Saturday, October 31, 2009

Jonothan Safran Foer on Dog-Eating

In a column in this weekend's WSJ, JS Foer presents his case for eating dogs.

[What we're already doing is]rendering—the conversion of animal protein unfit for human consumption into food for livestock and pets—[which] allows processing plants to transform useless dead dogs into productive members of the food chain. In America, millions of dogs and cats euthanized in animal shelters every year become the food for our food. So let's just eliminate this inefficient and bizarre middle step.

Friday, October 30, 2009

Global imbalances & US monetary policy

I'm currently doing a research paper for Jan Libich, one of my supervisors, on Fiscal-Monetary interaction.

A key area of research in the field is determining the game theoretic relationships between fiscal players---who are overly viewed as pouring fiscal `gravy' onto the electorate at any given chance---and monetary players, who are inflation hawks, and so take away Greenspan's punch as the party gets going. Jan knows about as much as there is to know with this game theoretic relationship (though he is more modest of himself than I am of him), and so his papers are worth reading. The essential insight from this strand of research is that independent central banks have the capacity to punish overly expansionary monetary policy if a few conditions are satisfied.

In layman's terms, the conditions boil down to the assumption monetary policy tightening hurts the same people who enjoy licking up the government's gravy. So in countries with no political business cycle (dictatorships), and in monetary unions, like the EU, the model requires modification, which is partly what my paper-in-progress is about.

What hasn't been researched in this literature so far (to my knowledge) is how central banks, which are mandated by law to target price stability, output gaps, or both, may have had their hands tied in punishing governments for reckless deficit spending. This view would say that Greenspan kept interest rates low well into the 00s because the Fed's implicit price target was not breached, due to the huge disinflationary pressure of Chinese imported goods.

If this holds, then blame for the explosion in house prices in the US can not only be pinned to China and the GCC for running huge surpluses---the so-called `global imbalances thesis'---but establish a degree of causality between Chinese currency policy (which kept export prices low in UD dollar terms) and US monetary/fiscal policy during the period.

Kevin Rudd goes moonlighting up north

I read somewhere that Kevin Rudd had spent somewhere around a quarter of his time in office overseas.

I took this photo somewhere between Malang and Mojo in East Java, during Indonesian parliamentary (DPR) elections during January. I thought I'd lost it, which is a shame, as it is definite proof that Kevin Rudd is leading a double life. Thankfully, I haven't lost it, so I can bring down the government for which I'm about to start working :p

Kevvy could probably have done better than run in PDI Perjuangan, though.

Thursday, October 29, 2009

Why people leave Mexico

Mexico is good at exporting people. It´s third largest foreign currency earner, after oil and manufacturing, is remittances.

This little article about the political situation in Mexico gives a few good reasons why.

Sarko's shower

Susana and I are are marrying in late January in Mexico. We´re both fairly young to be married (23), though this isn´t an issue to us; on the contrary, we are completely happy spending a lot of time with each other. I joke that one of the main reasons we get along so well is that we can wake up and talk about Hezbu´allah, or Sarkozy.

Gideon Rachman, from the FT, in his blog yesterday posted a nice little piece about the great French President:
For those of you who have not yet made it to p.24 of the second section (UK edition) of today’s FT, may I bring your attention to what seems to the single most amusing/interesting fact in today’s paper.

Paul Betts in his European View notes that, during the French EU presidency, France hosted a three day “Union of the Mediterranean summit” that cost 16.6m euros. He goes on - “On the occasion of that summit, a shower was specially installed in the Grand Palais in Paris at a cost of €245,000 for the personal use of the president. Mr Sarkozy never used it.”

Wednesday, October 28, 2009

On tutoring Macro 3

Today, sadly, is my last day (possibly ever) of tutoring Macro 3.

Over the last two years, I have taught (and tried to remember the names of) about 500 students at pre-university foundation level, first year, second year, and third year levels. Three things constantly surprise me.

1) While naturally bright students can do relatively well during first year without much work, during second and third years, sweat is the best determinant of success. I have probably two douzen very gifted third year students, and most this semester have been outperformed by sheer persistence of a few students,.

2) Filtering the whey from the curds works. La Trobe is in a bit of a tough spot when it comes to finding great first year students. The four main demographics of the student population are

(a) the chaff--students who've made it through school and whose parents have told them to do a degree,

(b) smart students from sloppy state schools--they tend to do well, though were probably either too lazy or too il-taught at school to get into Melbourne,

(c) rogues from private schools--these students did poorly in good schools, and are from fairly prosperous backgrounds; they tend to improve over their degrees, and

(d) mature age students from the Northern Suburbs--these students generally have a hard time getting started, but once adjusted, tend to go very well.

The problem with La Trobe's new expansion strategy is that it targets school leavers in order to improve numbers. This strategy will uncover a few good students. One of my best students from last semester would have probably fit in category (a) before he came to uni. He is from a Lebanese Australian background, born in the Northern Suburbs, and speaks with a broad Northern Suburbs accent. At first glance, the crass judgement would be that he probably studies accounting and drives a fully sick VL. Now at uni, he seems to have discovered that a whole deal of hierarchy depends on the amount of knowledge one has---a beautiful thing! Yesterday, he educated me about the finer points of the Malaysian monarchs.

Unfortunately, the majority of school leavers we get are not as inquisitive as the Wikipedia addict above. Many drop out, which is good for the other students, though it would be great if they were good students to start with.

A more sensible number-increasing strategy, I think, would be to target an increase in the number of the students from the most successful demographic. In economics, our mature aged students---most of whom have made too many lattés, or dealt too many hands of cards, and know the value of eduction---get great grad positions in most of the good government departments.

The problem is targeting these potential students. Should the university send out scouts to cafés and hand pamphlets to baristas who enjoy talking politics?

3) Despite the fact we have so many great third and fourth year economics students--certainly of the same standard to those from any other uni--so many continue to actually want to go into finance or accounting. For some reason, Economics has not successfully been made sexy the same way accounting and finance has. Could it be that economics is simply not sexy? Or have accreditations like CA, CPA, and CFA been marketed as being superior? Do we even want those who've been able to be attracted by the prospect of becoming an accountant barging in our territory?

Camping trip!

I am organising a big camping trip for friends and students on December 2-4. If you are keen, send me an email.


Sunday, October 25, 2009

Should smokers and non-savers face longer prison sentences?

This post is co-authored by Timur Behlul.

This follows from my post last night, which essentially states that virtuous behaviour is more or less the same as behaviour associated with not discounting the future: exercise, saving, temperance, and good manners. Conversely, acts of vice are associated with higher subjective discount rates.

If this line of thought is correct, then the following story should hold:

Two potential thieves consider robbing a store. They both have the same expectation of being caught, and the punishment for both potential thieves would be the same. If the two potential thieves differ only in their subjective discount rates, then there exists some level of punishment which will induce criminal behaviour in the potential thief with the higher discount rate, and will result in the thief who considers the future with more value not doing the crime.

Likewise, if the two thieves are able to be punished with different sentences, there exist two different sentences at which both thieves will not engage in the crime at the margin. The thief with the lower discount rate requires a shorter potential sentence as a deterrent than the other.

To the extent to which these two statements are true, there exists an argument that the deterrent sentences imposed on different criminals should be proportional to their subjective discount rates.

However, for a prospective criminal to be aware of the potential consequences of their actions, there must be complete knowledge over how their punishment is elastic to the court's perception over their subjective discount rate. This would require a publicly known set of proxies for discounting to be known.

So if people who smoked, saved little (relative to peers in their income bracket), had plenty of speeding fines and the like, were made aware their potential crime would result in a higher length of imprisonment than if they didn't smoke/did save/didn't speed, there would simultaneously exist incentives for people to review their potentially in-virtuous behaviour at both ends---crime and smoking.

Can a Society aim to be virtuous?

I should qualify this post with a disclaimer: I really enjoy vanilla economics. I like talking about tax systems, bank regulation, development, and town planning.

Sometimes, however, I get a little bit excited, and start to think about other things---the kind of dancing that in Strictly Ballroom loses Pan-Pacific Grand Prix tournaments.

The Virtuous Society: A worthy aim?

Economists generally have fairly concrete aims: inflation, unemployment, efficiency, growth, disease, education, crime, etc. The one very big one doesn't seem to be mentioned much---I think partly due to a lack of the Common Balls, and partly due to the fact that those who have mentioned it in the past have been genocidal maniacs---is `virtue'. Virtue is almost certainly the aim of all societies; this aim is reflected in law, religion, and many of those little social customs which help determine the social standing of people. I think also that virtue is inextricably bound to economic behaviour.

Virtuous behaviour is synonymous with economic temperance. The virtuous man is one who does not discount the future when making his decisions: he exercises rather than eating chocolate, abstains rather than drinks, studies rather than shirks, and never sleeps in. The man of vice trades the future for something a bit more immediate. A sugar hit.

I am not religious, though virtuous behaviour is put well by Luke 12: 37-38

Blessed are those servants whom the master finds awake when he comes; truly, I say to you, he will gird himself and have them sit at table, and he will come and serve them. If he comes in the second watch, or in the third, and finds them so, blessed are those servants!

Should Virtue actually be our unspoken social aim (I think it is, though I'm happy to be persuaded otherwise) then there are two distinct possibilities of its nature, each with their consequences for policy.

The first is that virtue is learned temperance. Social institutions, in this case, have the role of determining the norms of discounting. The Singaporese, who save almost half their private incomes, are normalised in a culture which places some (economic) weight on the distant future. In Guinea-Bissau and Burundi, they worry about today more---both countries were on average disinvesting between 2000 and 2005 (World Bank 2005). The difference is between their common social perceptions of the value of the future. Surprisingly, is it not due only to poverty---Haiti saves a greater proportion of private income than does Australia.

Should virtuous behaviour be just learned temperance, then policywise, there is an ethical dilemma: what is the acceptable cost in terms of liberty of "nudging" society into having a more distant gaze? This question recognises that any policy which is based upon having people modify not only their consumption choices, but also their choices of non-economic behaviour (like the decision whether or not to engage in road rage), requires some level of negative payoff. In this respect, Deepak Lal's thesis---that many Eastern societies govern individual behaviour by concepts of familial honour---is interesting: moderating influences are enforced by the group to which the ultimate consequences of individual indiscretion flow.

Judging most policy against this first possibility, it is hard to see that government believes wholly that virtue can be learned. `Consenting adults', the cornerstone of the brand of liberalism I enjoy, seems to have influenced most policy, save drugs and bicycle helmets.

The second possibility is that virtue is not learned temperance, but actually the capacity of only a few virtuous people. Under this scenario, there is little that can be done to make one obey virtuous behaviour; there are simply good eggs and bad eggs. What role is there for policy in this circumstance? Save recognising and helping good eggs (which already happens)---very little.

Thursday, October 22, 2009

Do we really know much about host-country effects of refugee immigration?

This recent wave of media hype on Tamil, Burmese and Afghan asylum seekers has stimulated some fairly spirited discussion lately. I fear though, much of the commentary involves people speaking beyond their competencies. This raises a question: in a debate in which most commentators have put "feelings in place of ideas", how much do we really know about the host-country effects of settling refugees?

I will ignore the (non) question of whether or not Australia should accept refugees, and focus on the discussion of what kind we should be allowing.

Harry Clarke disagrees with a few of his readers. They argue lines like:

Boat people have demonstrated their motivation and enterprise and are therefore differentially likely to make good citizens.


Encouraging queue jumpers on the grounds that they show entrepreneurial zeal and enterprise would be about the most daft policy I could imagine.

Meanwhile, over at Core Economics, Josh Gans argues that refugee immigration is a case of revealed preference over institutions

When we do not have free migration, we stop people being able to match different rules to their preferences. Personally, if someone in Sri Lanka prefers our rules, why should they be forced into convincing everyone else around them to adopt them rather than just moving?

The problem with both sides of this argument is that there seems to have been a lack of objective research into the relative successes of a cross-sectional sample of refugees, rather than a cross-sectional sample of immigrants. We do not know which of our Afghans, our Vietnamese, our Tamils, have done better than the others---the boat-people? former store-owners looking for good institutions? sign-up-and-wait rule abiders?

With this gap in knowledge, it is simply impossible to develop policy that minimises the loss/maximises the gain of refugee immigration in Australia.

Tuesday, October 20, 2009

Melbourne Honours Symposium: Call for papers!

I am currently organising a symposium, jointly sponsored by the La Trobe School of Economics & Finance, and the Economics Society of Australia, for students having just completed their honours theses.

It will be held on Friday the 27th of November, at La Trobe university.

If you are interested in coming along (perhaps to spot future talent/PhD candidate), or presenting a thesis, please email me on


Monday, October 19, 2009

The problem with assuming depletable natural resources are... er... depleting

My thesis research this year, on modelling the effects of natural resources on economies, has led me to ask a particular problem: is it reasonable to model depleting natural resources as actually depleting?

At first glance, it seems as though depletable natural resources should of course be modelled as depleting. How dare I suggest not! That is the approach taken by some really big names: Dasgupta & Heal (1974), Stiglitz (1974), Romer (in his textbook), Jones (in his textbook), Vernon Smith (in a bunch of papers in 69 and 69), etc.

The problem with this approach---despite it being correct physically---is that the amount of natural resources we know about has not actually been depleting.

Below is a little graph I did using data from the BP Statistical Survey 2009, graphing the aggregate stocks of "proven" reserves. These reserves may come on and off-line as prices fluctuate. A good example is Canada's Athabasca oil sands, which were included in Canada's proven reserves in the early 80s, only to be partially removed during the late 90s when oil prices were too low to make them viably extracted.

The surprising trend is that known oil reserves, despite rising extraction, have increased continually.

Given this, and given the fact we know one day proven oil reserves must fall, should depletable natural resources be modelled as depleting?

Saturday, October 17, 2009

Kornai on Soft Budget Constraints

In his guest post on Willem Buiter's Maverecon, János Kornai gives an interesting take on the Global Financial Crisis through his research on Soft Budget Constraints (SBCs).

During the communist period in Hungary, firms, despite being given material incentives to be profitable (including profit shares to the owners), they also faced very high rates of rescue by the state when in financial trouble. Kornai argues the real effect of rescues like this is a modification of the budget constraint faced by the firm, to one that is effectively "soft". That is, the short-term spending decisions of a firm will be looser should there be little chance of firm closure.

This argument is subtly different from the Moral Hazard argument. Moral Hazard tells the story of what happens to a firm's taking of risk when it becomes either implicitly or explicitly insured. SBC theory tells us that a firm will not necessarily take more risk, but their spending decisions will generally be brought forward, as their intertemporal budget constraint is perceived as being "soft".

My third year students, who've just covered the Keynes-Ramsey condition in intertemporal consumption choice, will be able to see this as a direct application. If a firm's internal discount rate is greater than the perceived cost of capital (which is decreased, due to the likelihood of rescue), then present expansion of the firm will appear to be a cheaper "option" than waiting later to expand.

Weekly Links:

Paul Romer on Elinor Ostrom:

Harry Clarke on climate change:

The Financial Times on a surprisingly peaceful bit of Afghanistan:

The problems with mis-specifying proxies (part 2)


The famous paper in proposing Resources Curses as being more or less a fact was Sachs & Warner (1995). In their paper, they regress, against 1970-1990 GDP growth, a bunch of variables including: primary produce exports to GNP, land per capita, number of coups, revolutions, assasinations etc., school enrolment rates, and the like.

This paper is super-influential: Google Scholar says it is cited by 1416 other papers. Unfortunately, though, the result it concludes---that natural resource `abundance' is correlated with low economic growth---is ill-gotten. It all comes down to the choice of proxy: in their case, using natural resource exports to GNP as a proxy for natural resource abundance. This was picked up by Stijns (2005), who replicated their regressions but using per-capita coal, gas, and oil production as the proxy for the same explanatory variable---not a perfect proxy either.

This next bit should come as a real lesson to economists and students everywhere about the choice of choosing a proxy variable. The picture below is lifted directly from Sachs Warner (1997)---an updated version of their paper. It shows Zambia as being the most `resource abundant' country in the sample. According to natural resource estimates for 2000 by the World Bank (2005), Zambia had a proven stock of natural resources of $17.5B USD. Venezuela, according to the same study, at the same time had an estimate of proven stock of natural resources of $658B USD---some 38 times the `abundance'.

An incredible problem with the choice of a proxy like this is that it not only that it messes up the magnitudes, but also the ordering. It allows researchers to say very little about what they are trying to explain.

As far as the Sachs Warner paper goes, although it shows fairly conclusively there is a negative relationship between natural resource exports and economic growth (though this is likely an endogeniety error; name a rich country whose exports are comprised almost exclusively of resources), it fails to say much about "Natural Resource Abundance and Economic Growth"---the title.

The problems with mis-specifying proxies (part 1)

At the moment, my thesis research is on identifying ways of modelling the consequences of countries' endowments of natural resources. There is a huge literature on this topic, and so it is quite hard to try to include them all. However, at the very core, the claim which echoes through the literature is that of the so-called `Resource Curse'.

The Resource Curse hypothesis is that countries with large endowments of natural resources will grow slower than resource-poor countries. This counter-intuitive proposition uses several channels to explain itself. They can be divided into the Dutch-Disease literature, the Institutional literature, and the Learning-by-Doing literature.

The Dutch Disease literature claims that countries that export natural resources will see an increase in their real exchange rates, either through currency appreciation or inflation, and this squeezes out producers in other sectors. This argument is often extended to include that natural resource exports also increase labour and credit costs, also increasing the cost of doing business for factories and pubs.

The Institutional literature claims that the presence of natural resources changes the incentive structure of countries, and so to the extent that a country allows itself to become over-run by robber-barons (either domestically-bred or foreign), natural resources cause economic stagnation.

The Learning By Doing literature says that in countries with natural resource abundance, a greater proportion will be induced into working in the resource sector. This results in a smaller proportion of the population working in the services and manufacturing sectors---both of which tend to be associated with higher skills, and continual opportunities to Learn by Doing. The long-term consequence of this is that people spend too little time acquiring skills, and too much time digging holes.

Friday, October 16, 2009

Refugees, Australia, & Boats

In an interview on the 7.30 Report a few nights ago, the Australian minister for Immigration, Chris Evans, made a strong point. Of the 438 asylum seekers onboard the Tampa, a Norwegian cargo ship which was refused entry to Australian waters in 2001, only one was not granted asylum by Australia or New Zealand.

If the majority of boatpeople are eventually granted asylum in Australia, and if Australia really wants to do something to stop people-smugglers, then there exists a smart way in which we could do so. Currently, asylum seekers pay smugglers tens of thousands of dollars to ferry them through South East Asia or the Mediterranean. I'm not against this pur sei---they're only filling a need---but they tend to do nasty things to their passengers from time to time. They don't observe Duty of Care.

If Australia ends up giving asylum seekers refuge, and if we don't like people-smugglers, then why doesn't Australia's government enter the market, and set a price on the processing/transportation of asylum seekers? Presumably, a price could be reached that would be high enough to limit numbers to an absorb-able figure, and similarly undercut people smugglers. If this was coupled with very strong policy against people smugglers (like sinking their boats), they wouldn't be able to reduce their price.

Isn't that pragmatic?