Stereotyping

Last week I was searching a citation for a paper I'm writing (hope my co-author reads this to see that I'm working!), and by accident I opened this link, with a very interesting introduction to a book that talks about how economic development is affected by cultural characteristics of a particular country.

It shows that a country's stereotype varies a lot over time (e.g. the Germans were perceived  by the British as being "indolent and dull" in the 19th century) and begins with this very interesting anecdote. Read it until the end and tell me if you weren't surprised with the ending:

"Having toured lots of factories in a developing country, an Australian management consultant told the government officials who had invited him: “My impression as to your cheap labour was soon disillusioned when I saw your people at work. No doubt they are lowly paid, but the return is equally so; to see your men at work made me feel that you are a very satisfied easygoing race who reckon time is no object. When I spoke to some managers they informed me that it was impossible to change the habits of national heritage.” 

This Australian consultant was understandably worried that the workers of the country he was visiting did not have the right work ethic. In fact, he was being rather polite. He could have been blunt and just called them lazy. No wonder the country was poor – not dirt poor but with an income level that was less than a quarter of Australia’s. 

For their part, the country’s managers agreed with the Australian but were smart enough to understand that the “habits of national heritage”, or culture, cannot be changed easily, if at all. As the 19th-century German economist-cum-sociologist Max Weber opined in his seminal work, The Protestant Work Ethic and the Spirit of Capitalism, there are some cultures like Protestantism that are simply better suited to economic development than others.
 

The country in question, however, was Japan in 1915. It doesn’t feel quite right that someone from Australia (a nation known today for its ability to have a good time) could call the Japanese lazy. But this is how most Westerners saw Japan a century ago."

Worst Investor Award

The Economist this week reports a fun contest sponsored by Hedgeable.com: who was America's worst investor during the crisis?

This sounds like a great publicity stunt to me. The winner gets a free trip to Rome (2nd ant 3rd places go to Iceland and Vegas).

The good thing about not having meaningful savings is that I didn't have to worry about decreasing prices! I feel that lots of people were convinced by their investment managers to get into the market with the same reasoning of the picture on the left.

Here is the link with the description of the actual contest:

http://www.hedgeable.com/financialcrisiscontest.php

5...4...3...2...1 ...

The Economist has created a Global Debt Clock, with data on public debt of different countries for different years (including projections up to 2011). Out of curiosity I decided to look at the numbers for Brazil, the US and the UK.

The ratio of public debt to total GDP in Brazil is expected to grow from 37.1% in 2008 to 44.5% in 2011, which doesn't look that bad.

The US is expected to go from 39% to 66%, which doesn't look that good, specially against its long term average.

The really scary number is for the UK, whose debt is expected to grow from 49% to 93% of GDP.

These clearly show the different efforts made by governments to rescue their economies. I expect that people in the UK are very likely to face either tax rises or big decreases in public services expenditures in the near future.

World War II & Protectionism

I'm a big fan of World War II history and usually read a book on the subject over the summer. I'm midway through the "The Wages of Destruction" by Adam Tooze.

On a different take than most WWII books, the author tries to view the conflict through an economics point of view. Something that drew my attention is how the Great Depression had a significant impact on international affairs during the 30s. In particular, I found incredible how the protectionist measures taken by individual countries (i.e. the usual "beggar-thy-neighbor" policies) ended up making life much more difficult to people in terms of reducing international trade and having domestic production of clearly inefficient goods.

I wish that leaders from the G20 take up the opportunity and give the Doha Round on multilateral trade another go.

Are you happy with financial markets?

A friend sent me the picture above that reminded me of the financial crisis (yet again). If we ask the question: "Are you happy with financial markets?" I get the feeling that we are closer to "No" and "No" above.

To be honest, even if we get to "No" and then "Yes", I have a feeling that we still won't be happy with outcome given the current changes that have been implemented.

I think that people are thinking that we can push implementing measures

A Defense of Modern Macroeconomics

Last week I blogged about Paul Krugman's article in the NYT. His article caused a great stir in the economics profession, with strong reactions from both sides of the "freshwater/saltwater" camps.

This article by Narayana Kocherlakota (U Minnesota) makes a defense of current macroeconomics models and try to counter some of the criticisms. I agree with most arguments, but I still think that many people over-relied in models that were clear simplifications of reality.

As he mentions in the article that I also agree, one of the consequences of the crisis will be to open new avenues of research to Econ and Finance professors, having showed us the importance of some characteristics (specially institutional) that were overlooked and should be essential parts of models.

Different Bear Markets over Time

This link here is old but I think it gives a pretty good comparison of the severity of crisis through time.

It is really amazing how big the Great Depression was. It must have been tough to live it through...

State of Macroeconomics

This article on the NYT by Paul Krugman asks how economists got the crisis so wrong. In my opinion, the crisis brought about some serious soul-searching for lots of people, specially macroeconomists, whose mainstream models (by this I mean the neoclassical paradigm) didn't help much in preventing / explaining the crisis.

I'm not saying anything new here, but a big part of the problem is that many models push aside the role of financial markets and the importance of imperfections out there. Of course simplifying assumptions have to be made in order to help our understanding of the world, but sometimes people get carried away and take their models too seriously.

Well, I hope we at least learn something for the next crisis. It's much easier to do empirical than theoretical work these days!

Will Electric Cars Become a Disruptive Technology?

The Economist this week has an interesting article discussing if electric cars will turnout to be a "disruptive technology" and forever change how our cars are powered.

There are obvious advantages to cell cars: like lower fuel costs, higher efficiency and a big potential to use renewable energy sources.

It would be really nice if we are able to develop a network of recharging stations (the trial being made in Israel is particularly interesting), benefiting from economies of scale.

Something I'm curious to know is what companies (from Apple to Bosch to Honda) do with batteries after they die. Can they recycle the chemical components into other batteries and/or useful things?

So Close... And Yet So Far

Perhaps THE biggest question in Finance is what makes expected returns vary from one security to the other. The idea that getting higher expected returns cannot be generated without bearing more risk has driven the revolution and spurred a million papers, either trying to show that it works or it doesn't.

Avanidhar Subrahmanyam has just released a paper on SSRN in which he reviews many variables and methods that people have used to predictor returns (like P/E, size, liquidity, etc.)

He writes "our learning about the cross-section is hampered when so many predictive variables accumulate without any understanding of the correlation structure between the variables, and our collective inability or unwillingness to adequately control for a comprehensive set of variables."

With so many people, testing so many variables, with so many different methods, it is often difficult to really know whether a given variable can truly predictive future returns or it is just reflecting correlation with something else.

It would be nice to see a paper trying to run a "horse-race"of lots of variables at the same time (I mean a lot, not just 4-5).

PS - The article cited that shows that garbage production in the US is a better proxy for consumption than standard measures is really cool.

Let There Be Light!

How to measure GDP growth in places with poor statistical resources? A cool measure is to look from the sky at night! These economists use change in lighting at night as a proxy for GDP growth.

The picture below shows lights in Eastern Europe in 1992 to 2002. Look how Poland, Slovakia and Hungary (to the left) did much better than the former URSS republics (Moldova, Ukraine and Belarus, on the right)



I love when economists use clever thinking to solve problems! I just which they could do that to solve the crisis ;)