THE Bank of Japan (BoJ) must feel as if it has a bad case of déjà vu. Three years after the central bank thought it had ended deflation, it has returned. And to fight it, the bank has had to resurrect a policy tool it tried to bury long ago—quantitative easing. If that is not bad enough, the BoJ once again has to deal with a government breathing hotly down its neck.
The psychologist Barry Schwartz’s book The Paradox of Choice (here’s his TED talk on the topic) was, for me at least, very persuasive. It made a compelling if counterintuitive argument: even though many people (economists especially) argue that more choice is almost always a good thing, Schwartz argued that too much choice is actually a bad thing, causing decision paralysis and unhappiness. That’s a simplistic rendering of Schwartz’s argument — there’s an obvious difference between having a lot of political candidates to choose from in an election and having a lot of flavors of jam to choose from in a supermarket — but that’s the gist.
...a more fundamental objection to the “choice is bad” thesis is that the psychological effect may not actually exist at all. It is hard to find much evidence that retailers are ferociously simplifying their offerings in an effort to boost sales. Starbucks boasts about its “87,000 drink combinations”; supermarkets are packed with options. This suggests that “choice demotivates” is not a universal human truth, but an effect that emerges under special circumstances.Tim Harford's piece here.
Like overstretched American homeowners, governments and companies across the globe are groaning under the weight of debts that, some fear, might never be fully paid back.
As Dubai, that one-time wonderland in the desert, struggles to pay its bills, a troubling question hangs over the financial world: Is this latest financial crisis an isolated event, or a harbinger of still more debt shocks?
Johnny R. Williams, 30, would appear to be an unlikely person to have to fret about the impact of race on his job search, with companies like JPMorgan Chase and an M.B.A. from the University of Chicago on his résumé.
But after graduating from business school last year and not having much success garnering interviews, he decided to retool his résumé, scrubbing it of any details that might tip off his skin color. His membership, for instance, in the African-American business students association? Deleted.
“If they’re going to X me,” Mr. Williams said, “I’d like to at least get in the door first.”
The failure of academic finance can be considered one of the symbols of the financial crisis. Two important underlying reasons why academic finance models systematically fail to account for real-world phenomena follow directly from two conventions: (a) treating economics not as a 'true' social science (but as a branch of applied mathematics inspired by the methodology of classical physics); and (b) using economic models as if the empirical content of economic theories is not very low. Failure to understand and appreciate the inherent weaknesses of these 'conventions' had fatal consequences for the use and interpretation of key academic finance concepts and models by market practitioners and policymakers. Theoretical constructs such as the efficient markets hypothesis, rational expectations, and market completeness were too often treated as intellectual dogmas instead of (parts of) falsifiable hypotheses. The situation of capture via dominant intellectual dogmas of policymakers, investors, and business managers was made worse by sins of omission - the failure of academics to communicate the limitations of their models and to warn against (potential) misuses of their research - and sins of commission - introducing (often implicitly) ideological or biased features in research programs Hence, the deeper problem with finance concepts such as the 'efficient markets hypothesis' and 'ratex theory' is not that they are based on assumptions that are considered as not being 'realistic'. The real issue at stake with academic finance is not a quarrel about the validity of the assumption of rational behavior but the inherent semantical insufficiency of economic theories that implies a low empirical content (and a high degree of specification uncertainty). This perspective makes the scientific approach advocated by Friedman and others less straightforward. In addition, there is wide-spread failure to incorporate the key implications of economics as a social science. As response to these 'weaknesses' and challenges, five suggested principles or guidelines for future research programmes are outlined.Abstract Hans J Blommestein's working paper
Hans Blommestein, Me JudiceVaak worden theoretische concepten als intellectuele dogma’s gehanteerd door zowel wetenschappers als gebruikers. Onderzoekers zijn hiervoor deels verantwoordelijk, aangezien ze onvoldoende wijzen op de beperkingen en zwakheden van hun theorieën en modellen. Ook waarschuwen ze te weinig voor het potentiële misbruik van hun werk. Deze houding wordt versterkt door de, veelal impliciete, ideologische elementen in veel onderzoekprogramma’s.
De economische crisis pakt op de verschillende opleidingsniveaus anders uit. Terwijl binnen veel
beroepen de vraag naar hoger opgeleiden toeneemt ten koste van lager opgeleiden, blijken juist
hoger opgeleiden (HBO’ers en WO’ers) maar ook ongeschoolden vaak te werken in sectoren en
beroepen die het hardst getroffen worden door de economische crisis. De vooruitzichten van
schoolverlaters tot 2014 zijn mede daardoor slecht voor de ongeschoolden en ook wat minder
goed voor de academici. Voor degenen die met een HBO-diploma op de arbeidsmarkt instromen
zijn de perspectieven het best, ondanks de dalende werkgelegenheid en de mogelijke
verdringing door WO’ers. Dat blijkt uit het vandaag verschenen rapport ‘De arbeidsmarkt naar
opleiding en beroep tot 2014’ van het Researchcentrum voor Onderwijs en Arbeidsmarkt (ROA),
Universiteit Maastricht.
Tobin, or not Tobin? That is the question. The answer seems to be the latter, judging from the slings and arrows that finance ministers have aimed forcefully at the idea.
When Gordon Brown, British prime minister, unexpectedly popped up at the weekend’s meeting of G20 finance ministers and floated the possibility of a “Tobin tax” on financial transactions, it represented something of a volte-face on his part. But the largely hostile reaction from other countries and his own rapid backtracking suggested that he had either misread his audience or was bashing bankers for domestic political ends.
Gold prices on Tuesday surged to an all-time high after India’s central bank bought 200 tonnes of the precious metal, swapping dollars for bullion as the country’s finance minister warned the economies of the US and Europe had “collapsed”.
The existence of this behavioral dream team — which also included best-selling authors Dan Ariely of MIT (Predictably Irrational) and Richard Thaler and Cass Sunstein of the University of Chicago (Nudge) as well as Nobel laureate Daniel Kahneman of Princeton — has never been publicly disclosed, even though its members gave Obama white papers on messaging, fundraising and rumor control as well as voter mobilization. All their proposals — among them the famous online fundraising lotteries that gave small donors a chance to win face time with Obama — came with footnotes to peer-reviewed academic research. "It was amazing to have these bullet points telling us what to do and the science behind it," Moffo tells TIME. "These guys really know what makes people tick."
"Suggestions that this figure marks the end of the recession in the US, although technically correct, ignore the relatively low quality of the growth registered in this release. Such suggestions also ignore the likely soft fourth quarter that is now in the pipeline. The US economy is not out of the woods yet."
A slower drawdown in inventories was one bright spot in Thursday’s report, as it indicated that businesses have largely sold out their current stock and may rev up orders in the coming months to replenish supplies.
“Everybody had been dealing with a just-in-time status quo,” said Sandra Westlund-Deenihan, president and design engineer for Quality Float Works, a plant in Schaumburg, Ill., that manufactures metal float balls and valve assemblies. “They were living off inventories they’d built up over the last several years. Now they’ve drawn that down and reached a point where they may have to have it ready and back on the shelf again.”
Boosting growth was an upturn in consumer spending, residential investment and strong government spending. The impact of government stimulus measures succeeded in jolting the economy during the latest quarter, as the soon-to-expire first-time home buyer tax credit and the “cash for clunkers” car rebate programme lifted residential investment and chipped away at car inventoriesBBC
"It's good to have the economy growing again," said Brian Bethune, economist at IHS Global Insight.
"But we don't think that rate of growth is sustainable because it is
distorted by all the government stimulus.
"The challenge here is to get organic growth - growth that isn't helped by fiscal steroids."
It probably ended in June.
Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near collapse of the financial system last year — how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble....
...The measure would make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.
"The Bank of Japan (BoJ) pioneered the process known as quantitative easing (QE) in 2001-06, when it massively boosted the reserves that commercial banks held at the central bank. Its verdict on how well QE worked then ought to interest policymakers today. It will also discomfort them. For all that it propped up Japan’s creaking banking system, QE did not really improve the economy nor end the country’s deflationary mindset "
"Rather than re-establishing the primacy of rational choice theory, List’s experiments show that psychological factors are important – but far more subtle and complex than previous experimenters seem to have appreciated."
"These are 24 seconds of impenetrable jargon, followed by a 7-word explanation of your field.
24:
Given decentralized constrained optimization by maximizing agents with well-defined convex objective functions and/or convex production functions, engaging in exchange and production with free disposal, leads, in the absence of externalities, market power, and other distortions, there exists an equilibrium characterized by Pareto optimality.7:
Greedy people, competing, make the world go round."
Weak institutions and bad rules are some of the most significant obstacles to economic growth in developing countries. Paul Romer, an economist known for his work on economic growth, has a plan to change that and recently resigned his tenured teaching position at Stanford to devote his full energies to the challenge.
“Moving from bad rules to better ones may be much harder than most economists have allowed.”
Romer’s plan calls for the establishment of Hong Kong-like “charter cities,” special zones within developing countries with better rules and institutions.The project has already attracted quite a bit of attention from both economists and the media. William Easterly, the development economist, told Newsweek, “There’s a thin line between revolutionary and crazy. Paul Romer has been adept at walking that line throughout his career, staying just out of the crazy part. He’s still tiptoeing along that line with this new idea.”
FOR Daniel Kahneman, one of the most moving episodes in the current global economic crisis took place when a humbled Alan Greenspan, the former chairman of the U.S. Federal Reserve, confessed before a congressional committee that he had put too much faith in the self-correcting power of free markets.
“He basically said that the framework within which we had been operating was false, and coming from Greenspan, that was impressive,” said Kahneman, who was awarded the Nobel Prize in Economics in 2002 for his pioneering work integrating aspects of psychological research into economic science.
But more to the point for Kahneman was how Greenspan, in his testimony, treated not only individuals but also financial institutions as rational agents. “That seemed to me to be ignoring not only psychology but also economics. He appeared to have a belief in the magic power of the market to discipline itself and yield good outcomes.”
In the absence of government action, the private sector will increase emissions up to the point where there is no further marginal benefit. That is, emissions will rise to whatever level is implied by profit-maximization, paying no attention to the effects on the environment.A cap-and-trade system puts a limit on overall emissions, so that emitters have to pay a price for emitting. This price will, as shown in the figure above, equal the marginal benefit of the last unit of emissions allowed.
The Confederation of British Industry said students should bear the brunt of a proposed funding overhaul to deal with a growing crisis in university finance. Under the plans, they face a triple blow of increased loan interest, fewer grants and higher tuition fees. One figure mooted is for annual tuition fees to rise to £5,000.
As we parse through the rubble of the one-year anniversary of the demise of what used to be known as Wall Street, is it possible to isolate the canary in the coalmine—the proverbial moment above all others when the magnitude of the growing carnage in the mortgage-securities market began to reveal itself, and could have been mitigated?
That moment was not the bankruptcy of Lehman Brothers, a year ago Monday, or the $85 billion government bailout of AIG or even the shotgun marriage between a near-bankrupt Bear Stearns and JPMorganChase. Rather, a relatively innocuous meeting held fifteen months earlier—in December 2006, in a conference room on the 30th floor of Goldman Sachs—would forever change Wall Street.
Dear Dr. Mankiw,
Hi, I am an undergraduate student studying economics in Michigan. I have recently become a big fan of your blog. I found your "Advice for Students" very helpful to professional economist-wannabes like me, and especially, those considering graduate study in economics. Your suggestion on math preparation for undergrads landed me on one simple question: "Do economists really use all that math?"
I was wondering if you could tell me how closely math and the works of professional economists at international organizations, such as World Bank and IMF, are related?
I look forward to your answer. Thank you in advance!
Best Regards,
[name withheld]
"...two central parts of the discipline—macroeconomics and financial economics—are now, rightly, being severely re-examined (see article, article). There are three main critiques: that macro and financial economists helped cause the crisis, that they failed to spot it, and that they have no idea how to fix it."
"Forget Thorstein Veblen’s leisure class. In today’s money culture, to be idle is to be irrelevant."
