Would you like a box with that?

A noticeable feature of dining in American restaurants (well maybe not the posh places that I can’t afford) is that they offer you a box to take your left-overs away in. You can often get a second meal out of this (tonight for example) unless, of course, you forget to retrieve it and your car smells of curry for a month. No chance of that happening in Ireland or the UK. I think I saw some unfortunate American ask once in Dublin only to be sniffily refused.
So is it a “good thing”? Well the option of a box means that you get what you pay for or at least the gap between the value of what you pay and the value of what you consume is smaller. The cost of the box is probably small so an efficiency gain, for sure.
Or is it? I have this niggling feeling that there may be a downside. Without the box, you have an incentive not to over-order. If we assumed that people don’t know how much they want to eat or how much is good for them (otherwise why is there an obesity epidemic) then its less clear to me that having this option is welfare improving.

Would you like a box with that?

A noticeable feature of dining in American restaurants (well maybe not the posh places that I can’t afford) is that they offer you a box to take your left-overs away in. You can often get a second meal out of this (tonight for example) unless, of course, you forget to retrieve it and your car smells of curry for a month. No chance of that happening in Ireland or the UK. I think I saw some unfortunate American ask once in Dublin only to be sniffily refused.
So is it a “good thing”? Well the option of a box means that you get what you pay for or at least the gap between the value of what you pay and the value of what you consume is smaller. The cost of the box is probably small so an efficiency gain, for sure.
Or is it? I have this niggling feeling that there may be a downside. Without the box, you have an incentive not to over-order. If we assumed that people don’t know how much they want to eat or how much is good for them (otherwise why is there an obesity epidemic) then its less clear to me that having this option is welfare improving.

The High Cost of Low Educational Performance

A new OECD report examines the relationship between education and economic growth.

While governments frequently commit to improving the quality of education, it often slips down the policy agenda. Because investing in education only pays off in the future, it is possible to underestimate the value and the importance of improvements.

This report uses recent economic modelling to relate cognitive skills – as measured by PISA and other international instruments – to economic growth, demonstrating that relatively small improvements to labour force skills can largely impact the future well-being of a nation.

The report also shows that it is the quality of learning outcomes, not the length of schooling, which makes the difference. A modest goal of all OECD countries boosting their average PISA scores by 25 points over the next 20 years would increase OECD gross domestic product by USD 115 trillion over the lifetime of the generation born in 2010. More aggressive goals could result in gains in the order of USD 260 trillion.

The High Cost of Low Educational Performance

A new OECD report examines the relationship between education and economic growth.

While governments frequently commit to improving the quality of education, it often slips down the policy agenda. Because investing in education only pays off in the future, it is possible to underestimate the value and the importance of improvements.

This report uses recent economic modelling to relate cognitive skills – as measured by PISA and other international instruments – to economic growth, demonstrating that relatively small improvements to labour force skills can largely impact the future well-being of a nation.

The report also shows that it is the quality of learning outcomes, not the length of schooling, which makes the difference. A modest goal of all OECD countries boosting their average PISA scores by 25 points over the next 20 years would increase OECD gross domestic product by USD 115 trillion over the lifetime of the generation born in 2010. More aggressive goals could result in gains in the order of USD 260 trillion.

HEA Competition for Research Students

The Higher Education Authority and the Irish Independent are inviting research students in any discipline to make a short submission on the difference that their research work will make to ‘a particular aspect of Irish life, to the country as a whole or indeed, internationally.’

The six researchers with the most innovative or challenging ideas will be invited to present how their research is making an impact at a public event at The Helix at Dublin City University on Monday 26th April.

The closing date is Thursday 4th March and more details are available on the HEA website.

UCC Lecture on Risk Intelligence

The lecture is titled: "Risk Intelligence" – How expert gamblers can teach us all to make better decisions" — and will be delivered by Dr. Dylan Evans on Wednesday, February 10th at 8pm in Boole IV Lecture Theatre, University College Cork.

Dr Evans is Lecturer in Behavioural Science in the School of Medicine at UCC. He is the author of several popular science books, including Emotion: The Science of Sentiment (Oxford University Press, 2001) and Placebo: The Belief Effect (Harper Collins, 2003).

Link to Projection Point: a project to gather information about risk intelligence. HT: mulley.net

Markets Beware Greeks Bearing Gilts

As Greece stumbles its way towards the humiliation of an IMF loan it is the way this latest economic tragedy is being reported that causes most concern. The hegemony of market domination is complete as journalists report on the need for the country to rapidly cut public spending with no voice given to those in the country who need public spending to continue.

The flight from Greek national debt is a demonstration of the growing power of the market makers, as they attempt to sideline and denigrate the more vulnerable of the European economies. Far from reducing their power, the financial crisis has emboldened the finance traders, since it proved that no government had the courage to make politics and public interest count for more than market profit. With a few exceptions, commentators who might defend the interests of the citizen against those of the speculators are excluded from the media so that the public debate is framed entirely in terms of what Greek politicians must do to please the markets. There is no sense of irony that, even in the home of democracy, the wishes of the people have become an irrelevance.

The speculative attacks on Greece and the lining up of the countries that are to follow – Portugal and Spain are in the firing line first, since Ireland kowtowed and put its credit-rating before the needs of its people – is reminiscent of the 1997 Asian financial crisis. The movements in value of national economies and their debt enables the gaining of arbitrage profit for the speculators, whose room for manoeuvre always expands during a crisis. Hence the credit-rating agencies and the media are working together to create opportunities for profit.

The case for a new international financial system, negotiated on a democratic basis, grows ever stronger. The original role of the IMF was to intervene in just this sort of situation, and in its early days its facilities were used mostly by the European economies who were taking the rocky road to reconstruction following the Second World War. The Greek crisis is a clear demonstration of the need for a democratic and accountable lender of last resort for the world economy to replace the disaster of a financial system dominated by private speculative interests.

Revisionist History on Financial Reform

I’m getting so tired of people who refuse to read financial reform proposals before dismissing them as woefully inadequate. This time it’s James Kwak, who writes (quoting a senior administration official during the background briefing on the Volcker Rule):

"The basic authority is provided in Chairman Frank's legislation, for regulators to break apart major financial firms or to address problems with risky activities to the extent that they cause the firm to act in an unsafe or unsound manner that threatens the financial system. So we worked very closely with Chairman Frank on that already."

Not exactly. The "basic authority" referred to must be the Kanjorski Amendment, which allows regulators to take action regarding a specific firm because it is a danger to the system (not just because it is a danger to itself). I don't recall the Kanjorski Amendment being in Treasury's initial regulatory proposal. (The Kanjorski Amendment is also hemmed in with all sorts of restrictions, like needing Tim Geithner's approval for any action affecting more than $10 billion in assets.)

Or, more precisely, the answer is technically correct–they are claiming that they worked with Frank on the Kanjorksi Amendment, which may be true–but it dodges the spirit of the initial question, which was "Why didn't you do this back in June?"

I know that administration officials have a tough job when they have to go out and spin new policies that (a) are significant changes from past policies and (b) may turn out not to be serious anyway. But that doesn't mean I have to give them a pass.

This is 100% false. I know James is still a law student, but that doesn’t mean I have to give him a pass either (especially since both he and Simon Johnson like to pass themselves off as experts on financial reform).

Both Treasury’s initial proposal and Barney Frank’s discussion draft contain the “basic authority” to prohibit specific firms from engaging in activities that regulators consider a threat to financial stability. Kwak clearly didn’t bother to read either Treasury’s proposal or Frank’s discussion draft, which is sad because he just co-authored a book on financial reform.

Frank’s discussion draft very clearly contained this “basic authority,” in Section 1104(a)(5):

(5) MITIGATION OF SYSTEMIC RISK.—If the Board determines, after notice and an opportunity for hearing, that the size of an identified financial holding company or the scope or nature of activities directly or indirectly conducted by an identified financial holding company poses a threat to the safety and soundness of such company or to the financial stability of the United States, the Board may require the identified financial holding company to sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms, to terminate one or more activities, or to impose conditions on the manner in which the identified financial holding company conducts one or more activities. (emphasis added)

It doesn’t get much clearer than that. And it’s not like this provision was buried hundreds of pages into the discussion draft — it was on page 19. Of course, admitting that this provision was in Frank’s discussion draft — which was the product of lengthy negotiations between Frank and Treasury — would go against Kwak’s little narrative, in which Treasury is in the pocket of the Evil Wall Street Banks.

What’s more, Treasury’s initial proposal, which they released last Jun, also gave the Fed a couple of ways to prohibit activities that threaten financial stability. First, Treasury’s proposal gave the Fed the authority to order Tier 1 financial holding companies (i.e., large complex financial institutions) and their subsidiaries to terminate “conduct, activities, transactions, or arrangements that could pose a threat to global or United States financial stability.” Treasury’s proposal also gave the Fed the authority to prohibit risky activities at Tier 1 FHCs through its Prompt Corrective Action (PCA) provisions. Essentially, Treasury’s proposal allowed the Fed to treat even Tier 1 FHCs that are technically “well capitalized” under the law as “undercapitalized” for purposes of PCA, which would’ve then allowed the Fed to order Tier 1 FHCs to terminate or restrict risky activities.

What self-proclaimed “reformers” probably don’t realize is that the Kanjorski Amendment significantly reduced the likelihood that a financial institution will be ordered to terminate activities that threaten financial stability. Under Frank’s discussion draft, the Fed had the authority to prohibit activities that “pose a threat to financial stability.” Under the Kanjorski Amendment, however, the activities have to pose a “grave threat to financial stability” before regulators can order a financial institution to terminate the activities. The Kanjorski Amendment also shifted the authority to prohibit risky activities from the Fed to the Financial Services Oversight Council (meaning multiple regulators have to sign off on the action), and added a whole bunch of cumbersome procedural requirements to boot. This is just terrible policymaking, which is why the Kanjorski Amendment was such a bad idea.

And yet for some reason, people who like to think of themselves as reformers cheered the Kanjorski Amendment on, and patted themselves on the back when it passed. This is what the financial reform debate has come to.

Revisionist History on Financial Reform

I’m getting so tired of people who refuse to read financial reform proposals before dismissing them as woefully inadequate. This time it’s James Kwak, who writes (quoting a senior administration official during the background briefing on the Volcker Rule):

"The basic authority is provided in Chairman Frank's legislation, for regulators to break apart major financial firms or to address problems with risky activities to the extent that they cause the firm to act in an unsafe or unsound manner that threatens the financial system. So we worked very closely with Chairman Frank on that already."

Not exactly. The "basic authority" referred to must be the Kanjorski Amendment, which allows regulators to take action regarding a specific firm because it is a danger to the system (not just because it is a danger to itself). I don't recall the Kanjorski Amendment being in Treasury's initial regulatory proposal. (The Kanjorski Amendment is also hemmed in with all sorts of restrictions, like needing Tim Geithner's approval for any action affecting more than $10 billion in assets.)

Or, more precisely, the answer is technically correct–they are claiming that they worked with Frank on the Kanjorksi Amendment, which may be true–but it dodges the spirit of the initial question, which was "Why didn't you do this back in June?"

I know that administration officials have a tough job when they have to go out and spin new policies that (a) are significant changes from past policies and (b) may turn out not to be serious anyway. But that doesn't mean I have to give them a pass.

This is 100% false. I know James is still a law student, but that doesn’t mean I have to give him a pass either (especially since both he and Simon Johnson like to pass themselves off as experts on financial reform).

Both Treasury’s initial proposal and Barney Frank’s discussion draft contain the “basic authority” to prohibit specific firms from engaging in activities that regulators consider a threat to financial stability. Kwak clearly didn’t bother to read either Treasury’s proposal or Frank’s discussion draft, which is sad because he just co-authored a book on financial reform.

Frank’s discussion draft very clearly contained this “basic authority,” in Section 1104(a)(5):

(5) MITIGATION OF SYSTEMIC RISK.—If the Board determines, after notice and an opportunity for hearing, that the size of an identified financial holding company or the scope or nature of activities directly or indirectly conducted by an identified financial holding company poses a threat to the safety and soundness of such company or to the financial stability of the United States, the Board may require the identified financial holding company to sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms, to terminate one or more activities, or to impose conditions on the manner in which the identified financial holding company conducts one or more activities. (emphasis added)

It doesn’t get much clearer than that. And it’s not like this provision was buried hundreds of pages into the discussion draft — it was on page 19. Of course, admitting that this provision was in Frank’s discussion draft — which was the product of lengthy negotiations between Frank and Treasury — would go against Kwak’s little narrative, in which Treasury is in the pocket of the Evil Wall Street Banks.

What’s more, Treasury’s initial proposal, which they released last Jun, also gave the Fed a couple of ways to prohibit activities that threaten financial stability. First, Treasury’s proposal gave the Fed the authority to order Tier 1 financial holding companies (i.e., large complex financial institutions) and their subsidiaries to terminate “conduct, activities, transactions, or arrangements that could pose a threat to global or United States financial stability.” Treasury’s proposal also gave the Fed the authority to prohibit risky activities at Tier 1 FHCs through its Prompt Corrective Action (PCA) provisions. Essentially, Treasury’s proposal allowed the Fed to treat even Tier 1 FHCs that are technically “well capitalized” under the law as “undercapitalized” for purposes of PCA, which would’ve then allowed the Fed to order Tier 1 FHCs to terminate or restrict risky activities.

What self-proclaimed “reformers” probably don’t realize is that the Kanjorski Amendment significantly reduced the likelihood that a financial institution will be ordered to terminate activities that threaten financial stability. Under Frank’s discussion draft, the Fed had the authority to prohibit activities that “pose a threat to financial stability.” Under the Kanjorski Amendment, however, the activities have to pose a “grave threat to financial stability” before regulators can order a financial institution to terminate the activities. The Kanjorski Amendment also shifted the authority to prohibit risky activities from the Fed to the Financial Services Oversight Council (meaning multiple regulators have to sign off on the action), and added a whole bunch of cumbersome procedural requirements to boot. This is just terrible policymaking, which is why the Kanjorski Amendment was such a bad idea.

And yet for some reason, people who like to think of themselves as reformers cheered the Kanjorski Amendment on, and patted themselves on the back when it passed. This is what the financial reform debate has come to.

UCC Lecture on Risk Intelligence

The lecture is titled: "Risk Intelligence" – How expert gamblers can teach us all to make better decisions" — and will be delivered by Dr. Dylan Evans on Wednesday, February 10th at 8pm in Boole IV Lecture Theatre, University College Cork.

Dr Evans is Lecturer in Behavioural Science in the School of Medicine at UCC. He is the author of several popular science books, including Emotion: The Science of Sentiment (Oxford University Press, 2001) and Placebo: The Belief Effect (Harper Collins, 2003).

Link to Projection Point: a project to gather information about risk intelligence. HT: mulley.net

Markets Beware Greeks Bearing Gilts

As Greece stumbles its way towards the humiliation of an IMF loan it is the way this latest economic tragedy is being reported that causes most concern. The hegemony of market domination is complete as journalists report on the need for the country to rapidly cut public spending with no voice given to those in the country who need public spending to continue.

The flight from Greek national debt is a demonstration of the growing power of the market makers, as they attempt to sideline and denigrate the more vulnerable of the European economies. Far from reducing their power, the financial crisis has emboldened the finance traders, since it proved that no government had the courage to make politics and public interest count for more than market profit. With a few exceptions, commentators who might defend the interests of the citizen against those of the speculators are excluded from the media so that the public debate is framed entirely in terms of what Greek politicians must do to please the markets. There is no sense of irony that, even in the home of democracy, the wishes of the people have become an irrelevance.

The speculative attacks on Greece and the lining up of the countries that are to follow – Portugal and Spain are in the firing line first, since Ireland kowtowed and put its credit-rating before the needs of its people – is reminiscent of the 1997 Asian financial crisis. The movements in value of national economies and their debt enables the gaining of arbitrage profit for the speculators, whose room for manoeuvre always expands during a crisis. Hence the credit-rating agencies and the media are working together to create opportunities for profit.

The case for a new international financial system, negotiated on a democratic basis, grows ever stronger. The original role of the IMF was to intervene in just this sort of situation, and in its early days its facilities were used mostly by the European economies who were taking the rocky road to reconstruction following the Second World War. The Greek crisis is a clear demonstration of the need for a democratic and accountable lender of last resort for the world economy to replace the disaster of a financial system dominated by private speculative interests.

HEA Competition for Research Students

The Higher Education Authority and the Irish Independent are inviting research students in any discipline to make a short submission on the difference that their research work will make to ‘a particular aspect of Irish life, to the country as a whole or indeed, internationally.’

The six researchers with the most innovative or challenging ideas will be invited to present how their research is making an impact at a public event at The Helix at Dublin City University on Monday 26th April.

The closing date is Thursday 4th March and more details are available on the HEA website.

WePredict

Using Twitter for macro-level analysis has been discussed on the blog before:
(i) Sample Selection, Twitter’s Public Timeline, TweetScan and Quotably
(ii) Twilert (re-launched this month), Summize Labs, Twitter’s acquisition of Summize
(iii) Life Analytics: Sentiment on the United States Economy
(iv) The Google-Index of Social Media, and the apparent superiority of Bing for deciphering real-time breaking trends

So it was interesting to read a recent article in the Irish Times about two students who used Twitter to predict that Joe McElderry would win the recent X-Factor competition… before the results were announced. “Ben McRedmond (17) and Patrick O'Doherty (16), two fifth years from Gonzaga College, Dublin demonstrated the power of their social networking analysis system, We Predict, at the BT Young Scientist and Technology Exhibition. It was developed over more than five months and is based on storing and studying a growing database of 24.5 million tweets which hold clues about what people are thinking.”

A quick search led me to the WePredict website. The information there states that: “WePredict is a showcase of several technologies we have built: a data mining application, capable of mining data from multiple social networks; and a complex suite of analysis tools for analyzing this data…WePredict’s large database of over 22 million status updates growing at 20 a second makes it the largest user survey ever done… using the collective intelligence of the whole internet, a mere 1.5 billion people, we can predict the outcomes of elections, talent shows or who will be the christmas #1 and analyze the public reaction to new legislation or medical epidemics.”

An exciting endeavour such as this one reminds me of Hal Varian’s famous quote that “the sexy job in the next ten years will be statisticians.” A two-minute YouTube clip of Google’s Chief Economist is shown below, discussing this very issue.

VOX interview with Joel Mokyr

Romesh Vaitilingham interviews Joel Mokyr about the ideas in his book “The Enlightened Economy: An Economic History of Britain from 1700 to 1850″ – link here

VOX interview with Joel Mokyr

Romesh Vaitilingham interviews Joel Mokyr about the ideas in his book “The Enlightened Economy: An Economic History of Britain from 1700 to 1850″ – link here

Book Club: Identity and Economics

The next book club will take place on the recently released book “Identity Economics: How Our Identity Shapes our Work Wages and WellBeing ” authored by George Akerlof and Rachel Kranton and published by Princeton University Press. The venue is Duke Bar at 7.30pm on February 16th. As usual, please email if you are coming along. It is not necessary to read the book in advance, but we don’t forbid that. This is a really important book and I look forward to debating it. Aspects of it will also feature in my teaching this year and I am happy to have a session in Geary during the day at some point also if people don’t like the later hour.

WePredict

Using Twitter for macro-level analysis has been discussed on the blog before:
(i) Sample Selection, Twitter’s Public Timeline, TweetScan and Quotably
(ii) Twilert (re-launched this month), Summize Labs, Twitter’s acquisition of Summize
(iii) Life Analytics: Sentiment on the United States Economy
(iv) The Google-Index of Social Media, and the apparent superiority of Bing for deciphering real-time breaking trends

So it was interesting to read a recent article in the Irish Times about two students who used Twitter to predict that Joe McElderry would win the recent X-Factor competition… before the results were announced. “Ben McRedmond (17) and Patrick O'Doherty (16), two fifth years from Gonzaga College, Dublin demonstrated the power of their social networking analysis system, We Predict, at the BT Young Scientist and Technology Exhibition. It was developed over more than five months and is based on storing and studying a growing database of 24.5 million tweets which hold clues about what people are thinking.”

A quick search led me to the WePredict website. The information there states that: “WePredict is a showcase of several technologies we have built: a data mining application, capable of mining data from multiple social networks; and a complex suite of analysis tools for analyzing this data…WePredict’s large database of over 22 million status updates growing at 20 a second makes it the largest user survey ever done… using the collective intelligence of the whole internet, a mere 1.5 billion people, we can predict the outcomes of elections, talent shows or who will be the christmas #1 and analyze the public reaction to new legislation or medical epidemics.”

An exciting endeavour such as this one reminds me of Hal Varian’s famous quote that “the sexy job in the next ten years will be statisticians.” A two-minute YouTube clip of Google’s Chief Economist is shown below, discussing this very issue.

Book Club: Identity and Economics

The next book club will take place on the recently released book “Identity Economics: How Our Identity Shapes our Work Wages and WellBeing ” authored by George Akerlof and Rachel Kranton and published by Princeton University Press. The venue is Duke Bar at 7.30pm on February 16th. As usual, please email if you are coming along. It is not necessary to read the book in advance, but we don’t forbid that. This is a really important book and I look forward to debating it. Aspects of it will also feature in my teaching this year and I am happy to have a session in Geary during the day at some point also if people don’t like the later hour.

Turn off the TV

Dynamic Treatment Effect Analysis of TV Effects on Child Cognitive Development

Fali Huang & Myoung-jae Lee



We investigate whether TV watching at ages 6-7 and 8-9 affects cognitive development measured by math and reading scores at ages 8-9 using a rich childhood longitudinal sample from NLSY79. Dynamic panel data models are estimated to handle the unobserved child-specific factor, endogeneity of TV watching, and dynamic nature of the causal relation. A special emphasis is put on the last aspect where TV watching affects cognitive development which in turn affects the future TV watching. When this feedback occurs, it is not straightforward to identify and estimate the TV effect. We adopt estimation methods available in the biostatistics literature which can deal with the feedback feature; we also apply the standard econometric panel data IV approaches. Overall, for math score at ages 8-9, we find that watching TV for more than two hours per day during ages 6-9 has a negative total effect

http://d.repec.org/n?u=RePEc:eab:develo:1532&r=cbe

Paul Volcker's Op-Ed

I think it's safe to say that Yves Smith and I don't see eye-to-eye on much. But on Paul Volcker's latest op-ed, we largely agree: Volcker simlpy doesn't get it. I have the utmost respect for Volcker, but he seems to be fighting old battles. He emphasizes the importance of — and the need to extend the safety net to — depository institutions like commercial banks. He contrasts commercial banks with “capital market institutions,” which he does not believe should have access to the safety net. Capital market institutions, Volcker believes, should “be free … to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail.”

I'm sorry, but were we watching the same financial crisis? The clear lesson from the financial crisis is that certain capital market institutions are every bit as important to the day-to-day functioning of the modern economy as commercial banks. That's a positive statement, not a normative one. Lehman Brothers was not a commercial bank, and yet its failure had catastrophic consequences for the global economy.

If anything, Volcker is not advocating enough government intervention. Capital market institutions need to be given access to the safety net — but just as with commercial banks, access to the safety net has to come with stringent regulation to limit the amount of risk that capital market institutions can take on. As Yves says:

The world has evolved so that many market making activities are now as essential to commerce as deposit gathering and lending. Those activities are de facto backstopped; there is simply no ready way back here (trust me, even if there were, it would take twenty years, and we'd still need an interim solution). We need to regulate those activities aggressively, including requiring much more capital to support them, and strict limits as to how much and what type of credit these firms can extend to hedge fund and other speculative investors.

If you accept that certain capital market institutions have become just as important to the day-to-day functioning of the modern economy as commercial banks — and given what we witnessed in September 2008, I don't see how that could be seriously disputed — then how can you justify extending the safety net (with stringent regulations, of course) to commercial banks, but not to those capital market institutions? Volcker essentially wants to implement a resolution authority for capital market institutions, and then send them on their way (leaving them “free to innovate, to trade, to speculate, to manage private pools of capital”). While I think a resolution authority is the most important element of financial regulatory reform, I certainly don't think it's sufficient. We need to extend the formula for commercial bank regulation (safety net access + stringent regulation) to capital market institutions. Volcker seems to be pretending that the lesson of the financial crisis is that we just need to clamp down harder on commercial banks. I think that's misguided.

Paul Volcker's Op-Ed

I think it's safe to say that Yves Smith and I don't see eye-to-eye on much. But on Paul Volcker's latest op-ed, we largely agree: Volcker simlpy doesn't get it. I have the utmost respect for Volcker, but he seems to be fighting old battles. He emphasizes the importance of — and the need to extend the safety net to — depository institutions like commercial banks. He contrasts commercial banks with “capital market institutions,” which he does not believe should have access to the safety net. Capital market institutions, Volcker believes, should “be free … to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail.”

I'm sorry, but were we watching the same financial crisis? The clear lesson from the financial crisis is that certain capital market institutions are every bit as important to the day-to-day functioning of the modern economy as commercial banks. That's a positive statement, not a normative one. Lehman Brothers was not a commercial bank, and yet its failure had catastrophic consequences for the global economy.

If anything, Volcker is not advocating enough government intervention. Capital market institutions need to be given access to the safety net — but just as with commercial banks, access to the safety net has to come with stringent regulation to limit the amount of risk that capital market institutions can take on. As Yves says:

The world has evolved so that many market making activities are now as essential to commerce as deposit gathering and lending. Those activities are de facto backstopped; there is simply no ready way back here (trust me, even if there were, it would take twenty years, and we'd still need an interim solution). We need to regulate those activities aggressively, including requiring much more capital to support them, and strict limits as to how much and what type of credit these firms can extend to hedge fund and other speculative investors.

If you accept that certain capital market institutions have become just as important to the day-to-day functioning of the modern economy as commercial banks — and given what we witnessed in September 2008, I don't see how that could be seriously disputed — then how can you justify extending the safety net (with stringent regulations, of course) to commercial banks, but not to those capital market institutions? Volcker essentially wants to implement a resolution authority for capital market institutions, and then send them on their way (leaving them “free to innovate, to trade, to speculate, to manage private pools of capital”). While I think a resolution authority is the most important element of financial regulatory reform, I certainly don't think it's sufficient. We need to extend the formula for commercial bank regulation (safety net access + stringent regulation) to capital market institutions. Volcker seems to be pretending that the lesson of the financial crisis is that we just need to clamp down harder on commercial banks. I think that's misguided.

Knowledge 2.0

I’ve been wondering for a decade or so what the government actually means by ‘the knowledge economy’ and the more I think about it the more it reminds me of Baudrillard’s simulacrum: the reason we have to be told so much that we live in a knowledge economy the less most of us know.

The credit crunch illustrated this superbly. We had offices full of people at the FSA producing massive reports about the soundness of a range of financial institutions but, as the horror show unravelled, it became obvious that they did not understand what those organisations were doing. The words had no relationship to the activities; the ‘knowledge’ was utterly disembbed and functionally useless.

How do you prove your worth in a knowledge economy? Clearly by producing more words than anybody else, hence the explanation for the rooms full of people at conferences and conventions who are just advertising piles of reports. Who has time to read all these words? Even if we could read a small proportion they would have no practical use because ‘It ain’t what you know it’s the way that you know it’. If your knowledge is not embedded so that you can use it to forge a relationship between yourself and something of importance to you, especially something physical and real, then it will always reamin virtual knowledge.

This is why I find my knowledge of basket-making the most valuable knowledge I possess. It is also why I have particularly enjoyed reading The Spell of the Sensuous by David Abram. For those who are not already familiar with this book, it explores the history of our dislocation from our planet, which Abram suggests was accelerated by our shift from a society that relied on story-telling to one whose history was literate.

Our knowledge has no resilience. If we fear for the security of our supply chains for food and energy, how much more should we be nervous about our knowledge. Not only is it floating free of any relationship with the real world, it is also stored on highly transient media. Without a computer most of it is not even available. The media we use to store data are so fragile that, within 20 years, we will have more photos of our great-grandparents than of our own children that we have taken in the past year.

Lest you fear that I have at last taken leave of the modern world, I will end this post with a recommendation for an excellent piece of knowledge-based writing that I would never have been able to find without the internet. Nicholas Hildyard’s A (Crumbling) Wall of Money might as well have been called ‘Derivatives for Dummies’. I would suggest you read in small chunks, for the same of your blood pressure.

Turn off the TV

Dynamic Treatment Effect Analysis of TV Effects on Child Cognitive Development

Fali Huang & Myoung-jae Lee



We investigate whether TV watching at ages 6-7 and 8-9 affects cognitive development measured by math and reading scores at ages 8-9 using a rich childhood longitudinal sample from NLSY79. Dynamic panel data models are estimated to handle the unobserved child-specific factor, endogeneity of TV watching, and dynamic nature of the causal relation. A special emphasis is put on the last aspect where TV watching affects cognitive development which in turn affects the future TV watching. When this feedback occurs, it is not straightforward to identify and estimate the TV effect. We adopt estimation methods available in the biostatistics literature which can deal with the feedback feature; we also apply the standard econometric panel data IV approaches. Overall, for math score at ages 8-9, we find that watching TV for more than two hours per day during ages 6-9 has a negative total effect

http://d.repec.org/n?u=RePEc:eab:develo:1532&r=cbe

Some Links

1. Sendhil Mullainathan asks: what are the irrational choices we make that perpetuate poverty, corruption and discrimination? His lecture is on TED.com

2. Three Irish firms a day go bust

3. #2 is a reminder why we need enterprise boards. There is currently an invitation to tender for the Dublin City Enterprise Board Annual Report 2009

4. The Nudge Blog discussed the idea of price discrimination in relation to the iPhone (in 2008), and a similar approach has been suggested for understanding the economics behind Apple’s new high-profile product: the iPad. It’s interersting to note that Apple's European Headquarters is based in Cork, Ireland where it employs over 1,000 people.

5. Stats.org: “advocate scientific and statistical methods as the best way of analyzing and solving society’s problems.”

6. The 2010 Conference of Applied Statistics in Ireland (CASI) will be hosted by the School of Computing and Information Engineering at the University of Ulster and will take place in the Ramada Hotel, Portrush from the 16th to the 18th May, 2010. The conference is organised under the auspices of the Irish Statistical Association.

Measuring Expenditure and Consumption

On February 22nd, we will have an afternoon session in the Geary Institute on the measurement of consumption and expenditure. Participants include Colm Harmon, Joachim Winter and Thomas Crossley. The aims of the afternoon include (i) focused discussion of current work on measuring consumption and expenditure in surveys (ii) introduction to the Irish internet panel being conducted in Geary and its potential use a tool for innovating in measurement in economics (iii) discussion of development of research (iv) discussion of development of ongoing seminar and workshops in this area (v) Short presentations from Dublin-based PhD students on their work on measurement.

Again, this is more focused than regular seminars. Please email if you are working on these areas and would like to attend this session. Also, would appreciate ideas for developing this from internal folks.

Biomarkers and Economics

A number of colleagues are currently in the processes of brainstorming on a biomarkers and economics event for London in April. Full details will be up soon. The integration of biological measures into economic data-sets and the utilisation of data-sets with bio-information to test economic hypotheses has been discussed on this blog for a long time, and there is clearly a growing literature with many parallel arms. If anyone is interested in potentially getting involved in this session or has suggestions for speakers for future sessions please email me. Potential uses of bio-markers include generating better econometric models of health and retirement, testing theories of the formation and determinants of preferences, providing a wider range of proxies for well-being, examining adjustment mechanisms that cannot be elicited through standard surveys, validating subjective measures and several others.

Basketball & endogeneity

Basketball is very important here in Kentucky. While at the mall today, on the back of a guy’s hoodie today I saw the slogan “Basketball doesn’t build character. It reflects it!” So this guy, or the person who designed his apparel, had a strong awareness of how unobserved heterogeneity can lead to misleading inferences about causal relationships. I thought about congratulating him on this, perhaps inviting him to reflect on Pearl’s recent work on causality, but thought better of it. Nonetheless, he is way ahead of many more educated people. Go Wildcats!

Websurvey tools

We are converted MMIC users in our research group and are currently very comfortable with its features for doing experiments and so on. American Evaluation Twitter page link to surveygizmo . Worth having a look at this to see whether it has useful features above what your own web package can do.

Humiliatingly Ceremonial

In general, I’m not a fan of Goldman-bashing. But this, from Michael Lewis, is too funny:

That's perhaps the most curious trait of these ordinary Americans: you don't need to give them any money to lead them to hope that you might. Take Larry Summers, for instance. We both know that we would never actually employ even this surprisingly intelligent Mort in anything but the most humiliatingly ceremonial role. But he doesn't know that — and thus he has done so much for us.

It’s funny because it’s true.

Humiliatingly Ceremonial

In general, I’m not a fan of Goldman-bashing. But this, from Michael Lewis, is too funny:

That's perhaps the most curious trait of these ordinary Americans: you don't need to give them any money to lead them to hope that you might. Take Larry Summers, for instance. We both know that we would never actually employ even this surprisingly intelligent Mort in anything but the most humiliatingly ceremonial role. But he doesn't know that — and thus he has done so much for us.

It’s funny because it’s true.

Weekend Links

1. Karl Whelan on whether we need more PhD Economists in the civil service

2. Stephen Kinsella on the road to recovery

3. A remarkable piece by George Osborne and Richard Thaler. I somehow doubt that “We can make you behave” was a title they suggested to the editors.

4. The Keynes/Hayek rap is up to over 350,000 hits – report.

5. Tim Harford talks in the FT about a behavioural economics application in Afghanistan

Links 27-01-10

1. Erin Go Blog . An article written in Forbes that provides an ode to the Irish Economy blog. Well deserved praise. In general, the idea of a death of blogging in Ireland is a simple miscalculation based on quantity rather than quality. Some of the blogs that are starting to settle down are a real addition to the public sphere

2. IAREP call for papers . You will regret it later if you do not submit something.

3. Ghost estates per county on the Ireland after NAMA blog. Good stuff again.

4. Psychology Today on debt and personal growth

5. Richard Breen will give the ESRI Geary Lecture this year (thanks Michael)

The Human Firm

The fanfare of publicity surrounding the announcement that the UK had experienced – hold your breath! – 0.1% of growth during the last three months of 2009 was embarrassingly inappropriate in several ways. First, and most obvious, was the awkwardness of statisticians behaving like media tarts. The explanation can only be their fear of facing the Osborne axe if the Tories get elected.

Second was the celebration over such a paltry increase – and in the quarter when all economists and statisticians know that the bulk of retail activity takes place every year. This time the Christmas effect will have been exaggerated because of what used to be January sales taking place before Christmas. The data are seasonally adjusted to attempt to eliminate these effects, but given the unpredictability of both business and consumers in these extremely unusual times, 0.1% growth is really no news at all. The dismal ‘growth’ trend in the figure from ONS illustrates this.

The most intelligent commentators extrapolated from this 0.1% to tell us how much smaller our economy is now than it would have been if we had followed ‘a normal growth path’: around 6%. I wonder how many people will think about that and realise what it teaches us about the rapid nature of expansion when we are following ‘the normal growth path’. Growth on growth, exponentially in this manner, is what is driving us to the planetary abyss. As the authors of Limits to Growth identified, humans have a problem grasping the abstract reality of exponential growth. To help explain they included this story in their report:

‘French children are told a story in which they imagine having a pond with water lily leaves floating on the surface. The lily population doubles in size every day and if left unchecked will smother the pond in 30 days, killing all the other living things in the water. Day after day the plant seems small and so it is decided to leave it to grow until it half-covers the pond, before cutting it back. They are then asked, on what day that will occur. This is revealed to be the 29th day, and then there will be just one day to save the pond.’

So we can learn lessons about the weakness of statistics and the crisis of economic growth, but I think I have detected a more encouraging sign: that people are not behaving like rational economic men. The statistics on which economic planning is based are monetary figures, so they include all the pointless shuffling around of money that a financial economy indulges in. If you are interesting in the real economy of stuff, then the second figure is more illuminating: manufacturing industry in the UK has fallen off a cliff.

And yet unemployment has not risen anything like as rapidly as predicted. In economic theory, a recession results in firms automatically reducing output and cutting prices and wages. They do this in a competitive process and without regard to the human costs. Yet in this recession we have seen firms negotiating with workers to share the available work and the income that is available to be paid out in wages.

Is this merely an adaptation of capitalism, where we willingly cut our own wages? I would prefer to interpret it as humanity rather than flexibility in the workplace. Since the steady-state economy implies a level of economic activity considerably lower than that which prevailed before the recession, this bargaining over the value of production is something that should be facilitated and extended.

Identity Economics: Not a Review

This is not a review. Just an attempt to stir up some interest in advance of a bookclub. “Identity Economics, How our identities shape our work, wages and well-being” by George Akerlof and Rachel Kranton was published recently by Princeton University Press. It draws from and develops material published by the two authors, particularly articles in the QJE, JEL, JEP and AER published from 2000 to 2008, articles that will be familiar to a lot of readers here.

The book is divided into ten chapters and four sections. Section 1 Economics and Identity comprises (i) introduction (ii) identity economics (iii) identity and norms (iv) where we fit. In particular, this section advances the idea that incorporating identity into economics is an important step in economics, as important as the process largely already undertaken of incorporating human judgment processes. They argue that norms and social categorisation are fundamental components of human decision making and valuation in a way that is simply not characterised adaquately in standard accounts of utility and tastes.

Section 2 Work and Schooling comprises (v) Organisations and (vi) Schooling. This section applies the identity economics framework to these two key components of economic life. The first chapter argues that understanding economic organisations such as firms and factories requires a detailed understanding of the identity and roles played by individuals within the organisation. Their schooling chapter considers the key role of identity in how people make decisions about and transition through schooling.

Section 3 “Gender and Race” comprises (vii) “Gender and Work” and (viii) “Race and Poverty”. The first of these chapters considers gender identity and work. The second examines ethnic identities and the relation to poverty, in particular advancing the idea of identity feedback loops between minority and majority that can lead to perpetuating cycles of poverty for affected ethnic groups.

Section 4 “Looking Ahead” comprises (ix) Methodology and (x) Looking Ahead. Chapter (ix) argues that methods such as IV and natural experiments cannot fully encapsulate what is driving the relation between identity and economic outcomes, and advocates for richer descriptive accounts of economic systems and subsystems. Chapter 10 concludes on how identity considerations may change economics.

This is not the place for a lengthy review. I recommend strongly that anyone with an interest in behavioural economics read the book. The extent to which identity as described by the authors truly adds to behavioural economics will be debated thoroughly as a result of this work. I really look forward to discussing this book in lectures and our bookclub and I am sure it will reoccur on this site as it begins to filter more into economic debate.

With respect to our policy debate in Ireland, the book raises a number of questions, a sample of which I list below purely to get the ball rolling. I would really welcome a chance to debate the ideas in this book with a wide variety of people, inside and outside economics.

- the extent to which identity considerations render ineffective jobs programmes aimed at areas where male unemployment is now the majority position.

- the extent to which men and women derive serious positive and negative utility through adherence or non-adherence to prescribed gender roles and the extent to which this matters for economic policy.

- the extent to which “working class” identities influence school and college choice and the extent to which this interacts to major government spending initiatives in promoting access to education.

- how identity interacts with working roles to lead to well-being.

- the extent to which Irish identity influences our economic behaviour in areas like consumption, saving, migration, working patterns and so on.

Miscellaneous

1. From geek.com, the Sleep Cycle Alarm Clock App for iPhone. This app monitors oscillations between “awake”, “dreaming” and “deep sleep” using the accelerometer in the iPhone. Apparently it’s better to wake up in a phase of “light sleep”.

2. Economists have examined the allocation of time to sleep. Recent evidence suggests that nearly 25% of U.S. adults (47 million) suffer from some level of sleep deprivation. But maybe we’re getting more sleep in the recession? Up to 22 minutes more per day?

3. “The Art of Labormetrics” by Daniel Hamermesh. I’m surprised that this has escaped my attention until now: it’s a NBER-WP from 1999. Appropiateness and cleanliness of data are considered, as are problems of extreme observations and interactions. Also covered are IV, natural experiments, selection and unobserved individual effects. The meaning of results and the clarity of presentation are also discussed. This is the most comprehensive review that I have seen about doing empirical micro research.

4. Randomizer.org: This site is designed for researchers and students who want a quick way to generate random numbers or assign participants to experimental conditions. Since its release in 1997, Research Randomizer has been used to generate number sets over 9.6 million times.

5. The ESRI’s 50th Anniversary. Anniversary events include two Geary lectures in 2010, the first of which will be given by Professor Richard Breen (Yale) on the topic of ’social mobility and education’. Registration is now open: here.

6. A matter of life and death: a TEDTalk about the importance of using personal location data to gauge health history. “Bill Davenhall wants to improve physicians’ diagnostic techniques by collecting each patient’s geographic and environmental data, and merging it with their medical records.”

7. A look back on the App Economy of Facebook in 2009. “We'd like to look back at some examples of startups and established companies, including those from Facebook’s own fbFund program, that built their businesses on Facebook Platform and with Facebook Connect, and made significant strides in funding, acquisitions, and creating new jobs in 2009.”

8. Inon: the UK’s leading provider of behavioural software. Using behavioural economics to help companies provide more value to customers and increase their revenues.

Yet Another Reason Why Capping Bank Size is a Terrible Idea

In addition to being a jaw-droppingly superficial idea overall, here's another reason why breaking up the banks and capping their size would be a titanic mistake. Everyone seems to agree that normal, non-TBTF banks can be resolved without causing a meltdown in financial markets. This is, in fact, the justification given for capping bank size — it would make all banks "small enough" to be resolved smoothly, which means that no single bank failure would pose systemic risks. Mission accomplished! Of course, this argument quickly breaks down when you think for more than 15 minutes about how the FDIC resolves failed banks.

The FDIC resolves the vast majority of failed banks through what's known as "purchase and assumption" agreements, or P&As. P&As are transactions in which a healthy bank purchases some or all of the assets of a failed bank and assumes some or all of the liabilities, including all insured deposits. P&As are much less disruptive to both communities and financial markets than straight deposit-payoffs by the FDIC. The FDIC has used P&As to resolve 163 of the 187 failed banks since the beginning of 2008. The JPMorgan/Bear Stearns deal was also a form of P&A (which was entirely intentional), with the Fed playing the role of the FDIC.

Now imagine that we cap bank size at, say, $100bn in assets. What happens if a bank with $99bn in assets fails? The way the FDIC resolves failed banks smoothly is through P&As, but the only banks big enough to buy the $99bn failed bank would surely be over the $100bn cap if they agreed to the purchase. So the choice is effectively between (1) a disorderly liquidation by the FDIC, which would pose exactly the kind of systemic risks that proponents of capping bank size are trying to avoid; or (2) granting an acquiring bank (or banks) a waiver from the $100bn cap and proceeding with a P&A. (The FDIC could technically use a conservatorship, but these are extremely rare, and no regulator has the capacity to manage a $99bn conservatorship.)

But think about how potential acquiring banks would respond if the FDIC approached them and offered them a waiver on the $100bn cap in exchange for agreeing to a P&A. They would think:

"Well, the government begged JPMorgan to buy Bear and begged BofA to buy Merrill, but then the government turned around and forced JPM and BofA to break themselves up a few years later! So thanks but no thanks, Sheila, we're not interested in buying a bank that you're just going to force us to divest in a couple years."

So with a cap on bank size, P&As would likely be off-the-table for the largest bank failures. But if the FDIC can't use P&As, then it can't ensure that the largest banks will be resolved smoothly—and thus pose no systemic risks—even with a cap on bank size in place! And if the FDIC can't ensure that the failure of the largest banks won't pose systemic risks, then what was the point of the cap on bank size in the first place?

See how easy it is to knock down this silly "break up the banks" idea?

A Plea to Journalists

Please don’t get sucked into the NY Fed/AIG circus tomorrow. There is nothing there. The people who are hyping this as some sort of outrage(!) are charlatans, and they’re hyping this purely for their own benefit. Either that, or they simply have no idea what they’re talking about. Look, these are complicated issues of securities law, with many competing interests. Anyone who tries to tell you that this as a simplistic story about good vs. evil is trying to manipulate you. Please resist the urge to regurgitate these simplistic narratives.

Oh yeah, and please stop quoting Chris Whalen as some sort of expert on finance. The guy is a freaking lunatic.

Thank you.