New Economist

Coming soon: Daily GDP?

In a previous post I mused: "Why use a monthly leading index when you have a weekly one to hand?" Forget that - how about a daily economic index? Martin D.D. Evans of Georgetown University has a new article in the latest International Journal of Central Banking which proposes just such a thing.

His paper, Where Are We Now? Real-Time Estimates of the Macroeconomy, describes a method for calculating daily realtime estimates of the current state of the US economy:

The estimates are computed from data on scheduled U.S. macroeconomic announcements using an econometric model that allows for variable reporting lags, temporal aggregation, and other complications in the data. The model can be applied to find real-time estimates of GDP, inflation, unemployment, or any other macroeconomic variable of interest.

In this paper, I focus on the problem of estimating the current level of and growth rate in GDP. I construct daily real-time estimates of GDP that incorporate public information known on the day in question. The real-time estimates produced by the model are uniquely suited to studying how perceived developments in the macroeconomy are linked to asset prices over a wide range of frequencies. The estimates also provide, for the first time, daily time series that can be used in practical policy decisions.

Evans argues that you can model GDP growth "as the quarterly aggregate of an unobserved daily process for real economy-wide activity."

The model also specifies the relationship between GDP, data releases on GDP growth, and data releases on a set of other macroeconomic variables in a manner that accommodates the complex timing of releases. In particular, I incorporate the variable reporting lags that exist between the end of each data collection period (i.e., the end of a month or quarter) and the release day for each variable. This is only possible because the model tracks the evolution of the economy on a daily basis.

His model captures quarterly GDP quite well, though it is more accurate to consider it as a continually-updated estimate rather than a daily one. He concludes:

In this paper, I have presented a method for estimating the current state of the economy on a continual basis using the flow of information from a wide range of macroeconomic data releases. These real-time estimates were computed from an econometric model that allows for variable reporting lags, temporal aggregation, and other complications that characterize the daily flow of macroeconomic information. The model can be applied to find real-time estimates of GDP, inflation, unemployment, or any other macroeconomic variable of interest.

Evans notes that "these findings give but a flavor of the possible uses for realtime estimates". I quite agree. I look forward to longer time series, and modelling of other economic data. It surely can't be long before one of the investment banks starts crunching out their own proprietary version, either.

Defying doomsayers, UK call centres are expanding

Remember all the furore over British call centre jobs being 'offshored' to Bangalore? Well it seems UK call centres are expanding, not shrinking. Christine Buckley at The Times today reports that according to a new Income Data Services report, Majority of call centres expect UK expansion:

Call centre work is growing in Britain despite the high-profile switches of some operators to India and other low-cost countries. ...The IDS found that 88 per cent of a survey of 102 operators employing 97,000 staff said that they didn’t operate call centres overseas and had no intention of doing so.

The growth in employment — with 58 per cent of operators saying that they had recruited extra staff — was felt across all sectors, but was most pronounced in financial services and the public sector. About 52 per cent of operators expect a growth in staff in the next year. Sarah Miller, assistant editor at IDS, said: “These findings show that, despite all the worries about work being moved to India, the call centre sector is not merely alive, but is thriving in the UK.”

Of course, it's not all a bed of roses:

But there is also high staff turnover and absence levels in the industry. The average annual turnover is 22 per cent and the median length of service for call centre agents is two years. The average annual sickness leave is nearly two weeks a year compared with a national average of just under seven days.

Maybe this is why:

The average starting salary for a customer service adviser was £13,600 last year — an increase of only 1.5 per cent on the previous year.

Such low salaries and pay rises are a little surprising, considering call centres are one of the most unionised parts of the private sector. The IDS survey found 58% of private sector call centre employees were covered by a collective bargaining agreement (even higher in the public sector).

Adam Smith Lives!

Another addition to my blogroll: Adam Smith Lives! A History of Economic Thought by Sandra J Peart, Director of the Summer Institute for the Preservation of the History of Economic Thought at George Mason University. Worth a look. (Hat tip: Tyler Cowen).

Don't blame the US for global imbalances

What are the Global Imbalances? was the topic for yesterday's dinners speech by Ian Macfarlane, Governor of the Reserve Bank of Australia. Macfarlane doubts the US should be blamed for global imbalances. Here is the key quote:

I do not want to give the impression that the large US current account deficit is not an imbalance, or that it can go on rising forever. Clearly, that is not the case. My view is only that we should not start our analysis with the US current account, or look to its remediation as the key to unwinding the imbalances. For example, the most commonly heard prescription is for the United States to reduce its call on world savings by reducing its fiscal deficit.

However, if my analysis is correct, a reduction in the US fiscal deficit by itself would be unlikely to have a major impact on international imbalances. In the absence of policy changes in Asia, the Asian countries would be likely to continue running surpluses, and so a fiscal contraction in the United States would only add a contractionary influence to a global economy already characterised by surplus saving and unusually low interest rates.

He also rejects the excess liquidity argument:

Aussie econobloggers deliver down under

Australian economists held their 34th Annual Conference of Economists at the University of Melbourne earlier this week. Aussie John Quiggin caught up with fellow econobloggers Stephen Kirchner and Andrew Leigh, "and lots of old friends and sparring partners". First, the econobloggers contributions:

* John gave a keynote address (written with Simon Grant) on Learning and Discovery (PDF), "an attempt to unravel the knotty problem of unknown unknowns".

* Stephen delivered a paper on Japanese Monetary Policy under Quantitative Easing: Neo-Wicksellian versus Monetarist Interpretations (PDF), which argued that "central bank policies are unlikely to be credible in the absence of a compelling account of the underlying monetary policy transmission mechanism at the zero bound".

* Andrew gave a paper (written with Justin Wolfers) on Competing Approaches to Forecasting Elections: Economic Models, Opinion Polling and Prediction Markets (PDF), which found that during the last Australian election betting markets wre much better at predicting the outcome than opinion polls.

The keynote speeches included:

Has Barro solved the equity premium puzzle?

It's not quite the holy grail of financial economics, but certainly one of the longest running debates has been over what is known as the equity premium puzzle - or why US stock returns are so much higher than returns on Treasury bonds. The seminal paper was by Rajnish Mehra and Edward C.Prescott in 1985: "The Equity Premium: A Puzzle" (PDF), published in the Journal of Monetary Economics. Mehra and Prescott showed it was difficult to reconcile empirical facts about equity and debt returns with reasonable assumptions about the relative rate of risk aversion and the pure rate of time preference, posing difficulties for the capital asset pricing model.

A new paper by Robert Barro to this year's Minnesota Workshop in Macroeconomic Theory attempts to answer the puzzle: Rare Events and the Equity Premium (PDF). Barro's paper builds upon a 1988 JME article by Thomas Rietz entitled "The equity premium: A solution" (sorry, no PDF available), which argued that the premium could be explained by infrequent but very large falls in consumption (i.e. wars, depressions or disasters), if the intertemporal elasticity of substitution of consumption is low. Or as Brad DeLong recently put it:

Rietz's (1988) answer to the equity premium puzzle was this: a long, fat lower tail to the return distribution. A small probability of very bad things happening to stock returns could support both (a) a relatively small sample variance of returns, and (b) rational aversion to large-scale stock ownership large enough to produce the observed equity premium. The question that Rietz was unable to answer was: "What exactly are these very bad things?"

Mehra & Prescott immediately dismissed the Rietz arguments in a 1988 JME article (PDF), concluding:

Are Rietz's disaster scenarios reasonable? They are undoubtedly extreme. That such extreme assumptions are needed to account for the average returns on debt and equity we interpret as supporting our contention that standard theory still faces an unsolved puzzle.

But Barro has resurrected Rietz, and added his own twist. Barro explained the origins of his 2005 paper in an interview just published by the Minneapolis' Fed's journal, The Region:

Mehra and Prescott were extremely critical of the Rietz analysis, and I think they managed to convince most people that low-probability disasters were not the key to the equity premium puzzle. But, although I highly value the insights in their original 1985 paper (which Mehra and Prescott like to point out was actually written in 1979), I think the arguments in their 1988 comment on Rietz were incorrect.

India versus China, part 3: No contest

Amit Varma's post China v India points us to a very interesting piece by Shankar Acharya enitled India is China's economic equal? Bah!

Acharya, a former Chief Economic Adviser to the Government of India, does not pull his punches: "Let me put this bluntly: as an economy, we are simply not in China's league." His table shows the stark differences:

CHINA versus INDIA
ECONOMY/SCALE	Units	Year	China	India	China to India ratio
Population	Million	2003	1288	1064	1.2
GDP (PPP)	$ billion	2003	6090	2908	2.1
Per capita GDP growth	%	1980-2004	8.2	3.7	2.2
Share of manufacturing in GDP	%	2003	39	16	2.4
Living standards
Per capita GNP (PPP)	$	2003	4980	2880	1.7
Life expectancy	Years	2002	71	63	1.1
Female adult literacy rate	%	2003	87	45	1.9
Under 5 mortality	Per 1000	2003	37	87	0.4
Under 5 malnutrition	%	1995-2003	12.1	45.8	0.3
Poverty ratio (% below $1 a day)		2001 & 2000	16.6	34.7	0.5
INFRASTRUCTURE
Electricity production	Billion kwh	2002	1640.5	596.5	2.7
Goods hauled (Railways)	Ton-km billions	2002	1508.7	333.2	4.5
Container traffic (ports)	Millions	2003	61.62	3.9	15.7
Air freight	Ton-km millions	2003	5650.6	580.0	9.7
Telephones (land + Mobile)	Per 1000	2003	424	71	6.0
EXTERNAL SECTOR
Merchandise exports	$ billion	2004	593.4	81.0	7.3
Service exports	$ billion	2004	62.4	51.3	1.2
FDI inflow	$ billion	2004	60.6	5.5	11.0
Tourist arrivals	Millions	2003	33.0	2.4	13.8
Forex reserves	$ billion	2004	614.5	135.2	4.5

Sources: World Development Indicators (2005); Institute of International Finance, RBI and CSO. 2004 data for India refer to the fiscal year 2004-05.

Footnote: Links to China vs India blog posts part 1 and part 2.

Goodbye Paris, hullo America: The world's top 100 public intellectuals

Who are the world’s leading public intellectuals? Kevin Drum, Tyler Cowen, Professor Bainbridge, The Observor blog, Clive Davis, the Mises Institute and others on the blogosphere report that Prospect and Foreign Policy magazines have compiled their list of who they regard as the world's top 100 public intellectuals. Needless to say it is hugely dominated by the west and above all America. David Herman writes in the Prospect cover story that Europe has lost its mojo:

A huge number of names come from the US and Britain. Almost a third are American citizens; one in seven are British. However the real story is not about nationality: almost half these people live in the US. Wherever you look in the intellectual culture—from DNA and AI to the new novels by Rushdie and Zadie Smith, from literary theory to economics—America is where the action is.

In Britain, most of the names come from Oxbridge and London. In the US, from the northeast, from Washington DC to Harvard and MIT. Europe has become America's intellectual poor relation. Not only are there relatively few European names, the quality is dubious. Too many of the names rest on old laurels, or are quirky (Negri? Sloterdijk? Zizek?). The almost complete disappearance of Paris as a centre of global ideas is most striking of all.

This Anglocentric bias will cause some controversy in continental Europe. There are, for example, as many Canadians and Australians represented as Germans (three each). Only four French intellectuals made the cut, compared to 14 British. The lack of women is also notable.

The list includes 9 economists, but they are quite a mixed bunch: Gary Becker (US), Jagdish Bhagwati (India, US), Hernando de Soto (Peru), Kemal Dervis (Turkey), Fan Gang (China), Paul Krugman (US), Jeffrey Sachs (US), Amartya Sen (India), Lawrence Summers (US). Richard Posner is listed as a "judge, scholar, author", but could just as easily been dubbed an economist. So too could Daniel Kahneman, labelled a "psychologist" despite winning the Nobel Prize for Economics in 2002.

I wasn't surprised by Krugman's or Sachs' inclusion - the two highest-profile economists in the United States right now - but disappointed that the two most influential economists of the last half century, Paul Samuelson and Milton Friedman, were excluded. There was another stunning oversight: Alan Greenspan. He has certainly been the most powerful economist of the last two decades, with financial markets analysing every syllable he utters. Other notable missing economists include Joseph Stiglitz, Eugene Fama, Douglass North and Charles Kindleberger.

Readers are invited to vote for a maximum of five names from the top 100 here. My five choices are people who not only have a high public profile, but who have made a major original contribution to modern science and thought:

1) Amartya Sen (economist, India)

2) Peter Singer (philosopher, Australia)

3) Richard Posner (judge, scholar, author, US)

4) Daniel Dennett (philosopher, US)

5) Daniel Kahneman (psychologist, Israel and US)

My write in is Milton Friedman, though I do so with some discomfort. I disagree with many of his views, and thought monetarism quite loopy in its heyday. But his huge influence on both economics and public policy around the world is undeniable. Other notable economists missing from the list include Paul Samuelson, Joseph Stiglitz, Charles Kindleberger and Eugene Fama.

Reading other blogs, Stephen Pinker seems popular - though I agree with Socratic Gadfly that Daniel Dennett "is a far better representative than also-listed Steven Pinker, as well as having a broader range of intellectual interests". The popularity of Lawrence Lessig among bloggers is no surprise, nor that of pop-science authors Richard Dawkins or Jared Diamond.

Of course, some commentators have been more concerned about who should not have made the list than who was missed out. On voting, Tim Worstall warns:

Anyone who answers Paul Krugman, Thomas Friedman, Tim Garton Ass, Germaine Greer or Naomi Klein (!) Chomksy (!!)  should and will be shot.

And the Joy of Curmudgeonry is quite splenetic about Slavoj Zizek:

Now, if I might venture here upon an expression of my own view, I should say that professor  Zizek is a purveyor of ugly, senseless and frivolous tat – in other words, everything one expects from a celebrated intellectual fraudster – and that reading his dumbfounding works is the closest one is ever likely to get to an armchair lobotomy.

Of course any list of this nature is subjective and somewhat arbitrary. As Daniel Drezner, points out, part of the problem is that the criteria used is quite muddled. Foreign Policy magazine (emphasis added) explains the criteria thus:

What is a public intellectual? Someone who has shown distinction in their own field along with the ability to communicate ideas and influence debate outside of it.

Candidates must have been alive, and still active in public life (though many on this list are past their prime). Such criteria ruled out the likes of Aleksandr Solzhenitsyn and Milton Friedman, who would have been automatic inclusions 20 or so years ago. This list is about public influence, not intrinsic achievement.

So is it only public influence, or influence and distinction in their own field? One can't help thinking the list is more about popularity and public prominence (or notoriety) than anything else. As for Milton Friedman, he's not exactly on the hustings these days but his ideas still influence. Have none of the list compilers visited Central or Eastern Europe in the past decade?

Corruption threatens Chinese economy

Andrew Yeh at the Financial Times today reports the OECD says corruption threatens the Chinese economy:

The severe and widespread nature of corruption in China is becoming a major source of social discontent and poses a threat to the legitimacy of the country's leaders, according to experts at the Organisation for Economic Co-operation and Development.

...“The economy is growing, so incidences [of corruption] are growing too,” said Janos Bertok, one of the OECD researchers in charge of evaluating corruption in China, and one of the authors of this month's ground-breaking report. “The social dimension is equally as important as the economic dimension,” he said.

Mr Bertok said that corruption had already become a “danger to legitimacy” for Beijing because there was much popular dissatisfaction with corrupt officials, particularly in rural areas. He said China's corruption problem presented acute risks for the privatisation of state assets and for the “highly vulnerable area” of the construction sector.

Many of the corrupt are fleeing abroad:

...In recent years, many Chinese officials and bankers have escaped prosecution by fleeing abroad with large sums of money, often to other parts of Asia or to North America. The Ministry of Commerce has estimated that 4,000 corrupt officials have fled the country with roughly $50bn in the past two decades.

Mr Wehrle said officials often fled to countries with which China did not have extradition treaties, and that foreign governments were sometimes reluctant to send people back to China because of concerns that they might be executed.

Transparency International's latest Corruption Perceptions Index rated China at 3.4 out of a possible 10, which ranks it about halfway between the worst countries (Haiti and Bangladesh, both 1.5) and the best (Finland, 9.7). Countries with scores of less than 3 indicate "rampant corruption" according to TI.

Procurement is a key concern. The Global Corruption Report 2005 country report emphasises corruption in China’s booming construction sector. The report's highlights (available here) state:

New guidelines on procurement were also introduced in China in line with the 2003 Government Procurement Law. A key area of concern is corruption in the construction sector, especially given the massive spending on infrastructure for the 2008 Olympic Games. An auditing and supervision department has been set up by the Beijing government and the organising committee for the Games to oversee an estimated US $16 billion of business opportunities for domestic and foreign investors.

Denmark doesn't like foreigners - but Belgium does

Europeans talk a lot about being 'inclusive'. But talk is cheap. How do they actually treat the 13 million EU residents in the fifteen old Member States who are not naturalised immigrants? Until now there has been a lot of rhetoric, but not much factual, comparative information about these legal labour migrants and family members, or 'Third Country Nationals' (TCNs) as they are called.

Andrew Geddes at the University of Sheffield and Jan Niessen of the Migration Policy Group have just produced The European Civic Citizenship and Inclusion Index 2004. The report, part funded by the British Council Brussels, is now available free online. The report examines policies in around 100 policy areas and presents averages of performance in five broad policy areas: labour market inclusion, residence, family reunion, naturalization and anti-discrimination. The British Council website says "it is hoped that the Index will extend to all 25 Member States in an annual publication".

I was surprised by the overall rankings, which can be found at page 31 of the report but were not highlighted in the findings. Belgium ranked best overall in its treatment of TCNs. It had the best anti-discrimination policies in the EU-15, and was above-average in the other four policy areas. Also performing well were the Netherlands, Sweden and Portugal.

More of a surprise were the laggards. Greece and Luxembourg did badly, but worst was Denmark - it was well below-average in all five policy strands. TCNs account for 5% of the Danish population. Their unemployment rate is more than three times as high as Danish nationals, and the gap has widened since 2002. The report comments:

The 1992 Danish opt-out in the sector of Justice and Home Affairs – coupled with an opt-out on European citizenship – affects commentary on migration and inclusion issues considerably. While the Danish Presidency of the EU made a positive reference to the economic and social inclusion of TCNs in 2002, this remains an extremely sensitive area in domestic political debate.

Now one can understand why!

As for Britain, it was neither lousy nor lovely: rather, they came "very close to the European average in each indicator."