inputs and labor that, were Mr. Schumer to rid his existence of these foreign contributions to his living standard, he would soon find himself dark-ages ignorant and appallingly impoverished.

We all probably know that the NBA is a successful brand worldwide. I remember how some friends in Brazil loved to watch NBA games and buy NBA gear. As explained in this Forbes article:

The NBA’s China operation is no small business. It runs one of the largest marketing machines in the region, currently hosting more than 170 special events in 112 cities in greater China, top among them the NBA China Games 2007. It also boasts deep TV penetration rates and maintains marketing partnerships with 20 of the world’s leading brands, as well as sells its memorabilia to Chinese fans in more than 50,000 locations.

I would like to see anti-free trade activists supporting a worldwide ban on anything NBA related, and supporting a US ban on anything related to the Soccer World Cup. They should be prepared however to deal with some pretty angry folks out there if they would have the courage to put their money where their mouth is...

Thursday, December 3, 2009

Krugman Recognizes that the Tobin Tax Isn't "Working Very Well" in Brazil

During an interview in São Paulo, Krugman recognized that the Tobin tax isn't "working very well," something that I discussed in this post a few days ago. This shouldn't be a surprise to him, for the reasons explained in the same post and also here. Strangely, he insists in not opposing it. Here's my translation of the original article from the estadao.com.br, which is in Portuguese:
He did not oppose the tax (called IOF) on capital inflows adopted recently by the Brazilian government, at a rate of 2% on foreign investments in stocks and government bonds. But he observed that the measure is not “working very well.”

Inflation Targeting: When Creator and Creature Collide

The death of inflation targeting has been covered in this blog here, here and here. Yesterday we got news from the Wall Street Journal that, in a coup de grâce, the creator has come to terms with the need to kill the creation (HT Selva Brasilis).

The creator's name is Ben Bernanke. The creature's name is inflation targeting. Bernanke devoted a large part of his successful career as a scholar to the analysis of inflation targeting regimes. This was probably the main reason for his appointment as Fed Chairman, as explained in this Bloomberg article of 2005:

The nomination [of Bernanke], which is subject to confirmation by the U.S. Senate, may nudge the Fed in the direction of more than 20 foreign central banks that pursue numerical inflation levels or ranges, said global economists and former central bankers.

Here's however the big irony: Bernanke was appointed to bring the creature to life inside Fed's labs. Once there, however, he became responsible for pulling the plug on his own creation.

I'll use Bernanke's own words to make the point. In an American Economic Review article of 2001, Bernanke the Princeton Professor said:

In recent decades, asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries. In light of this experience, how, if at all, should central banks respond to asset price volatility? ...

The inflation-targeting approach gives a specific answer to the question of how central bankers should respond to asset prices: changes in asset prices should affect the central bank's policy only to the extent that they affect the central bank's forecast of inflation.

What Bernanke meant is that, as long as inflation is expected to remain low and around the target, the Fed should not try to "shoot bubbles." Now, contrast the statement above with what Bernanke the Fed Chairman said recently, according to yesterday's WSJ article:

"The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset price bubble bursts in the future," Mr. Bernanke said in answer to a question after a speech in New York last month. ...

Mr. Bernanke is leaving himself hedged. If he felt stamping out a bubble with higher rates would forestall a rise in inflation or stabilize the economy, "We'd have to think about that very seriously," he told the New York Economic Club recently. "We can never say never."

So, what has happened? While I worked in the Central Bank of Brazil a few years ago I tried to bring to to the attention of some of my colleagues that inflation targeting is a monetary regime that lacks a credible nominal anchor. I discovered later that John Cochrane had the same intuition and was able to formalize it in this excellent critique of inflation targeting. Most central bank economists that I met however would prefer to follow Bernanke's inflation targeting cookbook without making any serious attempt to think about its economic foundations (or lack thereof). Many among them would also choose, mostly because of Bernanke's diagnostic reproduced above, to ignore asset price runs that would periodically infest economies based on new-Keynesian interest rate rules such as is the case with inflation targeting. What followed is history: welcome to "bubble world"!

Mistakes made by central banks during the inflation targeting years are a good example of a big problem in science: the institutionalization of scientific consensus. The Hadley CRU "Climategate" scandal is another example of the same problem, although in the latter case there was serious unethical conduct by some scientists and extreme politicization of the scientific community - something that I've never witnessed at such an inordinate level during my years in central banking.

Dissent, as long as based on the scientific method, should never be silenced. Indeed, it should be welcomed by all that are intellectually curious, ethical and passionate about science.

The Climategate According to Jon Stewart

Jon Stewart breaks the silence... Enjoy!

Wednesday, December 2, 2009

Krugman's Tobin Tax: Shooting the Messenger

Stefan Karlsson wrote a post clearly explaining one of the main problems (although not the only one) with Krugman's defense of the Tobin tax. In his words:

... The transactions that would be particularly discouraged by a Tobin tax would be arbitrage type dealings trying to close discrepancies in pricing. Ending arbitrage trade would represent a big reduction economic efficiency.

And furthermore, by reducing trading volumes, slippage (the decrease/increase in price caused by an individual actor's sale/purchase, something which prevents the realization of potential gains through transactions) would increase, something which would produce non-trivial costs for people engaged in foreign trade and long-term investments.

Thus, problems with large exchange rate fluctuations are not the result of “speculation”, but are inherent in the nature of fluctuating currency exchange rates. Given that system however, short-term speculation is a force that reduces, and not aggravates the problem. This applies to short-term speculation in other markets too.

In other words, Krugman's financial transactions tax economics is based on the wrong notion that, to solve a problem, all that you need to do is to shoot the messenger.

Tuesday, December 1, 2009

Lawrence H. White on the Rule of Law and the Fed

Below an interesting Cato podcast interview with Lawrence H. White on the state of central banking in the US.