The impact of poor climate

We often cannot choose where we live, especially as academics, and have to bite the bullet when we end up in places where the climate is less than favorable. You sometimes wonder why humans willingly decided to settle in numbers in uninviting places. And it matters, as people not like poor climate, but that may be compensate by other factors, like having a job. Still, climate matters for satisfaction.

David Maddison and Katrin Rehdanz document using the world values survey that poor climate has a significant impact on life satisfaction. The latter is defined by self-reported survey results, thus to be taken with a rock of salt, and poor climate is defined by a measure akin to a standard deviation from a comfortable temperature, 65F or 18C. How significant the impact is cannot be evaluated without seeing some statistics about the climate measure, but let us believe the authors for a moment. This means that, ceteribus paribus, people in Central America and some parts of Africa should be the happiest. Of course, all other things are not equal. And there may be others things that correlate with temperature variations that also have an impact of happiness. For example, long nights in the winter have a strong impact on depressions in Nordic countries.

Maddison and Rehdanz then proceed to look at the consequences of a climate change scenario which provides country specific temperature changes. From this exercise, they find that Europe will gain in satisfaction, the US will be unaffected and Africa will suffer tremendously. While this is an interesting first shot at the question, I am not quite sure I am willing to run with it. In particular because the initial elasticities may be tainted by correlates that do not vary with climate change (for example, length of night is not expect to change), and because climate change will have other important consequences, for example about the availability of fresh water. But at least, this paper gets us thinking about these issues, and it highlights that those who would suffer the most are those that have the least to do with the origin of climate change.

How to fight tax evasion

Tax evasion is a serious problem in developing countries because of the tiny administrative capacity of authorities and the size of the informal sector. Even in more developed economies, say, the Southern European ones, tax evasion is part of daily life. Again, administrative capacity is lacking. One could even argue it is a problem in the United States seeing the tiny auditing staff of tax authorities and the complexity of the tax code. Tax auditors have thus to define priorities.

Mirco Tonin studies the rules that Italy and Bulgaria instituted. In Italy, businesses and self-employed people reporting revenues below some level are subject to higher scrutiny. The idea is thus not to go after those who declare to be big fish, but rather those who may hide it. And making it known that there is such a threshold induces people to declare more to tax authorities. In Bulgaria, authorities are after employees and firms that declare too little in social security contributions. This is also forcing them to declare more to avoid scrutiny.

Tonin uses a model of imperfect monitoring to figure out whether such threshold rules make sense. And yes, they improve tax revenue, as those who have higher true income declare more than the threshold, and those below become more truthful. Now all you need to do is figure out where to put the threshold to equalize marginal tax revenue and marginal auditing cost, possibly adjusted by the dead-weight cost of taxation and for observable characteristics of the tax payer.

Are consumption taxes more equitable?

There is no doubt that consumption taxes are more efficient that labor income or capital income taxes, because they do not punish activities one would like to see promoted in an economy (labor supply, investment). But they are widely regarded as unfair, as the consumption share of income is higher for poor people. Hence the implementation of exclusions for essential goods where consumption taxes exist, in order the achieve some tax progressivity.

Isabel Correia claims that switching from income taxes to consumption tax can lead to less inequality even in the absence of lump sum transfers. This is a very counterintuitive result, and this is probably the reason why it made it into the American Economic Review (Yes, I know, I am breaking a trend here). But despite my best efforts, I still do not understand how this could happens, and the article provides very little in terms of explanation. Not only is no intuition provided, but the idea of using Gorman aggregation to reduce the model to a representative agent model seems wrong in this context. If anybody has read and understood the article, please help me here.

How not to encourage home ownership

Many governments try to encourage home ownerships by various means. I am not convinced this needs encouraging, as it leads to over-acucmulation of residential capital. Additionally, it is a myth that home ownners are happier and better citizens, as I reported previously. But suppose, for a moment, that a government really wants to increase the home ownership rate. How could this be best achieved. Two recent papers look at this.

First, Emre Ergungor compares mortgage interest subsidies to mortgage down-payment subsidies, and finds the latter work better. It is clear that down-payments are a significant hurdle for first time home buyers, and the recent crisis has at least partly been attributed to too easy down-payments, so one needs to be careful with this result. This is why Ergungor looks at loan performance for low to middle incomes. He finds that a one percent interest reduction is equivalent to a $3200 down-payment subsidy in that it leads to a 75 point reduction in default rates, and the latter is much cheaper to implement.

Second, Christian Hilber and Tracy Turner make the point that the tax deduction of mortgage interest makes mortgages more affordable but also raises house values. So in the end who benefits? Apparently only higher incomes in markets with few regulations. Hilber and Turner do not try to explain why this would happen, but I suppose this has to do with the high marginal rates on tax expenditures for high incomes, although I cannot explain the regulatory impact. In any case, there is more evidence that this type of subsidy should be abandoned.

ABM+NKDSGE=?

Agent-based models have a track record of generating stock market bubbles when they include agents that are not optimizing and use backward-looking decision rules. But they do not seem to have convinced the profession of their relevance because of the perceived arbitrariness of model components and the fact that they basically predict that a broken clock is right twice a day. Hence, it should be quite interesting to try to embed an agent-based model into a more widely accepted model and see how far this can bring us.

Matthias Lengnik and Hans-Werner Wohltmann do this by including two type of asset traders in a Neo-Keynesian model: fundamentalists, who are forward-looking and expect that price will get closer to the fundamental equilibrium, and chartists, who are backward-looking and obey some predefined rules based on past prices. This introduces some degree of history dependence and assumes that both types of agents are fooled every time. They never learn. And asset prices are thus essentially exogenously determined. The non-financial part of the model follows some old-fashioned model where inflation linearly impacts the output gap, and inflation is determined by the output gap and the evolution of stock prices. In other words, we are back the wind-generating hand-waving of 1980's macro, and not exactly something I would call DSGE.

Anyways, let's see what comes out of this. Of course, by the very nature of the model, there can be multiple equilibria, and an unstable equilibrium is possible. So one has to be very careful with simulations as potentially a lot of scenarios are possible. Yet, Lengnik and Wohltmann base their entire analysis on a single 40 quarter run of their model. They call is "representative." In which sense? Have all runs the same statistical properties? Or did the authors mine for the most convenient one? None of the results can be believed until this is clarified.

Suicide in happy places

It is quite baffling that the countries with the highest standards of living, and among several dimensions the happiest ones, also exhibit the highest suicide rates. Is it that places where material necessities are easily met other more psychological worries take over? Is it that somehow happiness is more volatile, or more diverse?

Mary Daly, Andrew Oswald, Daniel Wilson and Stephen Wu use two data sets that allow to compare suicide rates and happiness across US states to show that this paradox is also true within the United States. This thus invalidates the cultural or institutional explanations of the international paradox. This also allows to use all sorts of cross-state controls, but none makes the paradox disappear. Daly, Oswald, Wilson and Wu then conclude that there must be a direct causality from happiness to suicide: living among happy people is depressing for some. This may be consistent with the fact that suicide rates drop in war time. And it is difficult to imagine the reverse causality, that high suicide rates make survivors happy.

The economics of swinging

This is not about economic fluctuations or long cycles like Kondratieff cycles, this is about the sexual practice of partner exchanges or group sex. This practice that started in US military families in World War II has now spread world-wide, first as wife swapping than with women's emancipation into couple exchanges that a organized through websites or swinging clubs. Estimates vary widely, but somewhere between 1 and 15% of the population practices it.

Fabio d'Orlando tries to explore the economics of swinging. In the absence of much data and theory about it, he draws heavily on Jeremy Greenwood and Nezih Guner's theory of the emergence of premarital sex (discussed here) and modifies it to a theory of increasing kinkiness of sex. I did not think this was very inspiring in this paper, but a (long) footnote caught my eye.

Swinging clubs charge an entrance fee, which depends on who enters. Couples pay, say, $50, but single men $150. This is more than a night with a prostitute, but single men seem to value of having sex with a woman who does not fake it. Single women, however, are typically not allowed in on the premise that they are prostitutes. The interesting bit is how a swinging club owner should maximize profits, given that couples are more likely to come if there are fewer single men. Given the hidden nature of this market and thus the lack of information, it would interesting to see the diversity of outcomes.

Employer-provided health insurance is not that bad

Health insurance is, among OECD countries, uniquely organized in the United States. It is provided by employers, if they can, and is a benefit that is not taxable for employee. The others either buy individual insurance, which is much more expensive than group insurance, or simply bypass insurance. This reliance on insurance by the employer, instead of a group insurance for everyone independent from employment seems clearly suboptimal. For one, the implicit tax subsidy can only lead to over-insurance for the insured. And then, there is clear under-insurance for the others. And lack of mobility of the workforce.

Kevin Huang and Greg Huffman argue that the US system may have advantages that overcome its disadvantages. The basic reasoning is that through this tax subsidy and the fact that insurance is better provided by employers, there is a clear incentive not to fool around and get a job. This decreases unemployment, increases output and possibly welfare despite higher consumption of medical services than optimal.

They argue this welfare improvement through the tax subsidy is possible. But it may also not. It all depends on how much health and leisure are valued, and how risk averse people are. So not everybody prefers the current regime, probably. And the public debate about the subsidy provision while a removal was mulled during the Bush Junior administration clearly shows that. Huang and Huffman, however, argue against using heterogeneous agents, because it is unlikely to have a macroeconomic impact. I am not convinced. Indeed, just look how diverse the insurance packages are that people choose. This highlights fundamental diversities in the perception of risk, and actual risk, in the value of life and health and attachment to work. This has clearly an impact on optimal policy because marginal utilities vary, and there are winners and losers for every policy. This becomes a political economy problem, and heterogeneity is crucial.

The international flow of doctorates

With globalization, the trade of goods has considerably increased. But the substitution to international trade, international migration has also increased. While the migration of low-skilled workers draws headlines, the most "globalized" are the high-skilled ones. In particular, those holding doctorates are very mobile and in particular they move frequently.

Laudeline Auriol has analyzed for the OECD the flow of doctorates across its members countries. For examples, across European countries, 15 to 30% of all doctorate holders has moved across a border over the last 10 years. This is a remarkable transformation for Europe, where language and cultural barriers were much much higher a few decades ago.

This high mobility reflects the particular labor market for doctorates. Positions and candidates are very specialized, thus often need to move far to fond a match. This is compounded by the large increase in new doctorates across the OECD: from 140'000 in 1998 to 200'000 in 2006. But this growth has been very uneven, low in Germany, France and the US, very high for some of the poorer OECD countries, and for women. Currently, the US has the most doctorates (340'000) with Germany not far behind, which explains why a professorship there requires a second doctorate (habilitation).

Unemployment rates are low, 2-3%, but it usually takes several years after graduation until a doctorate finds a stable job, and this after graduating at a much higher age than other workers. While this sort of indicates a healthy labor market, it hides considerable heterogeneity. Women and doctorates in humanities face much higher unemployment rates. The latter are much less mobile because their research (and teaching) topic is much more closely related to the local cultural context, and can thus not take advantage of international opportunities like, say. natural scientists. It is then not surprising that in some countries a fifth hold jobs that are not related to their doctorates. There is also considerable uncertainty about job security. For example, post-docs (which include temporary visiting positions) now outnumber full-time faculty at US academic institutions.

Coming back to international mobility, it is remarkable how in most counties over a fifth of doctorate holders are foreign born, over half in Canada. Half of the foreign born doctorates in the US are from Asia, and two-thirds of the graduate students as well. And in the countries that have lower proportions of foreign born considerable share has stayed abroad recently. A truly international workforce.

Syphilis cannot be eradicated

Syphilis is back. As the most widespread venereal disease in the 1930's it was curtailed after huge efforts, both in developed and developing countries. And ten years ago a push was made to finally eradicate it. But syphilis is quietly making a comeback, hidden in the shadows of AIDS. And because the transmission of this disease is primarily driven by risky sexual behavior, it can be a leading indicator of other sexually transmitted diseases on the rise.

David Aadland, David Finnoff and Kevin Huang use a model of human behavioral response to study this resurgence and come to the conclusion that there is a fundamental cycle that cannot be broken. The point is that the transmission model that epidemiologists use has constant parameters tracing back to biological features of the disease, but these parameters can change through human intervention, and they do. Call this a Lucas Critique of epidemiology. The key here is that when prevalence is low, individuals in a riskier fashion and in particular have more sexual partners. No reasonable policy can overcome this.

Given free Internet to the unemployed

It is of general benefit that people do not stay unemployed too long and that those who are unemployed exert a reasonable effort to find a new job. While it turns out that they spend surprisingly little time looking for a job, the efficiency of this search can be improved in various ways. One, rather costly, is to provide more counseling and coaching, provide child care, another less costly is to give more search means.

This is what Randolph Beard, George Ford, Richard Saba and Richard Seals Jr. study by looking out the availability of the Internet impacts job search. They highlight one particular aspect of job search: discouragement. Indeed, nothing is worse than someone who is not even trying to find a job. Well, it turns out that having Internet access at home reduces the occurrence of discouragement in job search. Internet access at public locations like libraries have a similar effect. This is not unimportant, because becoming unemployed, especially a longer time where you may become tempted to abandon, lets you rethink budget priorities and Internet access may be among the first items to go. In such circumstances, it may make sense to offer free Internet access.

Trying to justify IS-LM

The IS-LM model is still not dead. Created to reflect the interaction of aggregate markets, it suffered from the rise of dynamics and microfoundations in macroeconomics, yet remained the staple of undergraduate macroeconomics because a generation of teachers knowing nothing else needs first to die out. Yet, even people in research have clung to it, trying to find the microfoundations of IS-LM, which seems to me completely backward. The scientific method should indicate that you build a theory from observations, then create its graphical representation (if possible), and not trying to justify a graphical representation with some theory.

But anyway, I was thinking about these vain efforts while reading a paper by Ingrid Größl and Ulrich Fritsche, whose goal is to show that the standard Neo-Keynesian DSGE model cannot be represented appropriately in the IS-LM framework. So what? Life is more complex than IS-LM, so deal with it and drop IS-LM. But anyway (again), let us see what their arguments is.

First, the claim is that a Taylor Rule is a poor substitute for the LM curve, because it neglects the store of value role of money. And the DSGE model cannot capture the IS curve because is assumes that savings always equal investment, and people never save in unproductive money. The final claim is that an overlapping generation model is better for the IS curve. Now let us see how these claims are formally made. The model starts with a standard Neo-Keynesian representative agent, who has intertemporal preferences over consumption, leisure and real money holdings. Real Money holdings? Why not question that while you are arguing about the role of money in a model? Why would I care about how much money I carry? Not because I need it for transactions, because current consumption is already there. Not because of the wealth it represents, because future consumption is also there. It is simply there because otherwise the LM curve would not exist. How wrong is that?

Then what about the firm? It produces goods proportionally to the number of employees. Where is capital? Are we now trying to derive an IS curve (where I stands for investment) without investment? Not very convincing. Does the resulting model have anything to do with observed facts? Nothing is offered by Größl and Fritsche. What do I take from this paper? To justify LM, one needs to force people to demand money just because, and to justify IS, one needs to assume away investment. Great.

Property rights and the tragedy of the commons

The tragedy of the commons is a well studied and understood problem. When property is shared, the owners tend to abuse it because individual actions and only a small individual impact. Typical examples are overfishing, air and water pollution, and the need for the government to tax to provide public goods. The typical solution is to assign exclusive property rights to the shared good. Do this always work to solve the tragedy of the commons?

No, say Preston McAfee and Alan Miller. The problem is that the exclusive property rights lead to underutilization of the good. This was the purpose of the property rights in the first place, but McAfee and Miller argue that this often goes too far. First, if a good become unavailable, there is a waste of resource trying to find other ways to consume. Second, there could be underutilization if social benefit differs from the private benefits of the owner. The problem is not trivial, for example think about the attribution of radio, phone or wifi frequencies that lead to significant underuse of some frequencies others would love to use. The solution? A part from just abandoning property rights (in the right situations), it is not clear to me what could be done.

How to measure governance

There is now a cottage industry trying to measure how well countries are governed, in particular how bad corruption is, or how well the rule of law is imposed. These indicators are important, they can determine where foreign direct investment is taking place, whether development aid is disbursed, or whether policy reform has been successful. Thus, it is critical that governance be well measured.

Charles Oman and Christiane Arndt point out that most measures are based on perceptions, which are notoriously biased and difficult to change in the face of hard facts. But their is also substantial danger in that users tend to misread these indicators. For one, they are not precise and should only be interpreted as giving a rough picture. Even when intervals of error are provided, they are often ignored by users. Second, international comparison is difficult because the sources used to construct the index differ widely from one country to the next. Third, a single index is used for many different purposes, and each of those purposes should weigh differently the components of the index. Finally, there is no theory that tells us how to scale the measured before or during the determination of a governance index. And let us not forget most measures are subjective, as they are based on opinions. It frightens me when such an index is used in a regression, especially without any robustness test.

Football has an impact on college quality

US faculty members are currently quite frustrated with sports programs on their campuses as the swallow substantial budgets at the expenses of academics. Very very programs yield a profit, even (American) football is in deficit save for a handful of colleges. And coaches get salaries that are completely disproportionate to the academic mission of universities. Then why are universities willing to invest all this money in sports? The standard answer that this builds alumni loyalty cannot be good, as they typically donate to the athletic foundation, which is run independently from academic budgets. The only advantage, so to speak, are that they reduce the deficit that needs to be covered by academic funds. Another argument is that it attracts better students. I can believe that for some sports, where student athletes are better than the general student population. But there should be better ways to attract good students, like merit scholarships.

Sean Mulholland, Aleksandar Tomic and Samuel Sholander claim that even the football program improves the academic quality of the student body. It is not that the football player are academically gifted, they are certainly not, but it is all about attracting other students. Their assessment is not based on actual fact, but rather on peer evaluation of faculty and university administrators, as they are records in the US News and World Report college rankings. And the better a sports team is, also from peer evaluation by football coaches, the better is the academic reputation of the student body. Now that the rumors have been established, it would be good to back this up with facts...