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.

parental pride

As a general rule, if your PhD student does well, it's his/her accomplishment; when they screw up, it's the advisors fault. And yet, I sometimes can't help mild pangs of fatherly pride... for example, have a look at the fly-out list for UCLA-Economics over at the Econ Jobs Wiki:

Maximilian Kasy (UC Berkeley), Christian Dippel (University of Toronto), Rafael Dix-Carneiro (Princeton), Zhipeng Liao (Yale), Kei Kawai (Northwestern), Myrto Kalouptsidi (Yale), Keith Ericson (Harvard), Alexander Torgovitsky (Yale), Dan Lu (University of Chicago), Peter Koudijs (Pompeau Fabra)

Yup, they are still struggling with the spelling of UPF a bit, but my doctoral student Peter Koudijs is the only European on that list. Fly-outs are not offers (yet), of course. But the change in visibility of our doctoral candidates in recent years has been very gratifying. No doubt, having had some great students and placements in recent years (for example, Nico Voigtländer and Davide Debortoli) has helped. Fingers crossed for the final leg of the jobmarket for all UPF doctoral candidates!

Love letters from the tax authority can work wonders

Dina Pomeranz (Harvard/MIT) gave a jobtalk yesterday. She conducted a clever experiment with the help of the Chilean tax authorities. Sending vaguely threatening letters to firms that are suspected of VAT evasion, they look at what happens to the amounts declared not just by the firm itself, but by suppliers and clients. Interestingly, she can show how collection goes up along the value added chain. In particular, there is a big effect for final sales reporting, where the self-reinforcing nature of VAT does not apply -- which in turn suggests that it is working pretty well at other stages of the value added chain.

Funnily enough, the New York Times published an article on the same day that Dina was here, on the unexpectedly large tax haul for the Spanish authorities in 2010 -- up by a quarter, equivalent to some €10 bn. Perhaps the autorities here should try and send a few, vaguely menacing letters? As it happens, I had the new Catalan Director General for Economics and Finance, Albert Carreras, in my office this week. Albert is a colleague at UPF, and the outgoing dean there - and many moons ago advised me when I studied at EUI. We talked about budget woes and possible taxes. I might drop him a line with Dina's paper...

You read it here first...

The Economist has come round to my conclusion of last spring, namely that the Greek sovereign debt case is a no-hoper... I hate to say "I told you so", but the simple debt dynamics of Greece are just too grim [see "Greece and 1+1 of debt dynamics"].

Meanwhile, the forex market is celebrating the "success" of the Portuguese and Spanish debt auctions. The Euro shot up against the dollar since Tuesday. It is true - the auctions didn't go as bad as feared. Yields still up by a 100 bp, and close to 7% for Portugal's 10 year bond. You can apply the same logic that I used for Portugal. Current debt stock is not as bad as Greece's, at 85% of GDP, but the Economist calculates that they need a swing in the primary balance of 8%. That's a very big number. Foreign bondholders will get scared long before any Portuguese politician can deliver on this. With fully 2/3 or debt held abroad, I agree with Paul Krugman, who observed in the NYTimes that with a few more successes like the last one, Portugal will be bust for sure.

Now I know it isn't just me...

For years, I used to joke with my co-author Mauricio Drelichman that the best way to make progress on our papers would be to sit in the office, take another office chair, push it hard against one's kneecaps, and then force oneself to be immobile for the next 4-10 hours. That's what being on an airplane is like, and these days I get a phenomenal amount of work done in flight. Give me a good run to Vancouver, where Mauricio works and lives, and we can put a major revision of one of our papers to bed. What exactly is it? I think it's partly the absence of disruptions - no phone calls, emails, nobody "just dropping by", no regular seminar or lunch appointment. Three times 1.5 h is much less productive than 4.5 h uninterrupted. I think it's also the sheer discomfort. The only way to mentally disconnect from one's miserable surroundings (let's be honest, where is the delight suggested by glamorous airline ads in being stuck in metal tube re-breathing the same air?) is to focus on something else - in this case, work.

Fresh from the New York Times comes the news that there may be another reason why this works, for some - the feeling that one is about to run out of battery power focuses the mind on "just get it done". Sir Raymond Carr, the master of my old college in Oxford, always gave the same advice to incoming Ph.D. students - just write. And doing that seems much easier for Simon Sinek when the battery indicator is slowly crawling towards zero -- see "Fly Me Anywhere, I Just Need To Work". Maybe, enterprises and academic departments should contain "productivity rooms" where we deliberately replicate the misery of airline travel, at what would surely be a low cost. In case of a sudden loss of concentration, masks will automatically... no, let's not take it that far.

Incidentally, Sinek is working on a book that emphasizes the importance of explaining intent to providers, employees, etc. I haven't seen the manuscript, but I hope he points out the analogy with what the German army called Auftragstaktik -- which involved explaining the point of a mission to humble sergeants and privates, so that they could make decisions on the fly about how to best adapt the means to the purpose of the whole exercise. It made for great combat efficiency, and I always thought it odd that an undemocratic country with a pretty authoritarian culture should evolve such a tactic, while the armies of Western democracies in WWI and II mostly believed in often bizarre micro-management, mostly with disastrous effect. The best book on this and other aspects of military HR I have ever read is Martin van Creveld's Fighting Power (a comparison of the US and German armies in WW II).

Application season...

Every year, we see a similar pattern - applications to the ITFD program start slow in November, and then pick up from December onwards. Compared to this time last year, application numbers are up 37%, which is encouraging. What is most striking is that the quality seems to vary a lot by date of application, with really good students often applying early. We process applications until the programme is full, and urge everyone to apply as early as they can - and before the end of March if possible. Scholarships are filled periodically until they are gone, so for our applicants who need some funding, applying early is a good idea, too. So if you are thinking of ITFD, maybe the right thing to do is to sit down with a good cup of tea over the holidays, fill in the forms and write the statement of purpose (yes, we do read them, and they do matter!), and give it a shot.