The Stimulus is Favoured by most economists

The IGM Forum produces a poll of a sample of the world's top Economists on a variety of issues. The sample includes a wide variety of opinions, including Alesina, Goolsbee, Acemoglu and many others. The results are supposed to be a quick glance at how the economics profession feels about any given topic. The sample size is 40, for obvious Central Limit Theorem / Law of Large Numbers related reasons. (The short version is that 40 is about the number when a population sample tends to become reliably reflective of the wider population, provided that you're not distinguishing the sample by too many variables).

This is just one of many, many interesting results. The overwhelming consensus among economists is that the stimulus created jobs. More importantly, I suppose, it is also by far the most commonly held view that the benefits outweighed the cost. 78% of those expressing an opinion pro or con said the benefits outweighed the costs. It is worth saying here however that the sample size is somewhat small, since almost 1/3 of those asked did not express a firm opinion either way.

We are all in this together, but some of us are more in it than others

This graph requires no explanation.

Be Careful with Correlations

Hello one and all,

A friend of mine brought to my attention a blog post from Mike Webb (also a friend), arguing that there was a crisis in confidence in the UK Government. The blog post is a good attempt at rigour, but I'm afraid Mike fell into a simple trap.

The argument is expressed in detail here but I think a not unfair summary is this:

1. Uk Government yields have been closely correlated with Yields from European nations..
2. In the months leading up to May 2010, there was a steep dropoff in that Correlation
3. The most natural explanation for that is uncertainty over the outcome of the election.

Statements 1 & 2 are both true, and statement 3 seems reasonable at first glance. So I can say that I liked the blog post. I particularly liked the effort he went to to double check his findings by comparing across multiple regions - UK compared to Germany, France, Italy etc.

Unfortunately his conclusion, that there was mounting suspicion over UK solvency has only a very superficial link to the data. His predictions entail maximally that UK Government Yields climbed in these months. Minimally, his explanation entails that UK yields behaved in a way that was at odds with a wide range of countries in those months.

With a Bloomberg machine able to run correlations he checks only the correlations between different Governments' yields. Unfortunately, he doesn't bother to show us what happened to the actual yields themselves.

Here are UK Yields in the relevant time period (click on the image to see it blown up):

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From the graph, we see that over the period UK yields moved up a bit, down a bit, and actually ended the period that he is referring to (January - April 2010) at about the same level, maybe a tiny bit up.

Now here are the European Yields that he is referring to:





Yes, falling yields, implying pessimism over the economy and as yet no worries about fiscal solvency.

The absence of any rise in UK yields is at least a worry for the argument that investors were getting jittery about UK solvency, Now, one could argue, I suppose: "Well, what happens if there was some, external international event that dragged those other yields down, and would have dragged UK yields down as well, if it weren't for solvency jitters?"

Well lets look outside of Europe for a moment:





Ah yes, they all went up, slightly.

In other words, the drop off in correlation he refers to is explained only by a decline in Bond Yields in European countries. One would be very hard pressed to argue that suddenly investors got jittery over UK yields- There's no actual evidence for this in the data whatsoever.

So next time you look only at correlations, remember to actually look at the things you're correlating, before you jump to any conclusions!!!

Scattershot Thoughts

Hello all,

Sorry I did a bit of a disappearing act there for a while, you know work happened, life happened.

Anyway, I think its about time for me to pen some thoughts about the future, what with it being the first of the month and all that, a great opportunity to pontificate & predict etc.

Well, politically of course 2012 is a big year - its election time in the States. Obama vs Romney/Gingrich/Santorum/

Well, the Republicans are doing an awfully bad job of choosing their nominee this year.

Anyway, in keeping with the spirits of this blog, which is trying to use models to predict political outcomes, we have a few different models which we can bring to bear on this:

1. Median voter Theorem


2. Economic Referendum


3. The guy that's taller

So most readers of this blog will be familiar with 1. & 2., whilst 3. is the controversial theory based on the simple empirical observation that since the television was invented in the 1920s, the tallest guy has tended to win the U.S. presidential election.

Median voter theorem unambiguously predicts Obama. Obama places jobs above the deficit as his prime concern, like the majority of the population. Obama supports a balanced tax&cuts approach to the deficit, like the vast majority of the population. Obama supports action on climate change, like the majority of the American population. Obama supported the repeal of Don't ask, Don't Tell, like the vast majority of Americans. The list goes on. In fact, Obama's attempt to occupy all of the mainstream Conservative positions has been so succesful that its driven the Republican party into the fringes of its base. With a Gay Soldier being booed in a Republican debate for no reason other than being Gay. So, Median Voter Theorem definitely scores this for Obama.

The Economic Referendum theory is a bit less clear. The basic principle is that the election is treated as a referendum on how well the current president is handling the economy. Until recently, it was obvious this theory would have predicted Romney would walk away with it. However, a few tantalising hints at a recovery (but no actual recovery yet as far as I can see) would suggest that the answer is not obvious. Part of the problem is that the theory isn't as simple as "Unemployment <7% = Incumbent elected, Unemployment >7% = Challenger elected". Partly its about directional movements etc. I would say, that if the economy continues to improve and growth hits 2% +/- 0.3% then this would score it for Obama. Anything less than 1% scores it for Romney. Between 1% to 1.7% is ambiguous.

Mitt Romney is a shade taller, so the third theorem, that the taller guy always wins, would call this for Romney, by an inch.

I'm assuming Romney wins the Repub nomination, which looks likelier by the day.

2012

I wanted to use the new year as an opportunity to pen some random thoughts about the new year. This is, afterall a blog thats supposed to be 1/3 about trying to use models to forecast the future and then using the data to improve the accuracy of our models.

So here are some thoughts:


Technology:

2011 has seen some really great additions to mainstream consumer web technology. Quora began to take off but still hasn't quite managed to make it mainstream. Google Plus exploded onto the scene but since then traffic trended downwards. Facebook continued its unabated storm to glory. Airbnb also had a break this year. Its more or less consolidated its dominant position now. Dropbox is supposedly running at a mental $5 Billion valuation! From a personal perspective, my friends have finally signed up in droves to twitter.

So, I think 2012 will be another hot year for tech startups. Facebook will IPO though, which will drive stock prices through the roof for a while before it all calms down again. The startups we come across this year will find that their success is made through their ability to forge real connections between people. Android's persistent growth will eventually begin to drive Google Plus this year I think - Google plus signups will stabilise and then begin to trend upward, slowly


Economics:

Unfortunately, all economists are predicting slow growth irrespective of their school of thought. Luckily for us however, the source of that slow growth varies and so we can therefore attempt to test some of the differences in views.

• Austrians, like Ron Paul are predicting economic catastrophe, in the form of "unexpected inflation and a collapse in the value of the dollar".
  
• British Politicians across the board have been predicting anaemic growth, although for different reasons. The Labour Party Line is that the Treasury Bond yields will fluctuate with the health of the economy (bad economy = low yields, and a strong economy will see higher yields). Conservatives are saying yields will stay low provided that the economy remains on top of its deficit.
  

Opportunity Costs of the Iraq War

Some of you have seen or heard my musings on this issue before. This Quora answer seems to have gotten some traction, so I reproduced it here:

What could America have bought and built for itself with the trillions of dollars spent in Iraq and Afghanistan over the last decade?
Nobel laureate economist Joseph Stiglitz places our war costs over $5T. A NY Times infographic (http://www.nytimes.com/interacti...) puts the tally at $3.3T. Leaving aside the politics of whether our money has been wasted, what could it have bought, had it been spent at home?

$3.3 trillion is a lot of $$.

For example it is equivalent to:

$60,000 for the poorest 50% of Households. (about 57,000,000 households)

End the Eurozone crisis by paying off Greece, Italy, Spain, Portugal and Ireland's national debt. (Together, their national debt's are just over $3 tril)

Endow over 100 new Harvard Universities (Harvard's endowment is $32 bil)

Guarantee Unemployment below 5% for the next 6 years, offering $40,000 a year to volunteer for charity. (13million unemployed, 9% of country)

About 150 Manhattan Projects (each costing about $24billion)

Tax Justice

I've been asked to contribute an essay on Tax Justice to the Tax Justice network's newsletter.

Here are my first thoughts on tax justice:

1. What is the point of taxes?
2. Under what conditions will takes fulfil that point?
3. Do those conditions hold?
4. How can we change things so that they do hold?

Firstly it seems to me that the point of taxes is two fold:

1. To raise revenue, for public goods provision, and social welfare projects.
2. To deter unwelcome behaviour, and reward welcome behaviour.
3. To act as a damper on the economy in boom times, and hence to act expansionarily in bad ones.

Secondly,
1. taxes effectively promote public goods and social welfare when it is generally progressive and fiscal expenditures are subject to proper democratic control.
2. taxes act as good behavioural influences if they tax negative externalities and effectively subsidise positive externalities.
3. They act as an 'automatic stabiliser' if they are progressive.

Which of these conditions hold?
Well, my guess is taxes are very slightly progressive, thanks to income tax. But I need to look into this. It goes without saying VAT is very regressive, and I suspect taxes on Cigarettes, Alcohol etc are so too. What does the incidence of corporation tax tell us? Surprisingly, the evidence seems to be that corporation tax is regressive (evidence to follow in the article)- really enormous companies hardly seem to pay any of it and high corporation tax rates seem to be associated with lower growth numbers. This tax is very popular though, so we need to think carefully about how we use it. Fiscal expenditures are sometimes extraordinarily well controlled, whilst at other times almost no one seems to agree with them (find me a room of 20 people where 3 or more people support the CAP, and I will show you a farmers guild). Finally, taxes hit negative externalities when the special interests that produce those externalities aren't too powerful. Conversely, they promote positive externalities when the special interest who want those positive externalities are very powerful. Sometimes this works right (the Tobacco lobby has long been losing power), more generally it doesn't (a Carbon Tax in America is long overdue). In America, kids get taught how to code from a much younger age than anyone here in the UK is (most kids don't touch code -the language of the 21st Century- until you hit undergraduate, and even then, only if your doing a science subject). Why is America so far ahead of this game? ... Silicon Valley, anyone? Finally I've already dealt with the progressive issue. Since unemployment benefits are very progressive, this means tat overall fiscal policy does act as a good automatic stabiliser. It makes sense I think to look at taxes and spending together, since obviously they are related, but we have to be careful before saying tax revenue belongs to those who paid it - on the contrary, it belongs to society at large.

When it comes to getting things to work properly, we need to make sure taxation is:

1. Progressive
2. Simple
3. Non-distortionary
4. Well Targeted.

Sometimes good taxes will be regressive (Cigarettes, or Carbon Taxes for example). That means we have to be willing to use spending to offset those effects. But generally, thanks to income tax we can have a progressive tax code. A simple tax code, is good for everyone. Right now, companies are almost forced to dodge taxes- the pressures of shareholder value maximisation and the ineluctable logic of the market means you can't let your competitors get one up on you. If they're finding clever accounting tricks to avoid taxes, you sure as hell need to too. In the end, society loses. A simple code would make dodging impossible for those really keen to do it, and less necessary for those who feel compelled to. It might even reduce some of the deadweight losses associated with collecting taxes.

How do you make taxes non distortionary? A million and one views to pick through here. One that needs to be debunked is the argument that taxing millionaires is a job killer, as these people work less and produce fewer jobs. Wrong - low taxes on high income people tends, in general, to increase rent seeking, rather than production (again, evidence to follow in article). We hear a lot about the substitution effect, but hardly anyone mentions the extremely important income effect. Since income taxes are not perfectly marginal, changes in the tax rate will have both an income and substitution effect. For the richest members of society, the substitution effect will be negative on work, but the income effect will be positive. Which effect dominates? Well, probably neither - as we see, what we get instead is reduced rent seeking at higher tax rates. Broadly speaking, we want taxes to be consistent - why should corporate income be taxed so differently to personal income for example (corporate income is taxed only as 'profit', whilst household investment in things such as education, nutrition etc is totally overlooked). Why are mortgage repayments tax deductible? On the issue of well targeted, its really a case of building powerful coalitions in favour of good taxes, and this is primarily a political, not an economic, problem. These things need to be looked at very, very carefully.

I'll be thinking about these issues over the next few days. Let me know your thoughts @ ravin.thambapillai@gmail.com,