Another great jobs report, but ...

Today we learned that employers added 145k to their payrolls while unemployment remains at historic lows.  One would think that when economists gathered in San Diego last weekend for the annual meetings of the American Economic Association, it would be laissez le bon temps rouler.  

Au contraire!  NYT reports that many leading economists are worried that the ten year expansion is near an end.  Concerns cited include large government budget deficits, trade wars and ultra-low interest rates.   The low rates discourage saving.  They also limit the ability of central banks to stimulate the economy in any future recession; when rates are close to zero already, you cannot lower them much more.

As of now, no prominent economists are predicting recession for 2020, but the consensus is that growth will slow down.  Keep in mind that no prominent economists were predicting the market crash and subsequent recession in 2008.

Big data creates big opportunities for economists

More economists are getting jobs in Silicon Valley to mine insights from data sets that NYT calls a "Candy Store."  Amazon currently has 34 job openings for economists, with top pay of $200k per year plus bonuses and options.  Airbnb recently hired an economist away from Harvard Business School.

In addition to higher pay than they would receive in academic settings, Silicon Valley firms offer economists the opportunity to work with transactional and click data that are not ordinarily available for research.  They can conduct experiments on questions dealing with pricing, promotions and workplace incentives.

At the same time more and more economists are keeping their academic positions and consulting for companies such as Microsoft.  The likely result is economic research that is better executed and more meaningful for businesses.

Economists adopt ethics code

Economists regularly consult for companies or organizations.  They also may receive research support from parties that have an interest in how the research comes out.  Last week the American Economics Association formally adopted rules that require disclosure in academic work whenever conflict-of-interest issues may be present.  According to WSJ,

Authors submitting papers to academic journals must disclose to the journal's editors all sources of financing for the research and all "significant" financial relationships with groups or individuals with a "financial, ideological or political stake" in the research. The policy defines "significant" as financial support to an author and immediate family members totaling at least $10,000 in the past three years.

Technically, the policy only applies to only the seven journals edited by the AEA but most observers expect all of the leading journals to adopt similar policies soon.  Economists also are encouraged to disclose potential conflicts in other contexts, e.g., op-ed pieces, press interviews, and testimony. 

These rules should apply to bloggers as well.  I received support from a wide range of sources over the years, with most dollars coming from the US Department of Labor, Interamerican Development Bank, National Science Foundation, Financial Industry Regulatory Authority, and AFL-CIO Building Trades. 

Nobel prizes in economics

Kudos to Thomas Sargent of NYU and Chris Sims of Princeton for receiving the Nobel Award in Economics, announced on Monday.  (Click for NYT and WSJ stories.) Both were Harvard PhDs but made their reputations at the University of Minnesota.  Sargent did important theoretical and empirical work on what came to be known as the "rational expectations" theory of how the economy would respond to monetary and fiscal policy.  Sims is well known for developing a technique called vector autoregression that can be used to identify shocks to the economy and the response to those shocks.  Sargent and Sims will split a richly deserved $1.5m award.  Sims said he intended to keep his in cash for awhile. 

Alan Krueger to head CEA

Princeton economist Alan Krueger was tabbed yesterday to become the next chairman of the President's Council of Economic Advisers.  Krueger is a labor economist who has written extensively on subjects such as the minimum wage, unemployment, rate of return to higher education, and efficiency wages.  He also has done well-cited studies on who is most likely to become a terrorist (they tend to be middle class) and why ticket prices at rock concerts have risen so much (blame the record companies).  Krueger, who has lectured at NC State twice, has his work cut out for him -- the President has promised to release a new jobs package after Labor Day.  I am confident that the President will get great advice.  My two cents: do something big on foreclosures and incentives to start and grow small businesses. 

What? Some people hate economics?

So says economist Stephen Moore in an WSJ op-ed yesterday.  Moore claims that economics is the least favorite subject of most students, although I am not sure there are any data that confirm his assertion.  He then goes on to argue that the reason economics is so unpopular is that "too often economic theories defy common sense." Most of the article focuses on macroeconomics, with Moore ridiculing numerous tenets of Keynesian theory.  As my students in MBA 505 will soon learn, this ridicule is well-earned in many cases.  In a case cited by Moore, White House press secretary Jay Carney recently was quoted as saying that unemployment insurance creates jobs.  Unemployment insurance is financed by taxing workers to fund benefits for those out of work, thereby simultaneously reducing the payoff to working while increasing the reward for being jobless.  There may be lots of good reasons to have unemployment benefits, but job creation is certainly not one of them. 

Most economists focus on microeconomics, the study of individual consumers and firms and how they interact in the marketplace.  Students should find that microeconomics, once properly understood, passes the common sense test.  Does that mean they will come to love micro?  Not sure I want to go that far. 

Rajan's thoughts on why economists failed to predict financial meltdown

Chicago Booth Professor Raghu Rajan with another stimulating blog post that basically asks, "If us economists are so smart, why did we not see this train wreck coming?"  Some have said it reflects lack of knowledge; others think our profession is too wedded to free markets with even a few questioning whether economists have become ethically challenged by being too close to big business. 

Rajan's take -- he sees three main causes: (1) forecasting turning points is not easy, (2) economists are over-specialized, and (3) all too many economists spend too much time on theoretical abstractions rather than the real world economy.  In other words we had a train wreck because the path ahead was very foggy and twisty, the personnel on board could only see their own roles and not the big picture, and the engineer thought autopilot could handle everything. 

WSJ interview today with Gary Becker

Learn what Chicago's best known Nobel laureate has to say about health care legislation, the power of special interests, market and government failure during the financial crisis ("The SEC didn't see it at all"), and the power of markets to promote economic growth (China, India and Brazil vs. North Korea). Unlike many conservative, market-oriented economists, Becker says that "I remain basically an optimist."

The future of economics: more history, less math?

Interesting NYT column by David Brooks today about the economics discipline. In a nutshell, Brooks argues that economics has become increasingly abstract and mathematically complex at the cost of ignoring history and psychology. I agree with Brooks on the history side, but there has been a lot of progress in the last 20 years integrating psychological rigor into economic models. NC State's COM just hired Stacy Wood to the Langdon Distinguished Chair of Marketing; one of Stacy's main interests is neuroeconomics. Stacy will be teaching a new course in consumer behavior in the fall.

Keynes vs. Hayek smackdown

Kudos to my colleague Jim Yuill for sharing this YouTube video of rappers representing the ideas of Keynes and Hayek. Not likely to put Eminem and Jay-Z out of business, but the summary of the ideas is actually pretty good. Markets vs. government -- an age-old question.

Economists gone wild

The American Economic Association recently held its annual meetings in Atlanta. WSJ reports that this was probably bad news for Atlantans whose livelihood depends on the convention trade because --- economists tend to be cheapskates. My favorite anecdote in the article was the one about Milton Friedman returning reporters calls collect. My own claim to fame: I continue to cut my own grass. But is it because I am a cheapskate, or because I have so few earnings opportunities on the weekend?

On a more serious front, there was much talk about the current economic crisis. Ben Bernanke's speech got the most attention, as one would expect. Bernanke warned that the Fed may very well act to pop any future bubbles. Last week WSJ ran another article that gave some interesting perspectives on how to deal with the financial crisis, growing federal debt and our old friends Fannie Mae and Freddie Mac. Money quote from Stanford economist Robert Hall:

If the banks really feel that they are insured, then we have a dangerous situation. The incentives are to take a very risky position. They get to pocket it if they win and it's the federal government's problem if they lose.

Mankiw on fiscal policy

Greg Mankiw's Sunday NYT column summarizes recent research comparing the size of the tax cut and government spending multipliers. The Obama stimulus to date has relied mostly on government spending; all indications are that the next round of "job stimulus" will be more of the same. Mankiw finds that most of the research shows that tax cuts generate a bigger bang per buck. This is contrary to what textbook Keynesian models imply. Mankiw cautions, however, that

economists should remain humble and open-minded when considering how best to fix an ailing economy.

The Nobel Prize in economics goes to ...

Elinor Ostrom of Indiana University and Oliver Williamson of UC-Berkeley. Ostrom's selection is unique for two reasons: she is the first woman to be recognized for the economics Nobel plus her academic affiliation is actually political science, not economics (true confession: I never had heard of her until the prize was announced yesterday). Ostrom is best known for her work on how resources such as pastureland and forests are shared by individuals in agrarian socieities; at least that's what the NYT and WSJ say. Williamson has long been rumored as a top-level contender for the award; he is known for his work examining behavior and incentives inside organizations as well as explaining the structure of organizations (e.g., should an electric utility with coal-burning generating plants own the coal mines that supply them?).

How economic policy gets made

Great story in this week's New Yorker that goes behind the scenes in the Obama administration and spills the beans on how key decisions about the stimulus package and the auto bailout were made. Fascinating reading for those interested in how serious academics like Christina Romer and Larry Summers interact with the politicos. The article also traces the intellectual odyssey of Summers over the last 20 years. MBA 505 students should note the use of multipliers in the discussion.

Response to Krugman's NYT piece

John Cochrane, an economist at the University of Chicago, responds to Paul Krugman's article with this piece: "How Did Paul Krugman Get It So Wrong?". The link is courtesy of Greg Mankiw. I do not normally borrow from blogs with much higher readership, but in this case I wanted to make sure alternate views were aired.

A must read piece on big finance and big government

Luigi Zingales, a finance professor at the University of Chicago, has a brilliant piece "Capitalism After the Crisis." Zingales explains how the finance sector has grown in both size and political influence, grown to the point where he thinks it has become dangerously co-dependent with the federal government. He sees two possible paths: (1) genuine market-oriented reform of the financial sector that would shift risk away from taxpayers and back to executives and shareholders (in other words, an end to "too big to fail") or (2) federal policy supports the continued survival of big firms in the financial sector while regulating executive pay to appease populist outrage (but taxpayers still end up holding all the risks). This is the type of "big think" piece that economists do not write often enough. You may or may not agree, but you should take the arguments seriously.

A real bipartisan report on health care reform

A general theme of my blogging on health care has been my concern that Congress and the President are all too focused on the symptoms and ignoring the root problems. Today the Brookings Institution issued a report from 10 leading health economists from across the political spectrum (including at least one from the Obama administration) on what should be done. They make four major recommendations:

1. Provide more and better information: IT systems, research on effectiveness of different treatments
2. Change incentives: go from pay for service to pay for performance
3. Major insurance reform: universal coverage, provide individuals and small employers with access to large risk pools, cut back on the tax subsidy for employer-provided plans
4. Help individuals make better choices and accept more accountability for their own decisions: cut back on first dollar coverage, support wellness programs

At last, a health platform I can get behind! But wait, this is an economists' white paper, not a bill in Congress.

Krugman on macroeconomics

Excellent and fairly balanced article by Nobel laureate Paul Krugman: "How Did Economists Get It So Wrong?" coming out in NYT Sunday magazine. Well worth reading. I must admit that I always found the extreme versions of "freshwater" macroeconomics a bit hard to swallow. However, I am not buying Krugman's call to put Keynes at the centerpiece of modern macro thinking. Even if every economist on the face of the earth used Keynesian modelling, would it have made any difference over the last year? Who besides Nouriel Roubini (aka Dr. Doom) forecasted the severe recession accurately? And before you give Roubini too much credit, please realize some economist somewhere is always saying "the end is near!"

Finance students: be sure to read about Larry Summers theory of ketchup economics!

Bernanke nominated for a second term

A wise move, applauded almost universally by economists. Robert Samuelson's column in today's Wash Post summarizes Bernanke's considerable accomplishments, while pointing out that there are no doubt some things he would have done differently if given the option (burst the housing bubble two years ago, come up with a way to keep Lehman Brothers afloat).

Economists on the blog forefront

Today's WSJ has a profile of the leading economics blogs and bloggers. I am familiar with and read most of them. Ordinarily I try to avoid content overlap with these blogs, but I thought the NC State College of Management community would benefit from knowing who the rock stars of the econoblog world are. Unfortunately the article did not mention NC State's own Craig Newmark, whose blog Newmark's Door is well worth checking regularly.