Sunday, December 15, 2013

In behalf of Free trade

This is a creative article that a French economist called Bastiat gave in 1840 to the French Chamber of Deputies when they legislated higher duties on all foreign goods in order to benefit French industry:

 "Petition of the manufacturers of candles, waxlights, lamps, candlesticks, street lamps, snuffers, extinguishers and of the producers of oil, tallow, resin, alcohol and generally everything connected with lighting.

To Messieurs the members of the Chamber of Deputies.

Gentlemen, we are suffering from the intolerable competition of a foreign rival, placed, it would seem, in a condition so far superior to our own for the production of light, the he absolutely inundates our national market with it at a price fabulously reduced. ... This rival... is no other than the sun.

What we pray for, is, that it may please you to pass a law ordering the shutting up of all windows, skylights, dormer-windows, outside and inside shutters, curtains, blinds, bull´s-eyes, in a word of all openings, holes, chinks and fissures. ...

If you shut up as much as possible all acceess to natural light and create a demand for artificial light, which of our French manufacturers will not benefit by it?

If more tallow is consumed, then there must be more oxen and sheep.. if more oil is consumed, then we shall have extended cultivation of the poppy, of the olive... our heaths will be covered with resinous trees.

Make your choice, by be logical, for as long as you exclude, as you do, iron, corn, foreign fabrics, in proportion as their prices approximate to zero, what inconsistency it would be to admit the light of the sun, the price of which is already at zero during the entire day!"

 from: The Worldly Philosophers, Robert Heilbroner.

Sunday, December 1, 2013


Gapminder is a interactive and online tool to make graphs. It´s a very good tool to design interesting graphs.

Hans Rosling was its founder and now he makes funny presentations around the world about data and the socioeconomic trends (see this video).

The only negative thing is that you can't upload your own variables. The good thing is that the number of variables available in the tool is pretty astonishing: 519!

Friday, November 15, 2013

Inequality in the OECD since 1980s

According to this report by OECD, inequality has been growing in the OECD for the last 25 years although there is a great diversity of results among its countries. Since mid 1980s until mid 2000s only five countries reduced their inequality: France, Greece, Ireland, Spain and Turkey. The bigger increase happened in Finland and New Zealand. That’s a bit against what has been told.... One would expect exactly the opposite. 

The richest 1% population share of pre-tax income started growing in the mid 80s for the first time since 1910s. In this last twenty years they have achieved levels not seen since 1950s. For USA the growth has been even more important.  

The share of wage in the total value-added of an economy has also decreased but the reasons are diverse the report states:

“While there are large differences in the level of the wage share across industries, this decline has affected
– to different degrees – most industrial sectors, suggesting that this downward trend reflects more than just changes in the structure of GDP (i.e. from industries with a higher wage share towards those with a lower one). Empirical analysis of the determinants of the decline in the wage share at the industry level
highlights the influence of higher capital-output ratios, higher real price of oil, stronger (non-labour
augmenting) technological progress and lower bargaining power of workers (as measured by industrial conflicts, Bentolila and Saint-Paul, 2003).”

Finally, not all the richest or poorest are the same. In fact, the poorest 10% in the Netherlands are better off than the average citizen in Hungary. If I could choose where to be among the poorest 10% of a country that country would be Luxemburg, for the richest case, USA is the best place to be.

Friday, November 1, 2013

Migration and happiness

According to this paper by Stillman international migration brings improvements in personal and household incomes to the migrant but paradoxically has a negative impact on their happiness. Clearly, any analysis of this kind has a potential selection bias. That is, we shouldn't assume that the ones who migrate are exactly the same in cognitive and psychological skill as those who remain in the original country. The paper goes around this issue by using a natural experiment.  The paper compared successful and unsuccessful applicants to a migration lottery held by New Zealand. By doing so, the selection bias is ruled out. Bear in mind that the comparison, then, is between those who wanted to migrate but were unsuccessful and those who were successful. So, there’s no comparison with those who don’t really want to migrate.

The literature seems to support this result. Migrants gain in material well-being but happiness and other components of subjective well-being may be reduced. Even more contradictory is that despite a grow in unhappiness , mental health improves. The most accepted theory to explain this fact is the ‘adaptation theory’. The changes in references makes subjectivity variables change in different ways.

Tuesday, October 15, 2013

The Economics Educational Achievement 2

Last post I was discussing the lack of empirical evidence on the relationship between wage inequality and early education inequality. For that purpose I used this  paper about  economic effects of education. The same paper give us a lot more insight. For example, it ranks countries by family-background effects on math and science students performance:

UK and Germany are countries where family determines a heck of a lot of how good children are going to perform on math and science. I am not sure if that is good or bad, though. Clearly, is bad if children with potential are discoraged to study and brought down to an appalling average by school public system.

How does investment affect quality education? The answer is nothing.

Not even class size seems to have a meaningful correlation with test scores:

So, what is it then? what improves student test scores? According to this paper, school autonomy, centralised exam, privately operated schools and probably incentives, that is, a clear link, for parents and students, between school performance and higher salaries.

Tuesday, October 1, 2013

The Economics Educational Achievement

This recent article by The economist is interesting. It says that inequality in the US has been growing since 2007 and the main reason for that is poor policies on early education:

"investment in the young should focus on early education. Pre-school is a crucial first step to improving the lot of disadvantaged children, and America is an international laggard. According to the OECD, it ranks only 28th out of 38 leading economies in the proportion of four-year-olds in education. [...] Equality of outcome will always be a fantasy, but America should do more to spread opportunity widely."

It makes a lot of sense. If the government invests in human capital of the poorest, they will improve their skills, and therefore their job opportunities. Unfortunately, as often happens in economics, empirics doesn´t match well with sensible theories. This paper by Eric A. Hanushek and Ludger Woessmann summarizes some of the empirical evidence on the relationship between skills inequality and wage inequality:

Clearly, the relationship between wage inequality and skills inequality seems to be, at best, modest. This second graph from the same paper also illustrates how uniqual primary school results are not linked to unequal societies. Iceland, Norway and New Zealand are some of the most equalitarian societies in the world.

The article continues by saying market inefficiencies might also be harmful:

"America’s tax code is riddled with distortions that favour the rich, from the loopholes benefiting private equity to the mortgage-interest deduction (an enormous subsidy for those who buy big houses). A simpler, flatter code with no exemptions would be more efficient and more progressive. A blast of deregulation would help, too. Many of America’s most lucrative occupations are shielded by pointlessly restrictive rules (think doctors and lawyers)."
I think that is more the point. Subsidies to big old industries and banking bail outs can't be good for equality. Government and local regulations on economic activities, employment legislations, financing, etc, doesn't help either.

Sunday, September 15, 2013

Economic Geography 2

The “ReshapingEconomic Geography” report from the World Bank that I started talking two weeks ago has an easy way to visualize the location of the main economic hubs in the World:

Clearly, most of the world’s economic activity takes place around the 40ยบ north of the Equator.

This picture is just static, if we could see the time evolution we would see that the number of transactions worldwide has increased dramatically, mainly due to a fall on costs of communicating. Although not everywhere, the following chart shows the number of checkpoints a road from Bamako to the coast has.

Its just impossible to imagine how anyone can make trade business there.

Even in the era of the Internet, transport costs are the main deterrent to economic growth. Bogota shows how economic time saving public transport reduced poverty rates in the slums:

Sometimes, this internal mobility creates interesting social disparities like the one that happen in Germany after the Reunification

As it can be seen economic variables are quite often determined by political decisions, and also political decisions of the past, like in the case just seen of Germany or the case of Africa.

Sunday, September 1, 2013

Economic Geography

In 2009 the World Bank published “Reshaping Economic Geograpy” a report on the field of economic geography,

The report is a full and detailed study on local, regional and global patterns of economic geography. There are many subsections all of them very interesting. One of the very first findings, the report describes, is about how people concentrate in cities as economic development progress.

Cities provide better economic opportunities than the countryside when countries are poor. That generates migrations of peasants from the countryside looking for a better quality of life in the city.

Interestingly, when countries become rich the countryside starts to perform better and the opposite migration happens. Concentration of population, gross product, and household consumption levels off when countries are rich.

How can economic geographic dispersion be measured? In page 76 of the same report, they use Distance in time to sizable settlements.

Greenland, north-eastern Siberia and Tibet are, according to this, the most remote regions.

Apart from geographic reasons, cultural differences is another obstacle for economic and population concentration. Africa probably one of the less concentrated is also one of the most cultural diverse.

Thursday, August 15, 2013

Feynman quote

I want to revive here and old habit of quoting great sentences. This one is from Richard Feynman, Nobel prize laureate in physics in 1965.
“I think it's much more interesting to live not knowing than to have answers which might be wrong. I have approximate answers and possible beliefs and different degrees of uncertainty about different things, but I am not absolutely sure of anything and there are many things I don't know anything about, such as whether it means anything to ask why we're here. I don't have to know an answer. I don't feel frightened not knowing things.”

The way he tought his ideas is remarkable and is worth spending a minut:

Sunday, July 28, 2013

International wars

I have heard many times that the world that we live in is a much more dangerous place than before, that the number of international conflicts is much higher than last century.

The truth is that even if the WWII is ignored the number of conflicts since the end of the Cold War has been dramatically decreased.

The Systemicpeace website provides a great amount of data about the number of international conflicts. According to this data the turning point in the number of international conflicts was the end of the Soviet Union in 1991. 

Before the end of the Cold War, more and more countries were involved in armed conflicts. There were at least three factors involved for this increase, I reckon. The first factor is the end of colonialism and the wars of independence from metropolis. The second reason is the indirect confrontation between the two super powers (USA and USSR) in third parties´ territories like Angola, Namibia, Vietnam, Central America, Chile, Afghanistan,… And finally, the third reason is pure logic, the more countries there are in the world the more likely to see a conflict between two of them.

Why the huge drop after the end of the USSR? A part from the obvious political reason, economically, one country would only be involved in a conflict if what it takes from it is more than the investment needed. As the West has seen, invasions are very expensive and apparently the investment to stabilise countries after the war is even more expensive. But also, there’s a cost of opportunity, today land is not a big stake of GDP, instead information, innovation and creativity is and those do not need land. Moreover, international trade is greater than ever and a war would mean a huge loss for the two involved.

It may seem then that the need for economic growth was the reason behind the big drop in conflicts. However, both concepts are related to a third one. GDP is linked to freedom a higher freedom higher GDP and conflicts are negatively correlated to freedom:

Monday, July 15, 2013

Google correlate

 For those who don’t know Google Correlate it’s a wonderful tool. Given a temporal or spatial data, Google Correlate determines which queries at Google best mimic the data. It allows for automated query selection across millions of candidate queries for any temporal or spatial pattern of interest. Similar to Trends and Insights for Search, Google Correlate is an online system and can surface its results in real time.

For example let’s say you want to find what queries are more correlated to mortgage applications in America. Then, you just need to upload the data and Google Correlate will find what query is most correlated to it. According to this, the search volume of “refinancing calculator” has a very high correlation with the actual value of mortgage applications. 

Monday, July 1, 2013

Auto-motivation and professional success

A very interesting paper (or here) by  Carmit Segal shows that one of the best predictors of professional success is intrinsic motivation  (auto-motivation) in absence of incentive.

Dr. Segal compared standardized tests taken by university students to their professional careers several years later. To make the correlation meaningful, those tests had to be, firstly, unincentivized (to measure auto-motivation) and, secondly, not linked to knowledge (to rule out any potential IQ effect).

First, in order to rule out incentives, tests needed to be unrewarded or unbinding on university marks:

“Classical economic theory predicts that if an action, like taking a standardized test, requires effort, then without performance-based incentives individuals will invest the lowest effort possible in performing the action. Therefore, one might expect that scores on low-stakes tests (tests administered without performance-based incentives) would be uninformative about an individuals cognitive ability, and thus that low-stakes tests scores would be uncorrelated with test-takersfuture economic outcomes.”

Secondly, in order to rule out IQ effects, tests had to be easy.

“Ideally, to investigate whether test-takers differ in their intrinsic motivation to take a test, we would like to find a test such that all test-takers have the knowledge necessary to correctly answer all questions if they so desire. The coding speed test seems a likely candidate to fulfill this requirement. It seems likely that everyone who knows how to read has the knowledge to correctly answer questions on the test. Therefore, due to its simplicity, speed becomes a good dummy of intrinsic motivation”

Results of the comparison were clear: “nearly all researchers find strong positive correlations between high scores on unincentivized tests and future labor market success.” The paper suggests that those unincentivized scores capture intrinsic motivation. Moreover, it suggests that intrinsic motivation is associated with favorable personality traits, such as conscientiousness, which lead test-takers to put effort into low-stakes tests and to future labor market success.

A good explanation might be that adult labour markets are often uncertain about rewards and therefore auto-motivation must play a key role.

Saturday, June 15, 2013

Institutions by Douglass North

Douglass C. North Nobel Laureate in 1993 wrote many papers about institutions. In his Nobel Prize lecture he admitted that how institutional change actually happens is one of the biggest mysteries in Economics. The importance of institutions in economic growth was well established long before now.

In his paper “Institutions” wrote in 1991, he defines institutions as “humanly devised constraints that structure political, economic and social interaction. They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights)”. Their main objective are “to create order and reduce uncertainty in exchange.” […] “they define the choice set and therefore determine transaction and production costs and hence the profitability and feasibility of engaging in economic activity”.

Why did institutions emerge?

North argues that institutions and rules were necessary when transactions between strangers happened repeatedly. As societies evolved, they experienced divisions of labour and growth in trade. These two factor increased the likelihood of repeated transactions with strangers and the need for common rules. “Cooperation is difficult to sustain when the game is not repeated (or there is an endgame), when information on the other players is lacking, and when there are large numbers of players”.

Why are they important for growth?

Because institutions reduce transaction and production costs per exchange so that the potential gains from trade are realizeable. Both political and economic institutions are essential parts of an effective institutional matrix.

Some economists have recently argued that the most important institution for economic growth are those involved in private property regulations. 

Saturday, June 1, 2013

Globalization and Democracy

Globalization has been demonized by many economists. Globalization is considered to be the cause of unemployment rise, degradation of democracy and to be a force opposed to welfare estate.

Barry Eichengreen wrote in 2006 a paper where he argued that there´s a positive relation between globalization and democracy. Causality, he states, works both ways from more democracy to more globalization and from more globalization to more democracy. He applied several econometric models.

So far so good. However, Eichengreen warns that “as in any case where positive feedbacks are present, there is the possibility of dynamic instability – that is, a positive or negative shock may send the system off in the positive or negative direction without limit”.

If the negative economic situation in Europe is not solved it will have negative feedbacks as more nationalism raises custom duties and at the same time deteriorates European democracies. It wouldn´t be the first time “If the system is dynamically unstable, then we can perhaps understand how in the 1930s negative shocks to trade and democracy could send the system down toward progressively lower values of both variables”

Wednesday, May 15, 2013

How long is the average dissertation? (Ph. D.)

This excellent post by "R is my friend" answers in a very beatiful way a common question among Ph. D: students: How long is the average dissertation? The answer depends greatly on the subject as it is shown below.


 The data comes from 2007-2013 dissertations from the University of Minnesota repository.

Wednesday, May 1, 2013

Economic researchers per country

Using data from ideas.repec I created this map showing the number of economic researchers per country. I took the 1,600 best researchers according to the above website (they use their citations and impact) and located them accordingly to their university. I had to split USA into states because the number of economic authors of US universities is 60% of the total!

However, even if we split US into states 5 of the best 6 are US states (California, Massachusetts, New York, DC and Illinois). Only UK was able to be among the best. Canada, France, Germany and Pennsylvania made the rest of the top ten.

The grey countries do not have a single author among the 1,600 best.

Sunday, April 21, 2013

Reinhart & Rogoff after peer review

Everyone talks about the "Reinhart and Rogoff affaire" and how some politicians used their paper to justify austerity measures. But the blunder wouldn´t have happened if the second part of the sign below had been applied.

Monday, April 15, 2013

The effect of the Euro on southern European countries

A new paper from Villaverde (U. Penn), Santos (Harvard) and Garicano (LSE) theorizes about the consequences of the introduction of the Euro on the Southern European economies. The introduction of the Euro together with a common monetary policy left Southern European economies with one unique economic policy available: structural economic reforms. That would, on the long term, bring economic growth and productivity to peripheral economies. However, such thing never happened. The reason, “the steep financial boom derived from the drop in exchange rate risk and from the Euro wide financial bubble meant that the budget constraints that these countries faced were loosened, rather than tightened. Countries that could cheaply borrow delayed painful reforms” “As a result, the financial bubble fueled the deterioration of governance and of the institutional arrangements on the Euro’s periphery”

So, the Euro brought the idea that the whole Europe was similar and high in efficiency and productivity. However, the truth was that countries were still very different. The easy credit was misused by most peripheral countries and when the crisis came those countries were the ones who suffered, and still suffering, the most.

This explanation raises two possible questions: First, why the markets misjudged the productivity and risks of Southern European economies? And secondly “Are all situations where financing is plentiful and cheap conducive to the lowering of standards, the deterioration of governance and the abandonment of economic reforms? If so, this situation is currently the one the United States, at the zero lower bound, is facing, in which case [the] analysis suggests that a similar deterioration public and private governance may occur.” That would mean that any fiscal expansion or QE affects negatively to quality of government and sound economic decisions.

Monday, April 1, 2013

The economic effects of Constitutions

Person and Tabellini came up with the following table to summarize many of the findings of their book "The economic effects of Constitutions" (2005).

A plus sign in a Theory column indicates that a constitutional reform, replacing the feature on the right  at the top of the column with the feature on the left will induce a greater degree or a higher level of the policy outcome for that row. And the opposite for a minus sign.

One of the central findings is the effect of electoral rules on fiscal policy. Interestingly enough, changing your country's political system from the proportional to a majoritarian one, improves fiscal policy. Specifically, and according to the data, it reduces Government spending by 5%, welfare spending by 2-3% of GDP and Budget deficit by 2% of GDP.

Another important conclusion that might be related to South European countries: "coalition governments are prone to a status quo bias,[...]. Hence, their reaction to adverse economic shocks is more likely to be inefficient than the response of single-party governments."

Friday, March 15, 2013

US growth using post office data

Derek Watkings used US Post Office places and date of establishment to create this brilliant map. Is an interactive map. It can be seen how the far west was colonized during XIX and how fast the Postal service was spread through the US territory.

Friday, March 1, 2013

Civil Servants vs the market

The graph below plots the number of differences between statutory public employment and employment rules in the private sector. The topics analysed were:
·         General government employment falls under public law, while private sector employment falls under private law
·         Dispute resolution is referred to administrative court as opposed to regular courts
·         Different hiring rules
·         Hiring rules restrict employment to avoid hiring staff with conflicts of interest
·         Different rights and duties (right to strike, unions, etc.)
·         Different guarantees in favour of lifelong employment
·         Special benefits including social security and pension

The higher the value the more differences in rules between private labour and public labour.

And how does the number of hours compare?
Civil Servant Average hours worked per year (adjusted)
Country Average hours worked per year
%dif  Country avg. vs Civil Servants
OECD countries
Czech Republic
Slovak Republic
United Kingdom
United States
New Zealand