Friday, August 14, 2009

Young's Tyranny of Numbers

I have always thought that an important part of the explanation of rapid growth of the so called Asian Tigers (Hong Kong, Singapore, South Korea and Taiwan) was productivity. Turns out that is not necessarily the case. LSE's professor Alwyn Young has this famous paper "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience". Young's estimates of productivity -a key feature of economic growth according to the neoclassical model- for these Asian countries is not particularly different from countries such as Mexico, Brazil or Canada.

The paper argues for a different reason why economic growth boomed in the region. A -sort of- one time shock of education, participation and investment. It seems that underlying fast growth is the laggard progress they had before World War II. So its not that they are particularly good at something. Nor it is that they are productive workers. Not even that real wages are low. These economies grew because they were far away from the needed level of capital human, investment and participation. Once they achieve these levels, employment along with exports pulled these economies.

When policy recomendations for countries like Mexico point to follow the Asian Tigers, the only thing there is to follow is the improvement of investment, participation and human capital levels, not necesarily the productivity indicators. Productivity should push prices down, but it takes more than that to increase aggregate output.

Mexican Senate organized a forum to recollect the opinion of experts to increase productivity and competition. According to Young's argument, competition should be addressed as a priority, including the increase in investment - GDP ratio. Taking official series at constant prices, the ratio's growth rate has lately fall to negative levels in Mexico. This should be a policy lesson.

Thursday, August 6, 2009

Lucas talks on the Critics of the Economics Profession

Robert Lucas from University of Chicago has a strong argument published in The Economist against those dooming modern macroeconomic models. It is worth reading.

A few thoughts from Animal Spirits

After completing the Animal Spirits book I have a few thoughts that I think deserve some discussion. I sustain that the book does not provide a way to model the Animal Spirits as defined by the authors. It does provide a list of topics and questions that macro guys should address soon if it wants to contribute to decisions among policy makers.

There are some interesting examples of how generalization in markets analysis may not be the right path to think of their behavior. The book includes an interesting and revealing example from Keynes.
It goes like this: Assume there is a beauty contest where judges are rewarded if they price contestants as the majority of judges does. With this simple assumption, it is farly straight to conclude that every judge chooses what he thinks every other judge will choose -maybe- instead of his true first preference. The latter illustrates perfectly how the stock market works.

I agree with a statement of Akerlof and Shiller: it is hard to believe that every single day there is an explanation for the recent stock market movements. I think that being a stock market columnist must require a vast stock of creativity, specially in days of many fluctuations.

Another example of "special" markets is a common one in Mexico. Physicians are rarely choose from the yellow pages. They get most of their patients because a satisfied patient recommends his services. Literature books are read not only because of their publicity, but because of some recommendation. So these two markets -physicians and books'- have in common that information is a strong determinant in decisions. This is not new, what is interesting is that prices may not reflect all information there is needed to make a "good choice".

The utility provided by a book -or a physician- can be explained by tastes, but the great supply makes it necessary to ask for a recommendation before making a transaction. So stock markets -books and physicians- may need a different framework to be analyzed.

Another part of the reading that kept me thinking is the efficiency wages theory and its implications in rigidities, it is indeed natural to conclude that this theory explains reality of rich countries. In poor countries the same effect of costly layoffs can be largely explained by unions.

There is another reality that can not be drawn out of the analysis: that is the skills and fairness issues in the problem of determining wages.
The latter is very important in recent tax design literature, and create a major problem arguing in favor of the non-negative slope Phillips curve.

We economist must always have in mind the important difference between normative and positive economics. The former must be the target, but the latter is our reality and must be understood too. If economist can diagnose what is wrong -using normative economics- we should also know how to deal with actual problems -with positive economics.

The book tries to take away the profession from a normative to a positive fashion, but both are essential, Skidelsky goes even further asking for a change in universities' economics programs adding a philosophical background and letting math aside.

Tuesday, August 4, 2009

A Big Obstacle Rebalancing Global Imbalances

The widely accepted assertion of macro theory which states that after a public budget deficit, a currency appreciation will follow can help to know when stop spending. Several mechanisms work and translate in to a -temporal- wealth effect for residents of the named country. This certainly could not contribute to an export rising.
This having said, it appears now that the future budget deficits of the U.S.' economy will play against economic growth. The latter is easily infered from Martin Feldstein's statement that even though savings in the U.S. are rising and could replace foreign one -known as capital inflows- there will not be a dollar depreciation which is a necesary condition for having economic growth and a current account re-balance.
Taking as a -disputable- truth that the increase in spending has helped improve the economic outlook world-wide, the effect pointed by Feldstein may perfectly work as a sign to know when to stop spending and let the economy re-balance by itself.