Monday, December 14, 2009

Education feedbacks

Last week I found a 2003 document from Ludger WöBmann about an analysis of European education.

These estimates show that each additional year of education goes hand in hand with, for example, a 10.9% increase in wages in Ireland, or of slightly more than an 8% wage increase averaged across the European countries. Ireland, UK and Portugal give great incentives to study. Obviously something not accounted here is that it also depends on your initial level of studies; it’s not the same to increase one more year of studies when you have no studies at all than when you already have a MSc.

The following graph shows the unemployment rate by country and by studies achieved. It is clear that those countries who incentives the most to study are those that have a higher difference between ‘Below upper secondary education’ and ‘Tertiary education’, Germany, UK, Finland and France.

By both methods UK, Finland and Germany are the ones who give more incentives to study. Moreover, they are three countries that already have high education levels.


Figure 3 plots European countries’ average educational performance against a measure of the size of the effect that family background has on students’ performance in each country. The size of the family-background effect can be viewed as a measure of the equality of educational opportunities for children from different backgrounds. As there does not seem to be a clear relationship between average performance and the size of the family-background effect across European countries, the cross-country pattern suggests that there is no apparent trade-off between achieving efficiency in educational production and equality of educational opportunity. This is good news for governments aiming to jointly achieve both economic efficiency and social cohesion.

Original document : http://www.eenee.de/portal/page/portal/EENEEView/010_Economics_of_Education/020_European_perspective

Friday, December 4, 2009

Presidency Analysis

A more enjoyable way than hearing US presidency speeches is to analyze their speeches by words and sentences. This is what I tried with the last presidency debate in fall 2008.
A beautiful way of showing the results of the debate is the following (with Wordle):



These were the most used words by each candidate (excluding those shorter than four characters). We can see that McCain’s two most used words were ‘Senator’ and ‘Obama’ (111 times together). Senator refers clearly to Senator Obama. However, its much more difficult to find words referring to McCain from Obama (63 times). This is something for what McCain was much criticized from Republican’s side moreover if we consider, see below, that McCain said less words in total.

The rest of the words said by them were, in the case of McCain, ‘America’, ‘need’, ‘now’ and ‘going’ and in the case of Obama, ‘think’, ‘people’, ‘going’ and ‘now’. ‘Now’ was used by both due to the emergency situation, economically. ‘Going’ is commonly used to construct future sentences so naturally they were whether exposing their respective plans and programs or their thought about the future. The first difference was ‘America’ against ‘people’, those are political spectrum words pretty linked to Republicans and Democrats respectively. The second difference is ‘need’ from McCain versus ‘think’ from Obama. I would say that the second word is much more evocative, freer and opened. In the other hand, ‘think’ is more reflexive and ‘need’ is basically an action verb. Also here those are words quite linked to Democrats (said to be more reflexives) than Republicans (said to be more pragmatics).

The rest of analysis is pretty fun. Assuming that they were assigned with the same number of minutes to speech (a common rule in all debates) we can conclude that Obama was able to say 7% more words than McCain (7194 vs 6710, including all words), a faster talking. Moreover, Obama used a larger variety of words, 3% more variety (1408 vs 1364). Again words from Obama were a little bit larger, 1% larger, than those from McCain (4.47 vs 4.42 characters by word). Finally, Obama used less sentences than McCain what means that Obama sentences were larger than McCain, 23% larger to be precise.

In conclusion, Obama showed a better grammar and lexical proficiency, but we don’t know if that’s why he won the elections, I guess not.

Wednesday, December 2, 2009

Simpson's Paradox

How can be possible that unemployment rate become higher now than in 1980’s but if we broke down population by education grade each component’s unemployment rate have surged.

Currently unemployment rate is 10.8 per cent in US and in 1980’s arrived to 10.3. However, by population education’s unemployment rates were and are the following:
(Invented data)



The solution to this apparently paradox is weights. Today there are more graduates than in 1980’s so 7% weights more than the 5% did for their respective Total rates.

You can know more at WSJ > The Numbers Guy

Tuesday, December 1, 2009

Too big to fail

Due the financial crisis two questions has become repeatedly asked. Are some financial institutions too big to let them bankrupt? Do governments have to bailout financial institutions?

On one hand it is true that the spillover effects of a big bankruptcy could be disastrous for the national financial system and at the end all the economy. Even thought, a NYTimes article argued that bigger financial institutions have become a historical process and there is no turning back. Moreover, he argues, it wouldn’t be any easy to impose limits to banks.

But the truth is that first, if governments bailout financiers, those big enough will have an incentive to become over leveraged. And second and more important, something wrong exists in financial systems that when they are freely auto controlled they become unstable. This is well explained on a piece from Sharyn OHalloran, on March 11th 2009, where she exposes the coincidences between the tragedy of Commons wrote in 1968 by Garrett Hardin and the Financial system. In its origins the tragedy of Commons is a 19th century phenomenon. English cows, sheep, pigs and other livestock grazed on the commons (shared pastures which anyone could use). But the commons were always depleted, with barely enough grass to everyone’s detriment. Everyone would be better off if fewer animals graze on the commons, but each individual user has incentives to increase the size of his herd past the socially efficient point. Beyond this social efficient point, gains and only for the individual and costs are share by all. So individuals have an incentive to exceed the socially efficient point. The same happens to financial systems. When people become over confident on the economic situation they want to get into debt. Banks in order to respond extend new and greater credits. Each bank is better off extending this new credits and avoiding the rest to get it, but the whole system as the commons in 19th century is worse, too risky. This failure is also implicit in prisoner’s dilemma, telling the other is guilty makes you free but telling both other’s guilt makes their situation worst. What about if a bank, knowing this, waits until the storm pass through? As a consultancy exposed during the crisis: or you play the game or your clients won’t accept your less returns and at the end you will be forced to close down.

The solution proposed by 19th century herdsman was to assign private rights to grazing land but no barrier would be enough to separate financial world from real economy. Solutions are not easy, but necessary. An article from The Economist (23rd Nov.) pointed two papers having a proposition: ‘The role of macroprudential policy’ and ‘The Warwick Commission on International Financial Reform’.

So, we said that to fix these bailout problems, first, financial system must be regulated and second something must be done with incentives behind ‘too big banks’. One would say that big banks are necessary but an empirical study (very few there are) from T.Beck, R. Levine et.al. in 2005 conclude that while there is a link between bank concentration systems and and less risk of financial systemic crisis, the also positive relation between competitiveness an banking stability suggests that “bank concentration is an insufficient measure of bank competitiveness” and therefore insufficient to measure risk probabilities.

Finally, we know that systemic financial crises are produced by a under regulated systems but we don’t know how to fix it properly (at least consensus is far away) neither if we have to bailout big banks. What is clear is once done, once a big bank is bailout we should demand for considerations towards the society.

Tuesday, November 10, 2009

Debt burden




Debt is an interesting measure. Indebtedness is the cause of almost all crisis. To trust too much in something you don’t know, to expect bigger returns than reality does. These are errors, but somehow unavoidable errors connected to what is unforeseeable, the future. We all do mistakes about future, we all have expectations so it does stock markets, financial institutions, households and Governments.

How could we know when are we expecting too much? We can’t, at least ‘a priori’.
A graph has been used recently to show irrationality of recent debt burden.

This graph shows %of Debt / GDP of all sectors of the economy for US.
Yellow is Government, red is for companies, green for households and blue for financial institutions.

The peak in the first part of the picture is 1929 bubble and late soaring starts in 1983 till today (or last year at least).

Therefore it seems that recently we have been in an irrational indebtedness but unfortunately (and I say unfortunately because is a very nice and understandable graph), this graph is technically wrong and analytically meaningless.

Credit-Suisse's has criticized it. According to them this graph is the aggregation of two.This is how the (aggregate debt) chart should look…

The earlier data was extracted from the Economic Report of the President and adds together household debt and corporate debt, both financial and non-financial. This report was discontinued in the 1970s. The later data comes from the flow of funds accounts and breaks out financial and non-financial debt, starting in the 1950s. The growth in the two measures is very similar for the overlapping periods, but the levels are somewhat different. Chart I splices the two series together, using the higher number as the base.

This does not imply that banks, hedge funds and investment banks did not become dangerously over-leveraged in the last cycle, but it does imply that one could and should look at quite different statistics to measure this.

Why? Because we can not show it this way. There are too many differences in time. Today things are different and better. We can trust in future more than before, there is no Cold war, there is more freedom, democracy, free information ... Moreover, we are richer and technologically superior so we can take a bigger leverage. Lowest interests rates since years prove it.

Strictly talking for households.
Following chart, looks only at household sector debt to GDP. Here, only in the last housing boom did household leverage clearly exceed the levels of the 1920s. If there is a problem with household leverage, then it is a relatively recent one and not necessarily massive in scale. Credit Suisse says.

Monday, October 26, 2009

Commons, Nobel prize and decentralization

This year Nobel Prize winner, Mr. Williamson, said that with hierarchical decision-making processes based on rules and authority, firms ought to be less efficient than decentralized market exchange based on relative prices as standard economic theory assumes that transactions occur. But companies do exist, so why? Because any transaction has an implicit cost that enterprises reduces via hierarchical decision-making and authority.

The other winner, Mrs. Ostrom, found that self-governance often worked much better to punished those who take advantage of tragedy of Commons, than an ill-informed government taking over and imposing sometimes clumsy, and often ineffective rules.

This is exactly what Easterly argues, decentralism and down to top creation of institutions, rules and laws makes economic development. Imposing institutions from outside cuts freedom, cuts the local own ideas, cuts entrepreneurship and the unforeseeable process of development.

And last but not least, J. Diamond says a middle point between decentralized societies and centralized ones would be the maximized point of efficiency in a historical economic perspective. China was too much centralized, depending so much on emperors’ decisions. India was too much dispersed leading too battles, wars and conflicts that brought stagnation. Europe instead was a middle point between those two and this would be the reason of its economic achievements. Diamond explains geography was behind centralized/decentralized societies. While (coastal) China is a monotone and easy access territory, Europe was a mixed of accessible lands and a complex relief.

Thursday, October 22, 2009

Statistical mistake

Many times lately I have heard about a statistical mistake. Based on those who were successful, in management, economic growth countries, sports competitors, etc, take their common strategies and managing and apply them to you or your interest and you will see it success.

The fallacy here is that unsuccessful stories have not been counted. What if a thousand unsuccessful stories had applied those “apriori” successful strategies and managing. That would mean that those were not such good ideas.

Usually we all ignore failures and as is commonly said “we learn from failures” also statistically.

Thursday, October 15, 2009

Rational Income-Maximisers

One supposition in perfect markets theory is rational income-maximization actors.. However, an experiment bring by John List shows theory’s lack of real existence. On the experiment one person (A) were gifted with 10$ while another one (B) was not. The first one was compelled to give the part he wanted to the other. The other, has the option to reject it, in such case all 10$ would be lost.
Rational income-maximization actors’ principle would tell us that (A) would just give a cent to (B). Both win something and (B) would accept because that’s better than nothing. What List’s experiment showed was that people representing (B) almost never accepted such a less quantity and in average the amount trespassed was between two and three dollars.

http://www.ft.com/cms/s/2/3138a3fc-b3a8-11de-ae8d-00144feab49a.html

Tuesday, October 6, 2009

How do we grow?

From long time ago is it said that R+D+i (research + development + innovation) is the key for growth. Now a tool from OECD stats webpage, makes easy to see wealth relations to those science and technology variables.
First of all we must clarify that not any kind of research is useful, see graph below.





Each dot is a region (not a country), 50 for USA, 17 for Spain, etc….

As we can see Public Expenditure in Research is not very related to GDPpc. However if we compare private research to GDPpc, the relation becomes much more clear. Look:


And if we use a proxy for innovation as it could be Patents, the relation to GDPpc still is quite important. Look:


So, it seems that ‘A’ from Solow equation is the origin of growth. And must be an ‘A’ brought by free market and competition.

But what I must say now is… growth relations and causation is much more difficult than this and there are great academic papers arguing about it. Be cautious on this matter.

Thursday, October 1, 2009

Is US a more unequal country?



First of all, I would like to advise that I don’t even dare to search for an explanation of the result. And also I would like to advise that you will find many convincing and conflicting explanations out there. Don’t believe what they say, be skeptical.
Is wages’ portion of GDP sinking? Here, almost all studies agree, yes.



Source: Bureau of Economic Analysis. U.S. Department of Commerce.

Does that mean that workers are receiving less portion of what is produced? Therefore is US more imbalanced? Yes and no. What is agreed is that workers are becoming paid with not only wage but complementary retributions like health insurance, pensions…. What is called Employees Compensation. Moreover, more population is self-employed and freelance that in the past. This means that we should add those retributions and ways of work to wage account. But, still with this aggregate there are studies asserting that Employees compensation portion is sinking and other studies asserting the opposite. It all depends on how you count it.
See:

http://www.nytimes.com/2006/08/28/business/28wages.html?_r=2&pagewanted=print
http://www.u.arizona.edu/~lkenwor/indv102slowincomegrowth.pdf



Source: Bureau of Economic Analysis. U.S. Department of Commerce.


One point not considered by the second study is that a portion of GDP has to be devoted to capital depreciation so it goes to nobody, not capitalists or workers. Once this is considered the result should be first study, they say.

And that’s not all, a study published in The Economist argued that inquality is not just a matter of income but a also a matter of costs. The article was based on a paper that argued inflation for rich people product’s to be higher than those for poor people. Therefore, the difference in inequality would be lower than considered first.

So, as usual in economy, a hazy subject.

Wednesday, September 30, 2009

Freedom, progress and anarchy

Hayek wrote on 1960

"If there were omniscient men, if we could know not only all that affects the attainment of our present wishes but also our future wants and desires, there would be little case for liberty. And, in turn, liberty of the individual would, of course, make complete foresight impossible. Liberty is essential to leave room for the unforeseeable and unpredictable; we want it because we have learned to expect from it the opportunity of realizing many of our aims. It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it."

And

“Interaction of individuals possessing different views is what constitutes the life of thoght. The growth of reason is based on the existence of such differences. Its results cannot be predicted that we cannot know which views will assists this growth and which will not. To plan and organise progress is a contradiction in terms. Individualism is an attitude of humility before this social process and of tolerance to other opinions and is the exact opposite of that intellectual hubris which demands comprehensive direction of the social process.”

It is easy to say, let institutions grow by themselves, society will make them grow up. But is clear that liberty by itself may bring us to progress but also to chaos. Look at Somalia, no institution is growing but terrorism and no progress at all. Is an utterly anarchy. I guess liberty, anarchy and progress are sides of the same coin.

Monday, September 14, 2009

Justice

On 3rd of September Will Wilkinson wrote a comment about last Amartya Sen book. Specifically he wrote about an experiment on justice (book's subject) described on the book.

The experiment was: [ you have one flute and three children who want it. One child wants the flute because she knows how to play it, the second one wants it because he is poor and doesn't have toys, and the third one says she made the flute, so she should get it. Who do you give it to?]

The point Wilkinson makes is "The correct answer is: It all depends on how “you” ended up with the flute!"

And is true. Why did you get that flute? did you produce it? then is yours, do what you want. If not, it depends on from whom have you stolen it? just give it back.

Is not a problem of justice but a problem of property rights. We don't know if it's better to give it to who it may get a bigger return or who has less is difficult to weight it. The first could suposse on latter periods to have a bigger output to be shared and then a bigger portion to be given to the poor boy.

Hume wrote: "No one can doubt, that the convention for the distinction of property, and for the stability of possession, is of all circumstances the most necessary to the establishment of human society, and that after the agreement for the fixing and observing of this rule, there remains little or nothing to be done towards settling a perfect harmony and concord."

But even then, even if we know who is the owner of that flute, we should not leave somebody whitout flutes (read food). And even less if it's about children because equal opportunities.
So it all depends on common values and probably on income. A second flute is better redistributed by property rigths.

A forever dichotomy about equality and incentives.

Best explained on : http://www.willwilkinson.net/flybottle/2009/09/03/the-tragic-flute/

Thursday, September 3, 2009

Causation vs. Correlation

Almost all economists understand the difference between correlation and causation. The first means that two or more variables follow the same path. The second means that one variable affect the other. The main problem here is how to identify if its causation or just correlation.

Not long ago, The New York Times economic blog (Economix Blog) show a graph with the positive relation between childs’ school results and parents’ income. It was quickly been the object of a lot of criticism. What the graph was showing was a mere correlation and not causation. Greg Mankiw said:
“This graph is a good example of omitted variable bias, a statistical issue discussed in Chapter 2 of my favorite textbook. The key omitted variable here is parents’ IQ. Smart parents make more money and pass those good genes on to their offspring.
Suppose we were to graph average SAT scores by the number of bathrooms a student has in his or her family home. That curve would also likely slope upward. (After all, people with more money buy larger homes with more bathrooms.) But it would be a mistake to conclude that installing an extra toilet raises yours kids’ SAT scores.
It would be interesting to see the above graph reproduced for adopted children only. I bet that the curve would be a lot flatter.”
Bathroom example is quite illustrative. So, it seems that if you win a lottery prize your children won’t get better marks.
But as I said identify causation is very tricky and Mankiw has assumed something not so sure. A book entitled Intelligence and How to Get It: Why Schools and Cultures Count , has relevant information:
“On average, the biological children of high-SES [socioeconomic status] parents had IQs that were 12 points higher than those of low-SES parents, regardless of whether they were raised by high-SES or low-SES parents…
The crucial finding is that children adopted by high-SES parents had IQs that averaged 12 points higher than those adopted by low-SES parents- and this was true whether the biological mothers of the children were of low or high SES.”
So again it seems that the relation is as The New York Times said…

In fact, the most probably thing is that parents’ gens and child environment both affect child result in a complex manner. As Chesterton said in Heretics: “The obvious truth is that the moment any matter has passed through the human mind it is finally and for ever spoilt for all purposes of science.”

You will find a better explanation of this childs’ marks debate on http://www.economistsdoitwithmodels.com/.

Friday, July 24, 2009

Easterlin paradox

Easterlin paradox is...let himself say it:

Richard Easterlin of the University of Southern California: "If you compare the rate of economic growth as the independent variable, let's say, with the rate of change in happiness, the expectation based on the cross-section would be the higher the rate of economic growth, the greater the improvement in happiness. When in fact you look at the data, the relationship is nil. There is no significant relation between the growth rate of GDP per capita and the rate of improvement in subjective wellbeing or happiness. That's for the developed countries."

Thinking about this... , I guess it is an easy comment but... could it be that economic growth has no end (a country can growth for centuries, as it has happended) and happiness scale are limited to 10. I mean, economic growth can be 3% per year during decades but if we consider a 3% growth for happiness rating and two decades, starting from a high level like 7, we would have at the end of the period a 12.64 rate. An impossible given the limit of 10.
Surely there are ways to do surveys without using limited scales like asking 'times felt sad this month'. Thus, it is better to go to Easterlin own's speculative explanation of this paradox(as is still a mistery):

"there are two factors at work, [...] one factor is that as people's incomes go up, their material aspirations rise. So if their aspirations stayed the same, and their incomes went up, they'd closer to achieving what they considered to be the good life in material terms. But when their aspirations go up, that undercuts the effect of the actual improvement of incomes. So, they end up no happier than before.[...]The other part of the story I think has to do with the domains of happiness other than the material domain. What happens with regard to people's family life circumstances? What happens with regard to people's health circumstances? What happens to their job opportunities?"

You will find this explanations at:
http://www.voxeu.org/index.php?q=node/3439

Wednesday, July 15, 2009

Imagination

Recently, economic growth has been related to productivity. Most of experts agree that productivity comes from innovation and development with research (R+D+I), and those at the same time with imagination.

Imagination can be poisoned with planning, Administration and burocracy. We plan to avoid unforesees but precisely that is imagination, unforeseeable.

However, imagination also can be fertilized,
- with policies encouraging education (or human capital).
- with policies encouraging trust. Tim Harford wrote the following in an article few days ago: "trust in its broad definition would explain basically all the difference between the income of USA and Somalia". Building stable and reliable institutions is a policy that fosters peoples imagination and thus economic growth.
- and finally, generating incentives. Incentives to imagination or also called: economic freedom, civil freedom and political freedom.

Tuesday, June 23, 2009

We take it

This could be one of the most irresponsible generations.


When democracy and rule of law comes to light, many groups of interest arise to defend their own belongings. This could be a burden for economic growth as Mancur Olson pointed out in his book “Rise and decline of nations”; but it is also a signal of development, as the state of law is the protection of minority rights rather than the rule of the majority. Without your rights, incentives (the source of economic growth according to new development mainstream) to make business, trade and become rich disappear. Incentives disappearance in minorities’ side causes incentives for majority to take rights, resources and ideas from them rather to be innovative (R+D+I).
Who are those minorities or people without rights? It is not just people who are less in number but also those who are underrepresented or no represented at all. Who? Among others, the next generation, they are unrepresented in our Congresses and Parliaments, they can not argue our decisions, they are not,… yet. Therefore, here we are us taking money from sons and grandsons. And not just money but also resources and no yet ideas cause we don’t know what they will think (it is better not to know). We have the greatest debt ever in relative terms.



We have plundered more resources from earth than any other generation in history; in our defense, we are the first with the technology to do it. But with this excuse no judge would let us free.




So, we are loading on our next generation a giant bill, plundering their legitimate resources and what’s more demanding them to keep paying our retirement (as you know crossgeneration retirements system uses the money of young people to pay costs of old ones)


As The Economist showed it (13th Jun 2009 Issue cover), welcome to the world child.