Teenage achievement and the house price bubble

The general economic context of where and when you grow up matters. Think, for example, of those raised during the Great Depression in the US or World War II in Europe who are likely to be very careful with their spending, never through anything away and finish their plates. In this regard, what should we expect from those reaching adulthood in the past years?



Daniel Cooper and María José Luengo-Prado study the impact on teenagers of the house price boom before the current crisis in the United States on educational outcomes. Using the Panel Study of Income Dynamics (PSID), they find that a 1% higher house price at age 17 leads to a 0.8% higher income as adult if the parents owned the home, 1.2% lower if they were tenants, after conditioning for socio-economic characteristics. These are big numbers. They can be justified by the observation that higher house prices allows more collateral to borrow for education. Indeed households with a below median non-housing wealth saw even a 1.6% boost in their child's future income. To explain the impact on tenants, I suppose one can explain it with higher tuition in reaction to larger loans, which tenants cannot afford as well.



The consequences from the recent house price crash are daunting in this context. And given that state are disengaging themselves from financing their public colleges, leading to even higher tuition, the outlook is even worse.

File sharing and the structure of the music market

For as long as music has existed, artists have lived from performing. The advent of packaged music (radio, TV, disk, tape or CD) has changed little to this, as the new medium has been more about promoting the artist than making money for the artist, with few exceptions. The ones making money from sales are the record companies, and the appearance on file-sharing is challenging their business model while not affecting the artist's way of living. In fact, the latter appreciate the zero marginal cost promotion. But the record companies want to survive.



Ralf Dewenter, Justus Haucap and Tobias Wenzel study the interaction of record and ticket sales under the assumption that both benefit from each other. Clearly, the impact of file sharing is ambiguous: it may increase record sales if people discover an artist through file-sharing and attend a show. But some potential sales are lost when a very close substitute is available for free. The solution for the record companies to to take over the management of concerts as well. Whether the artists want to go along with that is another question.

Do we need awards in Economics?

I do not like awards. They always create jealousies, and one cannot help that whenever a committee is involved, something may not have gone right. I am thus quite happy that economists give very few awards. It makes their CVs look bad compared to other scientists, but that is the price for a relative peace in the profession.



But we still have some prizes. The Nobel one, which is not really part of the Nobel family but is still attributed much prestige is always under much scrutiny. And in the end, the right people tend to win it. There have been a few controversial cases, Myrdal, Hayek, Buchanan and Ostrom come to mind as example where quite a few eyebrows were raised, but overall this award works well.



The American Economic Association gives an award that is considered to be even more difficult to get than the Nobel Prize: the Clark Medal, given to an American aged under 40. It is difficult to get because only one is awarded every year (no joint winners) and until recently it was given every second year. When comparing to the Nobel Prize, it is relevant to understand that American get a vast majority of them.



Now let us have a look at the past few year for the Clark award:

2011: Jonathan Levin, PhD MIT, Faculty at Stanford

2010: Esther Duflo, PhD MIT, Faculty at MIT

2009: Emmanuel Saez, PhD MIT, Faculty Harvard then Berkeley

2007: Susan Athey, PhD Stanford, Faculty at MIT then Stanford and Harvard

2005: Daron Acemoglu, PhD LSE, Faculty at MIT

2003: Steven Levitt, PhD MIT, Fellow at Harvard then faculty at Chicago

2001: Matthew Rabin, PhD MIT, Faculty at Berkeley

1999: Andrei Shleifer, PhD MIT, Faculty at Princeton, Chicago and Harvard



Do you see a pattern? Well I do, and others have, too. I am not saying these awardees are not bright and promising economists, but is there really no other qualifying economists that could have received it? Of course, John List comes to mind, who has no connection with MIT (or Harvard). But it actually worse than that. The award is given by a small committee, designated by the AEA. The AEA leadership is stacked with people with MIT and Harvard connections, so they also nominate their friends to the various committees, and you see the result.



It is even worse. In 2010, Ester Duflo was considered to be in the pool of strong candidates for the award. Guess who was on the awarding committee? Abhijit Banerjee, her PhD advisor, frequent co-author and colleague at MIT. In such a situation, an ethical person would decline the invitation to serve on the committee. That does not seem to have crossed the mind of Banerjee, who may be used to this cronyism.



There is another award, this time given by the European Economic Association: the Yrjö Jahnsson Award, to an European economist under age 45. It is given every two years, but can have several recipients. This awards has looked much cleaner because the committees and awardees have been distributed all over Europe. Europeans are indeed very sensitive to this. The last one was a shocker, though. Armin Falk won it to the surprise of many. And guess who chaired the awarding committee? His advisor, Ernst Fehr. Again, ethics would have indicated that if Falk had a chance of winning it, Fehr should have recused himself not just from chairing the committee, but from participating in it. In retrospect, this is not Fehr's first wrongdoing: two years earlier he was also on the committee when Fabrizio Zilibotti co-won the award. Zilibotti is a colleague of Fehr in Zurich.



I think we should do away with these two awards. It simply does not work.

Trust in private money

Money does not have to be supplied by government. Private money could work under some circumstances, and it has in particular been argued that competition should be beneficial. While previous attempts have failed, the wider availability of information, rating agencies (gasp) and information technology could make it happen. So it is of interest to find out what those circumstances are.



Ramon Marimon, Juan Pablo Nicolini and Pedro Teles say that money is an experience good, as you only observes its quality after the exchange is performed. This leads to serious limitations. If issuer of currency cannot commit to not inflate in the future, then competition over currency in the present has no bite. Building a reputation can solve this to some degree, but building the necessary trust means that future rewards must be larger that immediate gains from inflating. That implies that full efficiency cannot be attained: inflation needs to remain positive, while full efficiency implies negative inflation so that money has the same return as a risk-free bond. Unfortunately it also implies that there is indeterminacy and any inflation rate could happen. Oh well, may be the government could step in to help achieve efficiency...

Public consumption and the business cycle

One aspect of government purchases the current crisis has highlighted is how volatile they can be. Quite obviously, they are influenced by politics, to the point of complete reversal between massive spending and severe belt-tightening within months as in the US and the UK. But there could also be a more systematic component that is linked to the business cycle. After all, the government may be trying to improve the welfare of its constituents and for example substitute public consumption for lacking private consumption, or the same for investment.



Ruediger Bachmann and Jinhui Bai look at this using an augmented real business cycle model. They claim that 25-40% of the variance of public consumption can be accounted for by shocks to total factor productivity once implementation lags and costs of public consumption, as well as taste shocks to public vs. private consumption. I am no particular fan of taste shocks, as they are the symptoms of a modeler who is giving up on trying to explain something and simply equates the error term in the Euler equation to a shock. Then much is driven by how this shock is calibrated, in this case to match a four year electoral cycle and some data moments. When I think about shocks in this context, I think indeed about who is in power to decide on public expenditures. But that is not completely exogenous. Indeed, the state of the economy has an impact on who gets elected or reelected. And this can be calibrated without trying to match the data moments one is trying to explain.

Job referrals can be more efficient than open search

I a perfect world with heterogeneous workers and jobs, the matches are those that maximize efficiency. But when information about the quality of either is private and cannot be revealed credibly, the economy quickly looses efficiency. The solution is then to make hiring and firing easy, so that good matches can be found by trial and error. Employers also try to gather information about their potential employees, and their socio-demographic characteristics are certainly among them. While this looks like discrimination, it is OK if it is only statistical discrimination. But one can improve on this.



Christian Dustmann, Albrecht Glitz, and Uta Schönberg study job referrals from co-workers. They find that typically shunned minority workers are more likely to be hired the more other minority workers are already present, a clear sign of job referral. In addition, these workers earn on average higher wages and are more likely to stay in such firms. In some sense, this shows that job search networks can be better than open competition under some circumstances. One could even stretch the argument to claim that favoritism could be beneficial.

Penis size and growth

Understanding why some countries are poor and why some grow than others is probably one of the most important questions in Economics. The traditional tool to tackle this challenge has been growth regressions: use cross-country data and regress the GDP growth rate on various indicators that could be relevant in order to find which matter most. These regressions have been abused over the years, especially as there are obvious endogeneity and collinearity issues. Also, the results are driven by a multitude of (poor) countries where data quality is quite horrendous. The worst is probably all the data mining that is going on in this literature, which culminated with Xavier Sala-i-Martin's two million regressions.



Tatu Westling uses a variable the previous literature completely ignored: the average length of the erect human penis. Adding this variable to the regression shows a U-shaped relationship for the GDP level, explaining 15% of its variation. The optimal penile length is 13.5 cm, and 16cm is disastrous. For GDP growth, the relationship is negative, explaining 20% of the dispersion. This is not negligible, and more than institutional variables that are thought to be the key to growth and convergence.



I wonder how many people will take these results seriously and try to get policy recommendations from it. Westling hypothesize about the impact of self-confidence. The paper is very well written, taking the 'male organ hypothesis' very seriously, but in truth tongue-in-cheek. Very different from this study on flag colors I wrote about previously.