Friday, August 24, 2012

What is a Catholic Voter to Do?

It is ironic that in the 2012 election there are two Catholic Vice Presidential candidates and no good options for Catholic voters. The Washington Post writes:
While Catholics don’t vote as a bloc, they comprise about one-quarter of the electorate and the candidate who wins Catholic voters usually wins the White House. Obama won the total Catholic vote in 2008, 54 percent to 45 percent, but lost white Catholics, 52 percent to 47 percent.

So far this year, neither Obama nor Romney has established a consistent lead among Catholic voters. 
That is not surprising, given that neither platform is morally or intellectually satisfying. An article in Mother Jones gets at part of the issue:
When the US Conference of Catholic Bishops declared war on the Obama administration on religious freedom grounds, the GOP was right there with them. Republicans cited the bishops' complaints as they blasted the administration's contraception mandate in health care reform, and gave the bishops a prominent platform on the Hill to air their grievances...

In September, the bishops lost a $19 million contract to provide services to trafficking victims after refusing to make accommodations so that their clients could have access to a full range of reproductive health services...The lost contract was just one more piece of evidence the bishops invoked to prove that the Obama administration discriminates against religious groups and follows an "ABC—anybody but Catholics" policy, and House Republicans were happy to parrot that charge as well...

But even as GOPers have been piggybacking on the [US Conference of Catholic Bishops'] USCCB's skirmish with the White House, they seem to have forgotten that the Catholic organization is hardly a Republican proxy. Even though they may align with Republicans on contraception, abortion, and gay rights, the bishops have traditionally been much more in sync with the Democrats. The bishops supported the nuclear freeze movement during the Reagan era, have consistently opposed the death penalty, and backed comprehensive immigration reform.

Despite some GOP claims that the Pope himself has said that the national debt is a moral hazard, the party leaders seem to have missed the part where the church has said that debt is bad because it hurts the poor. USCCB has been a leading advocate for debt relief in Third World countries because the bishops believe debt has to be relieved in a way to help the poor, not simply to placate bankers and rich people.

So Republicans seemed a little taken aback, when [the USCCB] took aim at the GOP for backing draconian cuts to government programs for the poor. The source of the controversy dates back to a an interview House Budget Committee Chairman Rep. Paul Ryan (R-Wisc.) gave to the Christian Broadcasting Network earlier this month, in which he suggested that his Catholic faith had inspired him to draft a budget that takes an axe to social welfare programs...

In response to these comments, as well the broader Ryan budget, the bishops have sent a series of letters to House GOP leaders criticizing the plan for the dire impact it would have on the poor and disadvantaged. Contrary to Ryan's insistence that the budget is in keeping with Catholic tenets, the bishops insist that many of the budget choices are actually immoral.

Now that the bishops are taking on the House leadership, top GOP lawmakers, including House Speaker John Boehner (R-Ohio), have suddenly decided that the USCCB doesn't really represent the church or all its bishops, and thus, they are free to ignore it. "These are not all the Catholic bishops, and we just respectfully disagree," Ryan told Fox News last week. The argument didn't fly so well with the USCCB, which shot back in The Hill that the group does, in fact, represent all the bishops.
Last year I wrote a post on Papal Economic Teachings. It is interesting to see what Pope Pius wrote during the Great Depression, critiquing communism, unrestrained capitalism, class conflict, and inequalities. The current Pope, Pope Benedict XVI, also has applicable writing for the current electorate, such as:
Economic activity cannot solve all social problems through the simple application of commercial logic. This needs to be directed towards the pursuit of the common good, for which the political community in particular must also take responsibility. Therefore, it must be borne in mind that grave imbalances are produced when economic action, conceived merely as an engine for wealth creation, is detached from political action, conceived as a means for pursuing justice through redistribution.
The Catholic economic teachings and social teachings are based on the same principles: here is a good link to the major themes of Catholic social teachings. They are inextricably bound together, and together form a coherent vision: At the most fundamental level, "the dignity of the human person is the foundation of a moral vision for society. This belief is the foundation of all the principles of our social teaching." It is an unfortunate coordination problem, that even though Catholics are one quarter of the electorate, no party gives us a good option.

Tuesday, August 21, 2012

Kitchen Sink Crisis: Tough Lessons from Home Economics

Biodegradable Potatoware

We should have seen it coming. Our kitchen sink was draining slower than usual. But nobody in the house took action to address the problem preemptively. After all, it still worked well enough, and we are all just renters. Our landlord is unlikely to respond to such a trifling complaint as a slow drain. And in a house of economics graduate students, we all theoretically have more important things to do than to call him.

The next thing we know, we have a full blown crisis on our hands. The sink is entirely full of sludgy water, vegetable particles, and a sponge or two that have seen better days. Dishes seem to pile up all at once (we have no dishwasher). We analyze the situation. Did someone pour coffee grinds down the drain? The bathroom sink seems to be draining slower too. Or was it always like that? No, it is definitely slower now. Is there a common cause?

We cut back on our dish usage. We soak our dishes in a half inch of water, and wash efficiently, flinging water off of the back porch. We discretely wash a thing or two in the 5th floor restroom of Evans Hall (why is it so much larger than the 6th floor restroom?)

We call the landlord. Urgent, take action now! He promises to send relief the next day.

Relief is a day late, but arrives at last. The contract is awarded to our landlord's crony. He begins to attack our sink with a plunger. Thunk, thunk, thunk. We wait with baited breath. Is it working? we ask each other. The thunking continues. Our kitchen looks disgusting, and I notice that the rest of the house isn't much better.   I clean my room. By the time I have moved onto the hall closet, the handyman has moved on to unconventional tools. By the time I vacuum, he is applying the unconventional tools to the bathtub. I was not aware that the crisis had spread to the bathtub.

The bathtub fills with gray water and refuses to drain. An adverse consequence of the unconventional tools, or the unavoidable next stage in the unfolding crisis? We have no way of knowing the counterfactuals.

At this time our handyman announces that the problem is not with the indoor plumbing, his domain, but with the outdoor plumbing. Powerless to do more, he leaves. Now we wait, hoping our landlord will consider the tub too big to fail.

What does our future have in store? Will sponge baths in Evans become culturally acceptable? Will we grow habituated to eating with Berkeley-friendly disposable plasticware made of potato products? Will we take the plunger into our own hands? When we finally get through this, will we retain our water-conserving washing habits? Will we respond more quickly to signs of future household crises? Will my clean room last until the weekend? For now, we can only speculate and blog.

Monday, August 20, 2012


I am beginning a self-study of the textbook Robustness by Lars Peter Hansen and Thomas Sargent (2008). My macro professor from last semester, Demian Pouzo, briefly touched on the topic in a lecture devoted to relatively new extensions of the dynamic programming we learned during his course. At the time, what he told us about applying robust control techniques to macroeconomics sounded both fascinating and extremely useful--but I still had a long way to go in just grasping the basics of dynamic programming. The prospect of field exams motivated me in that, and now that exams are over, I feel reasonably literate enough to delve into Robustness.

Robust control theory extends rational expectations models to acknowledge fear of model misspecification. Here is a paragraph from the first chapter that convinces me just how fundamental this is for economists to address: 
Rational expectations models presume that decision makers know the correct model, a probability distribution over sequences of outcomes. One way to justify this assumption is to appeal to adaptive theories of learning that endow agents with very long histories of data and allow a Law of Large Numbers to do its work. But after observing a short time series, a statistical learning process will typically leave agents undecided among members of a set of models, perhaps indexed by parameters that the data have not yet pinned down well. This observation is the starting point for the way that we use detection error probabilities to discipline the amount of model uncertainty that a decision maker fears...(Hansen and Sargent Section 1.4.5).
Robust control theory began to be developed by control theorists and applied mathematicians in the late 1970s for application to a variety of engineering and physical problems. Model misspecification is probably a much greater problem in economics, where there is much less consensus about how the system works and what kinds of policies are effective. The engineering and physics applications don't include discounting, or at least not in the way that economists do. They also don't include multiple agents in a game theory context. Hansen and Sargent add both discounting and multiple agent settings to robust control theory in this text, greatly facilitating its application to economics.

As I start this study, there are a few things I am wondering:
  • Positive or normative? Does robustness describe what policymakers do, or what they should do? In other words, by understanding robust control theory, will I be better able to understand why policymakers made the decisions they made, or what they should have done/should do differently?
  • Can robust control theory incorporate policymakers' motives that may not be simply social welfare maximization? Reputation concerns, power struggles, etc. may lead to purposeful "misspecification."
  •  Is there some concept like "retrospecification"? That's just a term I'm making up, but perhaps the policy justification comes after the policy in some cases?
  • Does robust control theory apply to institutional design and regulatory design in a similar way as it applies to policymaking?
  • Misspecification implies that there is a "true" model. Is there?
Please suggest other papers I should include in this study or other issues I should think about as I read the text!

Reflection on Two Years in Economics

Today is the first day of the Fall 2012 semester. That means it has been two years since I have polished my nails. Before starting graduate school, more or less as a joke, I vowed not to polish my nails until I got my PhD. "Time is scarce, and becoming an economist requires sacrifices!"

I joke that this is my motivation. Whenever I felt discouraged, especially in the first year, I would just tell myself, "No quitting. You've got to get through it, so you can get your PhD, so you can paint your nails." The truth is, I like but don't love polishing my nails. As an incentive to finish my PhD, it is not that great. And yet, this little joke of a non-enforceable commitment mechanism has taken on more significance in my life than I ever planned. 

Most of the time, I love graduate school and economics and Berkeley. It is exhilarating and an unbelievable privilege to have five years of super-concentrated learning and thinking. It is really so awesome. 

But sometimes, I lose sight of this. I started my PhD at 21, and most 21-year-old girls are not pledging their twenties to this type of endeavor. Especially first year, sometimes the pressure was so intense that it felt immensely lonely. On one level you know that you are not alone, that other people, no matter what path they choose, work hard and feel stress too. But on another level you don't know this, not with any conviction, because when you start as a 21-year-old, you have the task of becoming an economist at the same time as becoming an adult. And when you start  as a 21-year-old girl, you become an economist at the same time as becoming a woman. 

Sometimes you're not ready for either. Sometimes it is too much, too soon. Sometimes you mourn the girlhood that is slipping away from you, and suddenly seems so idyllic and charmed and fleeting. You mourn for it like you mourn for the South. You blame work for taking it from you. But it is not becoming an economist that is ending your girlhood. The end of your girlhood is ending your girlhood. Growing up is bittersweet, and not like you expected. Womanhood is not like you expected, and for this too you blame work.

You dreamed you'd do everything, be everything, but none of it defined. One specific thing you do, or are, means how many undefined things you won't do, won't be? So sometimes it feels like you are giving up everything, past and future, to become an economist.

You're not, of course. You are just growing up and making choices. You are getting married in December, bringing your past along and vowing your future. You're a young woman and a child of God. You're becoming an economist, yes, but you're not giving up everything. You're just giving up some dang nail polish, and who even cares about nail polish? So get back to work!

Sunday, August 19, 2012

Princeton Initiative: Macro, Money and Finance

I just made my flight reservations to and from Newark to attend the Princeton Initiative on Macro, Money and Finance in September. I'm not sure which professor nominated me for the workshop, but I'm sure glad they did. The program looks really exciting. I'll hear lectures from professors whose papers I have read. The description of the initiative is:
Following the Princeton tradition of incorporating financial frictions in macroeconomic models - scholars like Ben Bernanke come to mind - this camp brings together top 2nd year Ph.D. students who wish to write a Ph.D. thesis at the intersections between Macroeconomics and Finance. The recent experience starting with the run-up of imbalances and bubbles in the first decade of the 21st century, followed by a severe financial crisis that ultimately led to the Great Recession, calls for new frameworks to study macro-prudential policy tools and to design a new international financial architecture. The aim of this meeting is to bridge the gap between modern finance and macroeconomics and expose the best students from across the country to macroeconomic models with financial frictions and /or non-standard expectations.
We have an assigned pre-reading, "Macroeconomics with Financial Frictions: A Survey" by Brunnermeier,  Eisenbach, and Sannikov. Here is an excerpt from the intro:

In a frictionless economy, funds are liquid and can flow to the most profi table project or to the person who values the funds most. Di fferences in productivity, patience, risk aversion or optimism determine fund flows, but for the aggregate output only the total capital and labor matter. Productive agents hold most of the productive capital and issue claims to less productive individuals. In other words, in a setting without financial frictions it is not important whether funds are in the hands of productive or less productive agents and the economy can be studied with a single representative agent in mind. In contrast, with financial frictions, liquidity considerations become important and the wealth distribution matters. External funding is typically more expensive than internal funding through retained earnings. Incentives problems dictate that productive agents issue to a large extent claims in the form of debt since they ensure that the agent exerts su fficient eff ort. However, debt claims come with some severe drawbacks: an adverse shock wipes out large fraction of the levered borrowers net worth, limiting this risk bearing capacity in the future. 
Hence, a temporary adverse shock is very persistent since it can take a long time until productive agents can rebuild their net worth through retained earnings. Besides persistence, amplifi cation is the second macroeconomic implication we cover in this survey. An initial shock is ampli ed if productive agents are forced to re-sell their capital. Since re-sales depress the price of capital, the net worth of productive agents suff ers even further (loss spiral). In addition, margins and haircuts might rise (loan-to-value ratios might fall) forcing productive agents to lower their leverage ratio (margin spiral). Moreover, a dynamic amplifi cation e ffect can kick in. The persistence of a temporary shock lowers future asset prices, which in turn feed back to lower contemporaneous asset prices, eroding productive agents' net worth even further and leading to more re-sales. 
The ampli cation eff ects can lead to rich volatility dynamics and explain the inherent instability of the fi nancial system. Even when the exogenous risk is small, endogenous risk resulting from interactions in the system can be sizable...(1-2).
There are a number of different ways to microfound financial frictions, and Brunnermeier et al survey a good variety. Some implications are surprising, like: "In certain environments the issuance of additional government bonds can even lead to a 'crowding-in eff ect' and be welfare enhancing. As (idiosyncratic) uncertainty increases, the welfare improving eff ect of higher government debt also increases. Note that unlike the stan-
dard (New-) Keynesian argument this reasoning does not rely on price stickiness and a zero lower bound on nominal interest rates" (3).

I'm looking forward to working through some of these models, thinking about the set-ups and implications more carefully, and bringing my questions to Princeton.

Thursday, August 16, 2012

The First Crash

My list of books I want to read is too long already, but I couldn't resist stopping to browse in Half Price Books today, and once there, buying "The First Crash: Lessons from the South Sea Bubble" by Richard Dale. I'm a sucker for history books that include old poetry and lyrics from the time period, and Dale's first chapter is generously peppered with it. Here's one gem:
So great a Universitie,
I think there ne're was any;
In which you may a Scholar be
For spending of a Penny
The Universities that this anonymous poet was referring to in 1667 were the coffee houses. To begin to explain the crash of the South Sea Bubble in 1720, Dale must begin by describing the coffee houses of late seventeenth and early eighteenth century London, "an amalgam of open-plan office, internet cafe, post office, pub and newspaper library" (13).

The coffee house phenomenon revolutionized social habits and the consumption of both beverages and information. In fact, the coffee houses remind me quite a lot of the Internet. Couldn't the above poem just as easily refer to us bloggers with our reams of armchair commentary?

The coffee houses also changed the business of news and challenged the business model of traditional newspaper proprietors. Newspaper proprietors argued that coffee houses were depriving them of subscription revenue by allowing multiple customers to read an issue without all being subscribers. (Sound familiar?) Information is both valuable and non-rival, so the market for it is contentious. Moreover, the coffee houses' informal private post system was more efficient than the official Post Office, as email and Facebook seem to be today. Coffee houses, like the Internet, also called to question the freedoms of speech and the press, and prompted new laws and regulations.

Most of all, the coffee house revolution and the Internet revolution both changed the was we socially interact with information. In 1674, "The Women's Petition Against Coffee" argued that coffee made men idle and impotent, much as many women today feel about mainly-male online "vices" like online gaming, or the way we all wonder what we're doing spending so much time interacting through a screen. Individual coffee houses came to be associated with particular types of clientele: houses for literary wits, for learned scientists, for lawyers, etc. So people socialized and shared and interacted over the news with other people like themselves-- much like we tend to read the news stories that our own social groups share with us or read blogs by people who think more or less like we think. The fact that we can custom tailor our news exposure to our own interests is a source of both excitement and criticism; it helps us in the necessary task of filtering information, but limits the breadth of our exposure.

The coffee houses, like the Internet, changed the way finance was conducted. Financial markets are markets in information. So it is important to realize that information exists in a social, political, and cultural context. It is how we interact with it; it is inseparable from its transmission. I think this will be essential to understanding financial crises.

I am curious to read on and see what Dale had to say, back in 2004, about lessons from the South Sea bubble, now in light of the most recent financial crash. If it is interesting, which I expect it to be, I will post more.

Wednesday, August 15, 2012

Reading Lists

I took the economic history field exam today. Five essays in three hours meant a lot of rushed writing! I felt comfortable that I knew the subject matters and hope I was able to make my points clearly despite the rush. The exam covered the reading list from the first year economic history course taught by Brad Delong and Barry Eichengreen and from Eichengreen's European Economic History course.

So it was interesting to see that Eichengreen composed a summer reading list for Europeans, published at Project Syndicate. I have only read part of one of the four recommended books-- several chapters from Friedman and Schwartz' s A Monetary History of the United States. In fact, I discussed it on my field exam (probably incoherently, since I was down to the last 20 minutes!) I hope to get to the Kindleberger book at some point, but I've still got to finish Eichengreen's Golden Fetters for my book club, and a few more of his books that I bought.

I'm also on a Russian literature kick. This summer I read, and was blown away by, Anna Karenina by Tolstoy. I think it is worth a future post. Now I am reading Pnin by Nabokov, which is more laugh-aloud funny than Anna Karenina.

Monday, August 13, 2012

American Exceptionalism: A Sequel

A few posts ago, I wrote about American Exceptionalism. For economic historians, this typically refers to the United States' industrialization and efficiency gains in the second half of the nineteenth. Economic historians refer to the first two thirds of the twentieth century  as the "American Century," due to the United States' considerable edge in productivity and wealth over the rest of the world. The American Century is thus the conceptual and chronological sequel to American Exceptionalism.

I previously explained how the concept of American Exceptionalism had become a rallying cry for Republican politicians. So too for the American Century. Here's Mitt Romney:
In 1941, Henry Luce called on his countrymen -just then realizing their strength - "to create the first great American century." And they succeeded: together with their allies, they won World War II, they rescued Europe, they defeated Communism, and America took its place as leader of the free world. Across the globe, they fought, they bled, they led. They showed the world the extraordinary courage of the American heart and the generosity of the American spirit...

Like a watchman in the night, we must remain at our post - and keep guard of the freedom that defines and ennobles us, and our friends. In an American Century, we have the strongest economy and the strongest military in the world. In an American Century, we secure peace through our strength. And if by absolute necessity we must employ it, we must wield our strength with resolve. In an American Century, we lead the free world and the free world leads the entire world.
Again, economic historians have to look for explanations other than the "extraordinary courage of the American heart and the generosity of the American spirit." Explanations of American Exceptionalism in the late nineteenth century largely focus on factors within the U.S.: factor endowments, technological development, railroadization, education, and so on. For the American Century--which included both world wars and the Great Depression-- international explanations are in order.

A few other grad students and I currently have a book club on Barry Eichengreen's "Golden Fetters." We read and discuss a chapter per week, and are on chapter 9 now. It has me convinced that the international monetary system, and especially the gold standard, is a key thread to understanding those remarkable decades. The pre-WWI gold standard worked well because of credibility and international cooperation. Eichengreen's intuition for political economy is strong, and he carefully traces why credibility and cooperation were sustainable before WWI but not in the interwar period.

The war greatly strengthened the U.S. balance of payments. Germany paid reparations to the Allies, who in turn repaid war debts to the U.S. American lending to Central Europe and Latin America rounded the circle of capital flows. But the balance of the whole system hinged on the U.S. keeping domestic interest rates low to encourage American gold to flow abroad. And for awhile, this worked just fine. The U.S. was more than happy to maintain low interest rates when it was also convenient for their domestic goals. However, starting in 1928, around the time of the Wall Street boom, Federal Reserve officials decided to tighten monetary policy, which curtailed foreign lending. To stay on the gold standard, other countries had to respond drastically, causing the U.S. downturn to both spread and deepen. The "golden fetters" also prevented policymakers from injecting liquidity into the banking system to contain bank runs. I strongly recommend reading at least the first chapter of Golden Fetters for more. The book is filled with examples of cooperation and coordination failures in the interwar period.

Anyhow, by the mid 1930s most countries dropped off of the gold standard and finally began to recover. The U.S. economy grew rapidly, save for a downturn in 1937-38. After that, monetary expansion in the form of huge gold inflows stimulated the economy. The gold inflows were at least in part due to fears of another war on European soil, causing capital flight from Europe. After WWII, the dollar was the dominant currency for international transactions and reserves. The Bretton Woods agreement of 1944 established a system of fixed exchange rates based on gold valued at $35 per ounce. Both world wars, then, were inadvertently beneficial to the United States relative to other countries. And our Great Depression was detrimental to the rest of the world. So it is hardly surprising that the United States' relative productivity and wealth grew in this era. Or that by the mid 1960s, Japan and Europe began to narrow the gap, and that Bretton Woods collapsed by 1971.

I will try to add more in future posts about what was going on in the American Century. So far it is not apparent that we want to repeat it. But maybe there are some features of the American Century worth striving for. For now I need to get back to studying for my economic history field exam on Wednesday. Today was macro-- quite difficult, a heavier than expected emphasis on stochastic dynamic programming.

Thursday, August 9, 2012

Field Exams

My field exam in macro is on Monday and in history is on Wednesday. It is crunch time now! It is also exciting to see the new crop of first year students in the midst of "math camp." Studying for fields makes me realize how much I have learned and changed since I arrived in Berkeley this time two years ago. Even looking back at old blog posts and seeing how my interests have changed is pretty surprising.

One perk of being a third year is that I now have a shared office! Like all of the grad student offices in Evans, it has no windows. So typically I prefer the P-Room with its nice big windows overlooking the bay. But it is nice to have a quieter spot sometimes, and also convenient to be able to leave stuff there (e.g. a week's worth of potatoes for lunches).

Sunday, August 5, 2012

How to Rock at Attending Seminars

Attending an economics seminar is not a passive endeavor. It took me two years of attending seminars to start to get the hang of how to attend seminars. Here are a few tips, especially for new grad students. The first two tips are "necessary but not sufficient." The third is the golden rule. The rest are more practical, with a few just for women at the end.

(1) Know your stuff.

Obviously, if you want to be good at attending economics seminars, you should want to be good at economics. Prioritize classes and learning, in your first year especially. For newer grad students, you don't have to know all the fanciest models to contribute at a seminar. Understand the basics really well. Identification, endogeneity, robustness--these are some of the crucial things that need to be discussed at seminars, and you learn about them right from the start, so learn them well. After first year, learn your fields well. This includes learning the main themes, the seminal papers, the important open questions.

(2) Know you know your stuff.

If you followed tip number 1, you are qualified to be an active participant in the seminar. Other members of the audience know more than you, but don't be intimidated to make a comment or question when you know what you're talking about. But know that the speaker knows their stuff too, especially on their own research topic, so phrase things in a way that sounds polite, suggestive, confident but not over-confident.

Here is the golden rule:

(3) Speak for the right reasons.

This probably requires that you be in academia for the right reasons. Remember that admissions essay you wrote about how you want to study economics so you can prove how smart you are and gain power and admiration? No, of course you don't, because you wrote about how you want to contribute to the state of knowledge and improve our understanding of the world for the benefit of society. Keep that in mind. You do not go into a seminar to impress people. You go into the seminar to learn and to be part of the collaborative process that is academic research. Don't try to find flaws, try to find improvements. And if you do want to impress people, it is more impressive (both to the speaker and to the rest of the audience) to give someone a suggestion that can improve their paper than to point out how flawed their paper is.

Now for the practical tips!

(4) Sit where you can see and be seen.

You're all ready to be an active participant. So why are you in the very back row? Sit where you can see and hear what is going on. Sit where you can get the speaker's eye if you have something to say. Sit near someone that is good at attending seminars, maybe an older student you really admire. That can help you stay more focused. Also, introduce yourself to the person sitting next to you if you don't know them. Name, department, year.

Since you will be seen, look presentable. We're not in business school, and I know we don't have tons of time to play dress up, but putting on slacks and a decent shirt doesn't take longer than old jeans and a t-shirt. When I started grad school I was 21, and in jeans and a tshirt looked 17. It's hard to get called on if you look like you got lost on your way to high school.

(5) Don't try to multitask, not even a little.

Sitting where you can be seen will also make you less tempted to multitask. You won't get half as much out of a seminar if you try to do anything else at the same time. First year, whenever I tried to do problem sets or skim class notes during seminars, I didn't follow along well at all. Even checking email or something mindless will keep you from being focused enough to be an active participant. Don't have an ipad or phone out, and definitely not a laptop. If you feel the need to multitask because you are so busy, then you probably should not go to that seminar. If, on the other hand, you want to multitask because the seminar is boring, you should pay even more attention to the seminar and ask yourself: What is or could be interesting about this research? If you really pay full attention and keep thinking about that, you will likely not be bored and will likely have interesting ideas and expand your horizons.

(6) Use appropriate timing.

Don't raise your hand or shout something out whenever an idea strikes you. If you have a question or comment directly related to a particular slide, try to raise your hand near the end of the slide. If you think of something related to a few slides back, or something either really specific or really general that is not directly relevant to the current slide, wait until the end of the presentation. If the speaker is getting pressed for time and is trying to speed up, be respectful of that and don't raise your hand unless it's really important.

(7) Attend more seminars.

It takes practice! They will get less stressful and more enjoyable. Don't just attend the crowded seminars with well-known speakers. Plus, you will start to get to know the other "regulars."

Tips especially for women:

(8) Bring layers. 

A lot of women tend to get colder than men. The room will be mostly men, who will keep the windows open even when it is freezing outside. The temperature in Evans Hall, and likely in many public universities, is a highly volatile stochastic process harder to forecast than the stock market. Prepare for multiple contingencies. You may get too cold to think straight unless you bring a sweater or two. Hang a sweater over the back of your chair so you don't have to dig around through your bag disruptively in the middle of the presentation.

(9) Attend other women's seminars.

Make a special effort to attend seminars with female speakers. At the macro seminar, I am sometimes the only woman in the audience. If a woman is going to present, I don't want her to have to face a room entirely full of men. Sorry men, I just don't. Plus, women tend to have slightly different presentation styles than men, and it can be useful to see what works and what doesn't. You might learn some lessons for when you give a seminar.

Saturday, August 4, 2012

American Exceptionalism, Then and Now

I am currently studying for my field exams in macroeconomics and economic history, which are on August 13 and 15. At Berkeley, we take field exams after our first two years in the PhD program, in two fields of our choice. Each field exam is a three hour written exam and can cover any of the papers, books, models, and techniques from your courses in that field as well as general knowledge associated with that field. So I have been revisiting the reading list from 210A, the economic history course taught to first years by professors Barry Eichengreen and Brad DeLong. The course was structured to cover a different theme each week. One week, the theme was "American Exceptionalism." In honor of the Olympics, let's have at it!

The phrase "American Exceptionalism," originally coined by Stalin in derision, carries a variety of connotations depending on who says it and in what context. In 2009, at the NATO Summit in Strasbourg, France, President Obama said, "I believe in American exceptionalism, just as I suspect that the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism." This provoked outrages from the likes of Herman Cain, who wrote:
"Let me be clear," President Obama: America is the greatest nation on Earth. We are not just any other nation, and we are certainly not analogous to our friends in Europe and elsewhere.
For economists, American exceptionalism means something a little more precise than how much you love America. In the context of the history course, American exceptionalism refers to the differences in American industry and manufacturing, particularly compared to Western Europe, that arose in the mid-nineteenth century. In the eighteenth century, Britain was far ahead in terms of industrialization and productivity, but the U.S. accelerated in the nineteenth, and by the end of the world wars was the global leader. In 1853 and 1854, two small groups of British men visited the United States and reported back to Parliament on American industrial establishments, manufactures, and machinery. They were quite impressed with the efficiency and all the "labour-saving" machinery they saw.

The visitors gave four possible explanations for the differences of the American system: (1) labor scarcity in the U.S., (2) the extent of the American market and the introduction of railroads, (3) the education of the American workman, and (4) the energy of the American people.

The first explanation, labor scarcity, was also the first to appeal to economists studying the issue. At first it seems pretty obvious that since labor was relatively scarce and land abundant in America in those days, the real wage was high, so labor-saving technology was be used. This is essentially what Erwin Rothbard claimed in his article "Causes of the Superior Efficiency of U.S.A. Industry as Compared with British Industry," published posthumously in 1946. H.J. Habakkuk formalized the argument somewhat in 1962. The "Habakkuk hypothesis" is that labor scarcity induced mechanization, the adoption of labor-saving technologies, and innovation. Then in 1966, Peter Temin showed that the hypothesis didn't hold up to scrutiny. (I got to have lunch with him last year. Cool, huh?)

Other economists have taken on the second explanation: the extent of the American market and railway. Alfred Chandler (1990) says that the U.S. was able to become the "seedbed of modern managerial capitalism" prior to World War I because its large geographic size and rapidly growing domestic market allowed economies of scale and scope. But Leslie Hannah (2008) argues that Europe, especially northwest Europe, was a larger and more integrated market at the turn of the 20th century than the U.S. The U.S. used rail much more than Europe, but Europe had more ships, especially for intra-European trade, and lower long-haul costs per tonne-km. Road transport was the main bottleneck, and for this Europe had an advantage by having less average distance between railheads. Americans were more dependent on horses. Tariffs in Europe were low, and there was an enormous volume of intra-European trade before World War I. Moreover, Hannah finds that giant plants (with 1000 or more workers) were basically as common in parts of Europe as they were in the United States. So the explanation that the U.S. had scale advantages may not hold up.

So far we have seen a supply-side view (based on factor endowments: land, labor, and capital) and a demand-side view (based on market size). Neither is "case closed" yet. In fact, the papers I have read only leave me more confused. The British visitors' third explanation, American education, would fall under the category of institutions, while the fourth explanation, American "energy," would fall under the more vague (to economists) category of culture or "other." These are the big four. Supply, demand, institutions, and culture. Explanations for most phenomena in economic history fall into one of these four categories. And from what I've seen, the fourth is the least accepted among economists and the most accepted among "laypeople." For an economist, it seems like cheating to explain anything by cultural differences, unless you in turn explain the cultural differences (a la Greg Clark's controversial hypothesis of genetic superiority in the countries that were earliest to industrialize). But culture really resonates with people. Bringing us back to Herman Cain:
We are blessed with unparalleled freedoms and boundless prosperity that for generations have inspired an innovative and industrious people. America is exceptional.
Or see Newt Gingrich's book, A Nation Like No Other: Why American Exceptionalism Matters.

Exceptional character, innate exceptional energy and drive, is the one kind of exceptionalism that can last. If either factor endowments or market size explains American exceptionalism, well, globalization means that factors flow and markets get integrated, which means nobody gets to be too exceptional for too long. That's not necessarily a bad thing. It's good for everyone if the rest of the world also becomes more productive. In fact, the freer the market, the faster the flow. So if you're a politician who's staunchly free market and wants America to maintain a huge productivity lead, to avoid a contradiction in terms, you've got to pray that there is something exceptional innate in the American culture and spirit. Maybe that's why talk of American exceptionalism had a huge surge under Reagan (wow, speeches used to be much better written!)

Most Americans believe this too-- 80%, according to a 2010 Gallup poll, believe that "the U.S. has a unique character that makes it the greatest country in the world." The dismal scientist in me sighs.

Monday, July 2, 2012

The Investment Tax Increase in the Affordable Care Act

On Thursday,the Supreme Court upheld the Affordable Care Act. One component of the Act is a 3.8% increase in the investment tax, starting on January 1, 2013. For filers with joint income above $250,000, or single filers with income above $200,000, the tax rates on long-term capital gains and dividends will increase from 15% to 18.8%. At first glance, this sounds like a horrible idea in an economy trying to recover from a recession. (In fact, my first reaction upon hearing about it was to exclaim, "That's a horrible idea in an economy trying to recover from a recession!")

If I have learned one thing in economics so far, though, it's that first glances never suffice. So here are a few ideas I'm considering on my subsequent glances.

Everyone learns in their first economics class, if not sooner, that fiscal policy is distortionary. Government spending and taxes distort the efficiency-inducing incentives of the free markets. Most people also learn that not all free markets are efficient; in cases of market failure, the government can and should improve upon market outcomes. And at least some people learn that efficiency isn't the sole priority of a society. We also need some notion of equity, and here too, the government probably can and maybe should improve upon market outcomes.

All this tells us so far is that some amount of taxes are needed. Where should they come from? Macroeconomists have been studying this question for years. The basic framework for analysis, called a Ramsey model, supposes that a government can choose tax rates on capital and labor so as to maximize welfare of a representative private citizen, while financing a given level of government spending. The model's canonical result (the Chamley-Judd result) is that the optimal capital tax rate is zero. The full tax burden should fall on labor income. 

The reason an investment tax sounds like such a bad idea at first glance corresponds to the intuition behind this result. Taxes on labor and on capital are both distortionary, but taxes on capital are worse because of the intertemporal nature of investment. Investment decisions at any point in time affect the capital stock at all future points in time.

The Chamley-Judd result is based on a very simplified model of the economy, but is nonetheless a useful starting point from which to depart. One simplification in the model is the assumption of a representative agent, basically meaning that we can act as if there is a single "typical" household (or lots of households whose aggregate preferences "behave" like a single household). This is one of the most common, and often one of the most useful, assumptions in economics. However there are some situations where it is not a useful assumption-- situations in which distribution matters for aggregate outcomes. Some of the literature on the recent financial crisis and recession is recognizing the essential role of heterogeneity of indebtedness. In other words, we can't hope to understand the recession unless we have at least two representative households in the model, creditors and debtors. Aggregating over household types in this dimension gives qualitatively different results about the outcomes of economic policies. (I promise I'll get to the investment tax soon...)

A primary example is the work of Atif Mian and Amir Sufi, summarized here. They find that the recession is largely attributable to household debt constraints. 

The basic argument, laid out in a series of studies, is this: When highly indebted households experience a shock to their credit availability that necessitates deleveraging, their decline in consumption and efforts to pay back debt push interest rates down. In a well-functioning flexible-price economy, interest rates would decline to the point where households with healthy balance sheets would be induced to increase their consumption, thereby making up for the reduced purchases of the over-levered households.
But what happens if real interest rates need to fall dramatically -- even go negative -- to boost the economy? The existence of currency prevents the nominal interest rate from going below zero, which effectively limits real interest rates from getting low enough unless the economy experiences substantial inflation. So even though interest rates for financially healthy individuals are historically low, they need to get even lower to induce those consumers to buy a car or remodel their kitchen. In such an environment, the economy will be stuck in an equilibrium where household demand for goods and services is depressed by a real interest rate that isn't sufficiently low.
Many economists use this framework to justify fiscal stimulus, but they may be missing the point. In both the data and the theory, the critical problem is the high level of debt in the household sector. So why doesn’t macroeconomic policy directly combat this problem?...[The practical problem is that] a successful principal writedown program must be targeted at  households whose consumption behavior would be materially changed. Unfortunately, such a program is difficult to design. What is more likely to happen is that all underwater homeowners would line up for relief

Heterogeneity of agent balance sheets severely limits the efficacy of standard fiscal and monetary policy solutions. Mian argued before the Senate subcommittee on Financial Institutions and Consumer Protection that transfers from creditors to debtors (e.g. principal writedown programs), and the eventual replacement of non-contingent with contingent debt, is the only policy that can be truly effective in such a situation. If we can overcome the practical (and political) problem of transferring some money from creditor households to debtor households, we can escape this low equilibrium. (This, at first glance seems radical and crazy. Probably did to the Senators too. But it is not historically unprecedented, and after carefully reading and replicating Professor Mian's papers for a class, I became more and more convinced that it might not be crazy. It is radical, and it's about time, too.)

Finally, back to the investment tax. Who will pay that extra tax? High income households who are earning dividends and capital gains, i.e. creditors. Who are the major beneficiaries? Recipients of the expanded Medicaid system. People not previously covered, who will now be added to the rolls, are highly likely to be debt constrained. First, they have low income: less than $29,328 for a family of four. Second, their lack of coverage can be both a cause and a symptom of problematic balance sheets. A household that is struggling to make its mortgage payments may forego health insurance. Healthcare costs are a leading contributor to problematic household debt. So an increase in the investment tax that funds Medicaid expansion may be precisely what Mian and Sufi prescribe.

I am not saying that this guarantees that the tax will be a good thing. There are a lot of other factors to consider (possibilities of gaming the system, uncertainty for investors, etc.), and without empirical evidence it is impossible to weigh them. I am merely saying that my first reaction to the tax, one of unambiguous dismay, was unjustified.

I am unqualified to say much about the Affordable Care Act as a whole, other than this: Efficiency is more complicated than it seems, and that's why we need economists. Equity and social justice are more complicated still, and that's why we need diverse economists, informed citizens, religious activists, civil rights activists, philosophers, theologians, wise leaders, open minds, and prayers. 

Sunday, May 6, 2012

An Oversight in Krugman's End This Depression Now

I started reading Paul Krugman's new book, End This Depression Now!, and felt compelled to point out one problematic remark from the first chapter. In chapter 1 he writes, 
"Clearly what we're interested in is involuntary unemployment. People who aren't working because they have chosen not to work, or at least not to work in the market economy- retirees who are glad to be retired, those who have decided to be full-time housewives or househusbands- don't count. Neither do the disabled, whose inability to work is unfortunate, but not driven by economic issues."
The problem is the last sentence. In fact, for people with disabilities, unemployment may be even more sensitive to economic issues than for others. People with disabilities may be the first to be fired when the economy makes a turn for the worse and the last to be hired when things begin to improve. The employment gap between men and women with and without work- related disabilities has increased over the past 20 years, reaching its largest ever recorded in 2009. Many people with disabilities are willing and able to work with sufficient accommodation. Often a small and relatively inexpensive change is all it takes. Since Krugman supports government spending and investment projects to End This Depression, why not target some of it towards workplace inclusion? Entrepreneurship and virtual or otherwise nontraditional work situations may also be viable--and productive-- options. These issues are all topics of a report of the National Council on Disability called "The Power of Digital Inclusion: Technology's Impact on Employment and Opportunities for People with Disabilities." I worked on the report while at the Center for Advanced Communication Policy at Georgia Tech.

Long-term unemployment, Krugman writes, is "deeply demoralizing for workers," and "the blow to dignity and self-respect can be devastating." Krugman's book is poignantly dedicated "to the unemployed, who deserve better." What an unfortunate carelessness to exclude the disabled even in the first few pages! 

One translation of an often cited Bible verse is "He who does not work, shall not eat" (II Thessalonians 3:10). Another translation of what Paul wrote to the early Christians is "He who is not willing to work, should not eat." Nowadays there is a distinction, but back then the translations would be equivalent. Involuntary unemployment was not a common part of the human experience. In pre-industrial society, farmers farmed and fishermen fished and servants served. But it was not the case that the "labor market" "failed to clear," leaving people involuntarily unemployed.

In fact, the rare biblical cases of involuntary unemployment mostly involve people with disabilities-- blind, deaf, lame, or lepers. They do not work, but Paul and the apostles do not argue that they shouldn't eat. Rather they spread Jesus' message of charity and compassion. This is the Christian attitude toward involuntary unemployment, not an attitude of "let them starve." Jesus' interactions with the lepers teach that they have human dignity, in an era when it was widely believed that disability was a punishment for sin.

When medicine, technology, and social understanding evolved enough to make it possible for people with disabilities to work, Christian teaching promoted this. Krugman cites Ben Bernanke and some happiness studies as his source that work lends dignity to human life, but this message was spelled out emphatically in 1981 in Pope John Paul II's "Laborem Exercens" ("On Human Work"). Laborem Exercens includes a section on disability.

Recently, national communities and international organizations have turned their attention to another question connected with work, one full of implications: the question of disabled people. They too are fully human subjects with corresponding innate, sacred and inviolable rights, and, in spite of the limitations and sufferings affecting their bodies and faculties, they point up more clearly the dignity and greatness of man. Since disabled people are subjects with all their rights, they should be helped to participate in the life of society in all its aspects and at all the levels accessible to their capacities. The disabled person is one of us and participates fully in the same humanity that we possess. It would be radically unworthy of man, and a denial of our common humanity, to admit to the life of the community, and thus admit to work, only those who are fully functional. To do so would be to practise a serious form of discrimination, that of the strong and healthy against the weak and sick... 
The various bodies involved in the world of labour, both the direct and the indirect employer, should therefore by means of effective and appropriate measures foster the right of disabled people to professional training and work, so that they can be given a productive activity suited to them. Many practical problems arise at this point, as well as legal and economic ones; but the community, that is to say, the public authorities, associations and intermediate groups, business enterprises and the disabled themselves should pool their ideas and resources so as to attain this goal that must not be shirked: that disabled people may be offered work according to their capabilities, for this is demanded by their dignity as persons and as subjects of work. Each community will be able to set up suitable structures for finding or creating jobs for such people both in the usual public or private enterprises, by offering them ordinary or suitably adapted jobs...
Careful attention must be devoted to the physical and psychological working conditions of disabled people-as for all workers-to their just remuneration, to the possibility of their promotion, and to the elimination of various obstacles...

This was in 1981! (And the rest of the document is equally far ahead of its time). Over 20 years ago, the Church proclaimed that unemployment of the disabled is involuntary unemployment and contrary to human dignity. Now Paul Krugman, who may or may not have a larger readership than the Pope, is finally proclaiming that involuntary unemployment is contrary to human dignity, but has to add the unfortunate aside: the disabled don't count.


Tuesday, April 24, 2012

Unsecured Consumer Credit with Risk of Default

Here are my slides for a presentation I'm giving tomorrow on a paper by Chatterjee, Corbae, Nakajima, and Rios-Rull called "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default" (Econometrica, November 2007). It is a very technical paper that incorporates the main characteristics of U.S. consumer bankruptcy law into a general equilibrium model.

The paper represents a relatively recent trend of taking household balance sheets seriously in macroeconomics. Macro models commonly abstract away from household debt, assumed that since one person's assets are another person's liabilities, in the aggregate it washes out. But as Chatterjee et al.'s paper and others by Mian and Eggertsson and Krugman show, the distribution of household debt matters a lot, especially when thinking about the effectiveness (or lack thereof) of various types of fiscal, monetary, and other policies in a recession.

Tuesday, February 21, 2012

The Economics of Structured Finance

For anyone interested in the financial crisis, I thought I'd try to summarize a paper I just read for my Empirical Macroeconomics and Finance course. The paper is called "The Economics of Structured Finance," by Coval, Jurek, and Stafford, 2009, in the Journal of Economic Perspectives, Volume 23, Number 1.

Structured finance is the pooling of economic assets and subsequent issuance of a prioritized capital structure of claims, called tranches, against these collateral pools. The prototypical example of a structured finance security is a collateralized debt obligation (CDO).

A reason that the practice of structuring securities arose was to allow the tranches to be rated by the credit rating agencies so that they could be comparable with single-name securities or corporate bonds. Securities involve a complex mix of risks. Adding the prioritization structure creates “safe” assets at the high priority senior tranches. Senior tranches only absorb losses after the junior claims have been exhausted, which allows senior tranches to obtain credit ratings in excess of the average rating for the whole collateral pool.

For example, consider two bonds, both with default probability p. Both pay $0 in case of default and $1 otherwise. You could pool them into a $2 fund, and then form a junior and senior tranche. The junior tranche pays $1 if both bonds avoid default and $0 if either bond defaults. The senior pays $1 if neither bond defaults or if only one out of two bonds defaults; it pays $0 if both bonds default.

The recent financial crisis involved the discovery that the “safe” manufactured tranches were actually far riskier than advertised. Even AAA rated securities defaulted with reasonable likelihood. When this was finally realized, in late 2007 and 2008, investors stopped buying structured finance products. How did the credit rating agencies get it so wrong?

Notice that in the example above, the risk of default for the senior tranche depends on the correlation between bond defaults. If the bond default probabilities are uncorrelated, then the senior tranche defaults with probability p2

Next, the authors look at the relation of structured finance to subprime. Government- sponsored agencies such as Fannie Mae, Freddie Mac, and Ginnie Mae were chartered to purchase mortgages originated by local banks that satisfy certain size and credit quality requirements. They repackage these conforming mortgages into mortgage-backed securities to be resold in capital markets with the implicit guarantee of the U.S. government. Mortgages that fall below the credit standard (“subprime”) were packaged into “private-label” mortgage-backed securities, which in turn were resecuritized into structured finance CDOs. So there were two levels of structuring, and a lot more correlations to worry about, which were not properly accounted for. The ratings also didn't take into account systemic risk, which structured finance was particularly susceptible to. Typically, securities that are correlated with the market as a whole should offer higher expected returns, since it is less valuable to have an asset that will pay well when times are good and pay poorly when times are bad, than vice versa. The systemic risk of the structured finance products was underestimated.

The authors don't place all the blame on the credit rating agencies. They partly blame some perverse incentives, and also a regulatory guideline saying that banks holding AAA-rated securities were required to hold only half as much capital as was required to support other investment-grade securities.This distorted the demand for AAA-rated securities, and fueled a lot of the effort to create an imprudently large volume of structured financial products.

Wednesday, January 18, 2012

After the Crisis

An interesting reading to kick off the semester warns of "the dangers of presuming a precision and degree of knowledge we do not have." The article, by Ricardo Caballero, is called "Macroeconomics after the Crisis: Time to Deal with the Pretense-of-Knowledge Syndrome," and appeared in the Fall 2010 Journal of Economic Perspectives.

Caballero, who is an MIT professor, writes that "On the methodological front, macroeconomic research has been in 'fine-tuning' mode within the local-maximum of the dynamic stochastic general equilibrium world, when we should be in 'broad-exploration' mode."

Basically, the general approach to macroeconomics these days is to begin with a stochastic neoclassical growth model-- a basic model of households and firms that everyone learns at the beginning of grad school-- and tack on some special effects, like money, monopolistic competition, or nominal rigidities. The problem is that "by some strange herding process the core of macroeconomics seems to transform things that may have been useful modeling short-cuts into a part of a new and artificial 'reality,' and now suddenly everyone uses the same language, which in the next iteration gets confused with, and eventually replaces, reality.
Along the way, this process of make-believe substitution raises our presumption of
knowledge about the workings of a complex economy."

We try to make incremental improvements to the model, adding a parameter here and there, but actually bring it further and further from reality by compounding absurd assumptions. "In realistic, real-time settings, both economic agents and researchers have a very limited understanding of the mechanisms at work. This is an order-of-magnitude less knowledge than our core macroeconomic models currently assume, and hence it is highly likely that the optimal approximation paradigm is quite different from current workhorses, both for academic and policy work. In trying to add a degree of complexity to the current core models, by
bringing in aspects of the periphery, we are simultaneously making the rationality
assumptions behind that core approach less plausible."

Caballero makes a distinction between uncertainty and Knightian uncertainty. The latter involves risk that cannot be measured and hence cannot be hedged--things you'd never think of thinking of. This is the kind of uncertainty that is involved in most crises and panics. In one sense, it is very discouraging that novelty and surprise is such a big part of financial crises, for then, how can we ever hope to model or understand them? On the other hand, there are nevertheless some insights: widespread confusion triggers panics which trigger demand for broad insurance (and a role for government). Macroeconomists need to embrace complexity and recognize that human reaction to the truly unknown is fundamentally different
from reaction to the risks associated with a known situation and environment.

Last semester, I took a course in Psychology and Economics with Matthew Rabin. The types of models we studied there captured things like belief-based or reference-dependent preferences, ego utility, social preferences, and framing and bracketing effects. All of these tweaks to the standard models are made for the sake of increased realism, but still, they are just tweaks. Usually they involve adding a nice Greek letter to the model. The standard model is a special case for which the Greek parameter is 0 or 1. Agents are allowed to have particular types of risk preferences, but the risks can always be measured, and in fact the models almost always impose rational expectations. Rational inattention is allowed, but Knightian uncertainty is not; agents are perfect Bayesian updaters with well-defined Bayesian priors. In this sense, as Professor Rabin describes in the syllabus, the course is "purposely, pointedly, persistently, proudly and ponderously mainstream."

Caballero says we need to go further from the mainstream and into areas like complex-systems theory and robust-control theory. In doing so we may need to "relax the artificial micro-foundation constraints imposed just for the sake of being able to generate 'structural' general equilibrium simulations."

This semester, I have one course that teaches precisely the methodology that Caballero so harshly criticizes. It's a theory-intensive course in macroeconomics, and the main textbook is Recursive Methods in Economic Dynamics by Stokey and Lucas. I'm excited to balance this course with a new course called Empirical Methods in Macroeconomics and Finance taught by Professor Atif Mian. This course will focus on new ways to integrate finance and macro. We will also get to learn about some new data sets and work at developing research ideas. Yet another complementary course will be Professor Barry Eichengreen's European Economic History course. Theory, empirics, and history sounds like a balanced mental diet for this semester.