100 Years of the American Economic Review: The Top 20 Articles

Via Brad DeLong's blog, here are the top 20 articles in the AER's first 100 years.

I've read about 6-7 of them, but the one I often use on my research is the Grossman and Stiglitz's one:

Grossman, Sanford J., and Joseph E. Stiglitz. 1980. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70(3): 393–408.

Still a long way

Lots of student and non-Brasilian friends ask me about the Brazilian economy and its recent emergence as an economics power house. I usually tell them that we have gone a long way, but still have a million problems to solve.

This graph below (from the FT's Beyond BRIC's blog shows the composition of Brazilian exports since 2002 split between primary and manufactured goods. Much of the increase in primary goods can be explained by the commodity price boom (both in prices and Chinese demand).

This is all fine in simple monetary terms, but if Brazil ever wants to be at the frontier of development we serious need to begin developed higher value-added products (and research). Otherwise we will be the granary of the world (with good caipirinhas and samba) and that's about it.

Why There is No System Like Capitalism...

Many in Brazil are fond of socialism, tough none moved to Cuba or China. Here is maybe why:

Another Interesting Graph

One of interesting (and bad) features of this recession in the US is the much larger increases in unemployment. This graph here from calculatedrisk.com is interesting:

Not only employment fell by more than other recessions, but it is been taking longer than others to recover.

There and Back Again

The usually great Emmanuel Derman has a nice description of how the financial crisis turned into a "real economy" crisis. For all incoming students of the Capital Markets course, this is one of the things we'll discuss in class:

° After the financial crisis everyone got scared about the future and stopped buying the crap they don't really need.

° The companies that make the crap people don't really need, anticipating a decline, laid off people, sometimes preemptively.

° The laid-off people then had to stop buying not only crap they don't really need but some of the things they actually do need.

° That affected the companies who make things people really need, and so they laid off people too.

° If everybody would just start buying stuff they don't really need then pretty soon everyone would be able to buy the stuff they really need.

Even will all the talk of the emergence of the BRICs The world economy stilldepends a lot on a healthy US economy. The last round of indicators showed that the sky is more cloudy than it was last quarter. Will the US come up with another large stimulus package? Is this going to rattle ond markets or are we still going to see the low yields observed today?

Not as bad as it seems...

Personally I think that the likelihood of any sovereign default of Spanish bonds is much lower than thought by the financial press. If you're read the FT it feels like Spain will follow the path of Greece really soon, when in my opinion, the situation in the UK is not much better.

Anyway, a friend of mine (Jason Sturgess) sent me this picture below that is really interesting to show the linkages between EU countries. While Greece's overall impact is very small, with Spain things have a much bigger magnitude.

Spanish Mess

Paul Krugman has written a nice summary of how Spain has reached its current (poor) economic situation.

http://krugman.blogs.nytimes.com/2010/02/09/anatomy-of-a-euromess/

The comparison with Germany is also nice. We can definitely see all the rent income earned by Germans who invested in Spanish real estate. I bet that if we look at the UK we might see the same thing.

I wonder what will happen with the deficit as this rental income (due to smaller demand for real estate) goes down.

Myth of the American Over-spending

I enjoy seeing a statistic that changes my preconceptions about an issue. Over this decade I've read many articles about the excess spending by American consumers and how people were buying cars, flat-screen TVs, etc...

This article by Doug Henwood shows the share of consumption relative to GDP with and without medical expenses. I guess the UK picture would look completely different given the impact of NHS.

I guess this yet another good reason to improve the health-care system in the US.

Paul Krugman on Crises

For my (few) non-academic readers, every January Econ and Finance academics get together for the AEA/AFA meetings, the most important conference we have. (Off-topic: for anecdotes on how cheap economists are during these meetings, check this WSJ article)

This year they took place in Atlanta, where I heard was freezing relative to the nice weather in San Francisco last year. On top of presenting papers, interviewing job market candidates and going out for dinners with old friends, people also get to attend panels and luncheons with speeches by top people.

I just read Paul Krugman's summary of his Nobel luncheon speech on financial crises. It's a very good piece looking the effects of the current financial crisis relative to previous currency crisis.

Every time I think about currency crises, I think about Mark Twain's quote:  "History does not repeat itself, but it often rhymes."

How to know you are from a civilized country - Instrumental Variables proposal

I've just arrived in Brazil for the Holidays, taking one of those crowded flights with a random sample of those that left the country in search of a better life and are also returning for Christmas. I am usually ashamed about the average Brazilian immigrant's behavior and this last flight just reinforced my beliefs (or prejudices...).

During the flight, I was thinking that what really sets apart "civilized" from "non-civilized" societies (or groups of people) is how much individuals from this group respect others around them There are so many niceties simply forgotten by people that show, at least to me, a clear display of the lack of development of human beings.

I think that economists could use the intensity of clapping when a plane lands in their home country as a measure of low development. Shouting "Thank you pilot!" or "My mother loves you for landing us safely" gives your extra bonus points. From my small sample, here goes the ranking so far on a 1-10 scale:

Brazil: Average 10. My last flight: 134.53

Egypt: 9

Italy 7.5

Spain: 6.5

Portugal: 3

US: 2 (although there were many Brazilians in it).

France, Iceland, Sweden, UK: 0.

Perhaps a binary variable would work better... Anyway, suggestions accepted!

R.I.P - Paul Samuelson

Today was a sad day for Economics with the passing of Paul Samuelson.

My first textbook in college was his classic "Economics" and I'll never forget talking about "guns and butter" when talking about resource allocation.

Let his soul rest in peace.

Things I Love about Work

There are many things I love about being an academic. One of the best is the chance to meet interesting people and take part in interesting discussions.

Today IESE hosted a workshop on Football Economics. The event was organized by Barcelona FC and IESE. and opened by Joan Laporta (Barca's president), who even stayed for the whole presentation of the first paper. Johan Cruyff was also in the audience (he's the current manager of Cataluña's national team) and many senior directors of Barcelona.

Papers talked about the market for broadcasting rights, differences between European and US sporting leagues and the labor market for football players.

Overall, a good day.

Weak Dollar

At the beginning of each class of my first-year course this year we spend about 15 minutes discussing the major events in the Financial Times.

One of the "big stories" in recent weeks has been the weakening of the dollar relative to major currencies and, not surprisingly, it prompted many questions about the underlying reasons for it.

In class we discussed many things::

1.  Recent decreases in risk aversion reversed the "flight to quality" seen during the peak of the crisis.
2.  Bad monetary and fiscal policy by the Fed and the US Treasury relative to other countries (aka higher inflation).
3.  Sovereign governments diversifying their reserves to securities in other currencies.
   

The last time I was a serious student of macroeconomics was almost 10 years ago. Paul Krugman comes up with a sensible argument, but a smart guy like Barry Eichengreen (link here) is not so sure about the death of the dollar.

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.

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!