Wednesday, 23 February 2011

I should be more careful what I work on...

you see, first I worked on (historical) bubbles, and then NASDAQ blew up... then I did research on the sovereign debt defaults, and Greece imploded. In the fall, for a conference at the Bank of Chile, I did a paper on social and political unrest - assassinations, riots, anti-government demonstrations, violent overthrows of the government... and look what we get in the Middle East. The pejorative term for scholars changing research focus as events unfold is "intellectual ambulance chasers"... but what is this? A reverse Midas touch? At any rate, for a sample of South American countries, I looked at what drove levels of unrest. In particular, I show that budget cuts have a strong effect on the likelihood of instability - over and above the effects of an economic downturn. Here is a link and the abstract:

Efforts at fiscal consolidation are often limited because of concerns over potential social unrest. From German austerity measures during the 1930s to the violent demonstrations in Greece in 2010, hard times have tended to go hand in hand with antigovernment violence. In this paper, I assemble cross-country evidence from eleven South American countries for the period 1937 to 1995 about the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between austerity and instability. I examine the extent to which this relationship simply captures the fact that fiscal retrenchment and economic slumps are correlated, and conclude that this is not what is driving the effect. Finally, I test for interactions with various economic and political variables. While autocracies and democracies show a broadly similar response to budget cuts, countries with a history of stable institutions are less likely to see unrest as a result of austerity measures.
The paper will be out later in the year in a volume edited by Jordi Gali and Luis Felipe Céspedes. Right now, with a doctoral student from UPF, Jacopo Ponticelli, I am working on a related paper to see how much of this holds over the long run in a wider set of countries.

Tuesday, 22 February 2011

ITFD => Yale PhD program

One of our graduates, Moritz Lenel (ITFD 2010) just got admitted to the Ph.D. program at the Yale Economics Department. All the faculty in our program thought very highly of him, and he really hit some impressive home runs when a student here. Remarkably, in addition to being an academic star, he is also a genuinely nice guy, and I think our letters reflected that! Of course, we are enormously pleased that the admissions committee at Yale did the right thing, and I would bet real money that some other top schools will follow suit. This is also great news for the program, since it shows that the training here is actually pretty decent preparation for entry into highly competitive doctoral programs in economics...

*** March 10 update **** Moritz also got into Stanford, and is waitlisted at Harvard and MIT. Congratulations again, and fingers crossed...

Monday, 14 February 2011

After you, please (it's only a matter of life and death)

Bruno Frey and friends have written a wonderful piece in the Journal of Economic Perspectives on who survived on the Titanic. They argue that social norms (women and children first) and class explain survival well. Being British, on the other hand, was bad for your chances to make it -- the downside of too much civilized queuing up...

Sunday, 13 February 2011

Inflation and diplomacy - Axel Weber edition

Axel Weber, the current President of the Bundesbank, is resigning in May of this year. He also won't seek office as head of the ECB. There is a good deal of gloating in the press about him going. A well-known inflation 'hawk' and an opponent of the ECB's bond-buying extravaganza to keep Greece & Co. afloat, he is widely considered not diplomatic enough for leading the ECB. For example, his open dissent about the bond purchases last year is seen as an unacceptable lack of esprit de corps.

To be honest, the whole logic of this line of reasoning is passing me by. Central bankers are not diplomats. At some point, Western countries decided that independent, technocratic institutions are better at making monetary policy than politicians. The Fed under Volcker, and the Bundesbank under Hans-Otto Pöhl, are excellent examples of how to do this right. Was there anything diplomatic about raising interest rates in the middle of a recession, as both of them did in the early 1980s? For sure not. They courted controversy, told smooth-talking politicians begging for some easy money to take a hike, and helped to bring inflation (and inflationary expectations) under control. In the long-run, there is no tradeoff between inflation and unemployment; only dead inflation is good inflation.

When the ECB was set up, it was meant to inherit the inflation-fighting prowess of the Bundesbank. One shouldn't exaggerate the implications of a single personnel decision, but I see a broader pattern that is turning the ECB into more of a mixture between the Bundesbank of old and, say, the bad old Bank of Italy or Banco de Espana, which presided over double-digit inflation for decades. Where Pöhl and friends would hike interest rates overnight by a few hundred basis points, with no warning, cold-turkey style (even the early Greenspan pulled one of these off), the new regime hopes to guide expectations through the most esoteric of shifts in bureaucratese, thinking that if they say "strong vigilance" against inflation instead of "vigilance", bond markets and the economy at large will get it. Interest rates? Almost never shall they be touched, and if so, by 25 basis points every 6 months, maybe.

So far, the inheritance of strong inflation-fighting credentials from the past, plus a benign macro environment, have ensured that this sort of magic worked surprisingly well. But at some point, I fear that stronger medicine will be needed - someone, at some point, will have to do the ugly thing of raising interest rates, big-time, perhaps even if growth is not looking pretty, because inflation is too high. Who are you going to call? Suave, smiling diplomats, who got their jobs by being nice to their home country politicians, or by working for Goldman Sachs? Or blunt, robust characters with solid academic qualifications, like Axel Weber? For my money, the fact that he was a bit rough around the edges, said what he thought, didn't take his views from the editorial pages of the FT, and wasn't afraid to p*** off some politicos, was the strongest set of recommendations anyone could have for the top job. Shame that it's not the kind of person who will lead the ECB.

Monday, 7 February 2011

Ryanair, Max Weber, and the social basis of capitalism

BBC news brings us a story of a Ryanair flight from the Canary Islands which saw a "student rebellion". Apparently, some students from Belgium became unruly and decided to stop following crew instructions after one of them was charged a gate fee for "oversized luggage". So what? This happens all the time, budget airlines are known to make life miserable for passengers to squeeze a few extra euros out of them, and students misbehaving is not really surprising.

The reason why I am interested in this is that it highlights, in a nutshell, what makes modern economies tick - and how companies partly undermine the social compact underlying their profitable operation. The legal situation is probably quite clear - the company wrote something in the small print of the contract you agree to when you click 'ok' (yes, we all read that, no?). This gave them the right to charge extra for all luggage larger than 1x2x3 cm, or all bags that are red, or square. You should know, and shut up. The problem is that in modern societies, strangers get on largely by agreeing to be "reasonable". The taxi driver you just paid doesn't scream bloody murder to get paid again; you don't refuse to pay after you reach your destination, even if the cabbie can't do anything to make you. In either case, there is probably no witness, no enforcement. You just do it because it is the right thing to do.

If we were left to only  follow immediate incentives, with no restraint on our actions, most transactions would become impossible, and we would need lawyers on standby 24/7 to get the shopping done. So what's my point? There are companies - and Ryanair is a chief culprit - that go way outside what is reasonable. Indeed, their business model is partly founded on pushing the limits of reason, decency, and the law. In Barcelona, a judge recently ruled that Ryanair cannot charge you €€€ extra for not turning up with a printed boarding pass. I assume that half of their fine print is equally open to legal challenges. And yet they try, and they get away with it.... because we are all collectively too lazy to do what the one heroic Spaniard did who took them to court. The result is that companies like Ryanair gradually undermine the very fabric of reason and trust that govern and allow most commercial transactions. The US in no small measure is less pleasant as a place to live because companies have gone down this route to a greater extent. Interestingly, Max Weber also thought that modern capitalism destroyed the moral basis from which it sprung. If he had suffered a single flight on Ryanair, blaring trumpets on landing included ("another Ryanair flight on time"), I am sure he would have felt vindicated.

What's the solution? We have "sin taxes" (on alcohol, tobacco, gambling). Let's have a tax on rip-off companies, too. Let's put together some general-purpose small-print that is reasonable, involving consumer associations. Companies aren't bound to use it, but if they don't, they get taxed (a lot) extra. That would protect the "commons" of trust and decency which allows modern-day capitalism to flourish...

Thursday, 3 February 2011

what's in a slide?

Jeff Ely, from the econ department at Northwestern, uses a slide from UPF doctoral candidate Peter Koudijs' job market talk to show how you should always have one chart that encapsulates everything you are trying to say in an academic presentation ...(over at cheeptalk)

The chart shows what happened to the stock price of the East India Company after Prime Minister Fox warned that the company would not be bailed out by the government (yes, they did that in those days). You can see the reaction in London on Nov. 19th and the following days. But you don't see it in Amsterdam, where the same share is traded. Why? Because the boats bringing the information didn't sail when the weather was really bad. In this chart, every vertical line shows when a boat sailed (upper panel), and when it arrived (lower panel). You can see that it took until Nov. 29 for the news to reach Amsterdam. Then, the reaction was instant. Peter weaves this into an interesting story about informational efficiency, and what we can learn about the importance of news in generating volatility (it turns out that about half of the price changes can be explained by news in this uniquely clean setup - but that leaves the other half unexplained, which Peter tackles in a nice, home-made model emphasizing asymmetric information). Now, we have to wait for those job offers to come in...

Inflation watch...

Who issues currency? Well, of course, governments and central banks do. But if you think about it, up to a point, airlines do, too. The miles you accumulate, what are they worth? You can redeem them for a plethora of goods, from flights and upgrades to hotel stays and donations to charity. You can even pay your (flight) taxes with them. Given that more and more economists are starting to think that perhaps, with inflation above the ECB target, we should worry about price pressure, it is interesting to see that Lufthansa has just (effective January 2011) decided to devalue its own currency. While some award requirements stay the same, others are going up by a whopping 17%. I am sure they will say that they haven't adjusted them for years. Well, since the price of their flights changes in terms of "real" money, it is not clear to me that this is much of an argument -- the value of the miles fluctuates with the value of the normal tickets, so there is no reason why they should change at all.

So here is your lesson - miles are really just like fiat money. If Lufthansa (or any other airline) decides that tomorrow, your miles are worth 90% less, there is nothing you can do about it. And if you look at the charts in Reinhart and Rogoff's book on average inflation since 1500, you see very clearly that the overall pace of inflation has accelerated hugely since the introduction of pure fiat money in the 1970s... So if miles are a bit like fiat money, what is the limit of the analogy? Getting and spending are oddly tied up with airmiles, in a way that is not the case with normal money. The only way you can accumulate enough miles for a nice award is to fly so much that you don't want to see another plane for a very long time [yes, I just came back from the Boston area, where, inter alia, I gave a couple of talks about the M.Sc. programs at Barcelona GSE /UPF].

Indian Reservations

I never thought I would be able to mix boyhood entertainment with serious scholarship... cowboys and Indians AND serious economics? Get lost. But no, one of the job market candidates coming through CREI/UPF, Christian Dippel from U Toronto, has a very clean and cool paper on the incomes of native American-Indians. First, he shows that income differences between different reservations are HUGE -- much bigger than across US states. Most of these probably opened up in the last 20 years, or so he argues. This matters, because until ~1980, the reservations were largely run by the federal government. Under Reagan's "New Federalism", they got a degree of autonomy. Christian shows that reservations where previously politically independent groups were forced together do much worse than the rest -- the effect is around -20 to -30%. He uses a clever identification strategy that uses the effect of mining on reservation formation in the 19th century, which is reasonably plausible. This allows him to claim the effect is causal. Overall, I thought this was very nice work - clear, clean, important.

The only thing that remained a bit muddy is the mechanism. What political economy model would rationalize this gigantic effects? If you force previously independent clans together, why is that necessarily bad? It could be that there is more competition for leading the local council, instead of having deep political factions that lead to stalemate or power-grabbing. Ex ante, I wouldn't be sure what to expect, so the actual, big differences leave me a bit puzzled. But Christian has some plans to get census data to tell us more about exactly which type of activity suffers on the 'bad' reservations. With that in hand, my guess is that the paper could go far. Actually, in some ways, Christian reminds me a lot of another Toronto product, Nathan Nunn, who first got a job as an assistant professor at UBC-Vancouver before going here.