New Economist

Free NBER Working Papers

Some econoblogger readers must get frustrated by the frequent references to NBER Working Papers. Acedemics forget that while they get them free, others have to pay. So it is welcome news that the NBER have announced a free trial, available at www.nber.org/trial

Free trial subscription to NBER Working Papers through November 15, 2006.

All working papers issued since October 2004 can be downloaded without charge. Each registered user is limited to 100 free papers.

Registered users will also be offered free downloads from the abstract page of each eligible working paper.

India - A study in contrasts

If like me you think charts are often the best way to convey an economic or statistical point, then you'll want to see a new 28 page chartpack on India by Tamara Trinh, senior economist at Deutsche Bank Research. Some of the key points made in the presentation India - A study in contrasts (PDF):

* India’s attractiveness for foreign investors is increasing - but huge investment is needed, especially in infrastructure
* Low workforce participation, especially of women – more labour market reforms are needed
* Qualifications are unevenly distributed and do not always fit - but huge improvements in the quality of workforce is likely to be a major driver of future growth
* GDP growth from 2006 to 2020 is forecast to average 5.5% p.a., greater than China
* At the end of the next decade, India could reach Japan‘s living standard of 1960 or Korea’s of the early 1980s
* Despite many challenges, India is rising

Does empirical economics follow the scientific method?

Some activities of economists are valued more than others in the academic pecking order. Research trumps teaching. Journal articles often have more impact than books (unless you are as well known as Mankiw or Krugman and can corner the 'principles' textbook market). As John Quiggin remarks:

..books are a high-effort, low-payoff exercise for economists, unless you have something you really need to say at book length.

But surely lowest of the low activity must be attempting to replicate others work? If you get the same result, journals certainly won't want to publish it - and even if you don't, there's no guarantee they will (some journals won't touch them). Yet we all know that published results are often not as robust as authors like to portray them. Results can vary widely depending on the period chosen, the dummies used, the regression method, treatment of outliers etc. And documentation is often surprisingly sloppy.

If one were to venture down the replication path, though, what are your chances? Not that high, according to a new paper B. D. McCullough, Kerry Anne McGeary and Teresa D. Harrison from Drexel University: Do Economics Journal Archives Promote Replicable Research? (Hat tip: Craig Newmark).

All the long-standing archives at economics journals do not facilitate the reproduction of published results. The data-only archives at Journal of Business and Economic Statistics and Economic Journal fail in part because most authors do not contribute data. Results published in the FRB St. Louis Review can rarely be reproduced using the data/code in the journal archive. Recently-created archives at top journals should avoid the mistakes of their predecessors. We categorize reasons for archives’ failures and identify successful policies.

The authors attempted to replicate the results from 138 empirical articles in the Federal Reserve Bank of St. Louis Review. Of the 138 articles, 29 employed software they did not have or used proprietary data, and were excluded. Of the remaining 117, they were able to replicate only 9 of them: a lousy 8 per cent. In 2001 the National Research Council wrote that:

The ability to replicate a study is typically the gold standard by which the reliability of scientific claims are judged.

Judging by these results economics would not even meet a bronze standard, let alone gold. Many economists think that most articles are replicable, and hence the issue is not a matter for concern. They are wrong.

McCullough et al argue that the incentives for authors to comply with replication policies (or journal archives) are weak; many don't comply, and there are seldom any sanctions against them. The honour system of most journals simply don't work. They put the case for mandatory archiving of both data and program code:

Data and/or code archives are supposed to make it easier for one researcher to build on the work of another. A necessary condition for this is that the archived material enables the replication of the published results. “Data only” archives do not meet this condition, since the article cannot possibly describe everything that was done to the data. Neither do data/code archives meet this condition if data and code are not archived or if the data and code are not those that actually produced the published results.

It is the duty of the journal editors to ensure that authors supply material to the archive, and it is the duty of the author to ensure that the archived materials will accurately reproduce the published results. ...Generally, it is the duty of the editors to provide authors with incentives to comply with the journal archiving policy, and the failures of these archives must be laid at the feet of their editorial boards.

Note: Also worth reading is an earlier paper by Richard G. Anderson, William H. Greene, Bruce D. McCullough, and H. D. Vinod: The Role of Data & Program Code Archives in the Future of Economic Research. Amongst other things, it discussses the supply of and demand for replication, the current 'strategic information problem', and summarises much of the earlier research. The authors found that most economic journals don't even have a policy on replication:

So, what is the “replicability” policy of most current professional journals? Most journals have no such policy. A few journals have “replication policies” whereby authors “must” provide data and code upon request, and even fewer journals have mandatory data/code archives, where the researcher must deposit his data and code prior to publication. There is no journal, however, that can provide tangible evidence that its published results are, generally speaking, replicable. To date, every systematic attempt to investigate this question has concluded that replicable economic research is the exception and not the rule.

Noting some recent progress, Anderson et al conclude with a plea:

For empirical economics to at last become a science, the profession must embrace the scientific method by archiving and sharing data and program code.

UPDATE: I should have mentioned a related weblog discussion on statistical significance and data mining: see Kevin Drum's post Lies, damn lies and... and Andrew Gelman's comment: Something fishy in political science p-values Of course, this problem of publication bias goes well beyond political science (Hat tip: Mark Thoma).

Issues facing the MPC

The bank of England's Monetary Policy Committee holds its pre-meeting today, with the formal meeting on 4 and 5 October. Gabriel Rozenberg of the Times provides a useful summary of the issues facing it: Bank's nine digest the work of 100

At 8.45 this morning, nine bleary-eyed men and women in a lecture theatre high above Threadneedle Street will struggle to comprehend the entire economy.

Every aspect of economic life is on display for the interest rate-setting members of the Bank of England’s Monetary Policy Committee at the regular pre-MPC meeting, which takes place on the Friday before each month’s rate-setting meeting. The daunting presentation lasts about four hours and features scores of graphs and charts, created by 100 Bank staff crammed into the seats behind them.

...Growth: services slowdown
The economy grew more slowly in the second quarter than hoped, expanding by 0.7 per cent. That is in line with the long-run trend, but will make the Bank’s growth forecast for the year very difficult to reach.

In addition, the third quarter seems to have started slowly, with service sector output falling by 0.3 per cent in July and the PMI surveys showing unexpected weakness. However, retail sales remained robust in August and CBI data suggest that they enjoyed a healthy September as well.

Prices: rising strongly Inflation strengthened to 2.5 per cent on the consumer price index in August, the fourth successive month above the Bank’s target of 2 per cent.

Pipeline price pressures appeared more under control, with output price inflation dropping back in response to a large fall in the cost of fuel and scrap metal.

Unemployment may have stopped rising over the summer, although it was hard to be certain as the two measures of joblessness pointed in different directions.

There were also mixed signals on housing. Gross mortgage lending reached a new high of £32.7 billion in August, and Nationwide reported the fastest house price rises since February last year. But the rise in new mortgage approvals recorded by the British Bankers’ Association was modest.

The international economy
The eurozone looks set to become less supportive of UK growth in the months ahead after a weak business confidence survey of Germany from the Ifo institute, which edged down to its lowest level since February.

Meanwhile, across the Atlantic traders are starting to price in a cut in interest rates by January, following the softest Philadelphia Fed survey of manufacturing for 3½ years. The evidence is that the housing market is continuing to weaken.

I agree with the articles verdict for a 'probable hold' on rates this month - as do those polled recently by Reuters. A November rate hike is more likely, though there is no rush.

Immigration: what are the questions?

Immigration can no longer be ignored, writes Martin Wolf in today's Financial Times. Who would disagree?

Immigration is the most contentious of all the challenges confronting today’s high-income countries. Decent people do not want to confront the issue, not only for fear of being labelled racist, but ...this is a vital issue for the future of a country. It must be confronted.

That the British agree is evident. According to an Ipsos Mori poll conducted in June, they regarded immigration and race relations as the second most important issue facing the country today, after crime. This is not surprising. Between 1995 and 2004 alone, net immigration by non-British people was a fraction under 2m, or 3 per cent of the population. It was 342,000 in 2004.

...Not only is the inflow substantial, but it is also having significant impact on the size and composition of the population. Net immigration generated two-thirds of the increase in the UK’s population between 2001 and 2004. By 2001, ethnic minorities made up close to 10 per cent of the population. More recently, there also has been a very large immigration from new members of the European Union.

Nobody planned this level of immigration. On the contrary, both the country and the government avoided serious debate on the subject. Suppose, however, that they were to confront it seriously: what questions should they ask? I suggest the following: first, whose welfare counts? Second, is it possible to control immigration? Third, what are its economic consequences? Fourth, does the cultural impact matter? Finally, what policies should the UK have?

Let me at least suggest some answers. The first is that the welfare of existing citizens has priority. This does not mean that the benefits to potential immigrants count for nothing. It means that political communities have a right to determine their own composition.

...The second is that controls are feasible. Indeed, the huge discrepancies in real wages across the globe demonstrate this. While unavoidably porous, controls are at least partially effective.

The answer to the third has one central element: immigration’s impact on an economy’s overall size must be carefully distinguished from that on incomes per head. Too much of the debate in the UK has focused, absurdly, on the former. China has a bigger economy than Switzerland. Most people would prefer to be Swiss.

The return of the Phillips curve

An interesting Economist economic focus column this week. Curve ball: A link between unemployment and inflation is fashionable again

If haircuts and dress styles can come back into fashion, then so can economic theories. That is why policymakers have recently been debating the implications of the shape of that very 1960s concept, the Phillips curve.

The Phillips curve was named after A.W. Phillips, whose research suggested a trade-off between British unemployment and wage inflation over the period 1861 to 1957. The curve was widely used in the 1960s. Economists developed models that gave politicians a neat way to find the right balance between the two factors; for every percentage-point fall in unemployment, inflation would rise by, say, half a point.

But in the 1970s, the trade-off between unemployment and inflation seemed to evaporate; both rose at the same time, a phenomenon known as stagflation. ...Even before the curve began to break down in practice, Milton Friedman had cast doubt on the theory, as had Edmund Phelps, another American economist. The doubters argued that workers would demand higher wages to protect themselves against the rise in inflation. Thus the only effect of government stimulus would be to increase inflation for the same level of employment; in the long run, the Phillips curve became vertical.

So the Phillips curve fell out of favour and was replaced by its corollary, the NAIRU, or non-accelerating inflation rate of unemployment (in effect, the natural rate). Economists spent much of the 1980s and 1990s debating what the rate might be.

...Why has the Phillips curve, displaced by the NAIRU and the output gap (which suggests that inflation will rise when economic growth is above trend), come back into the economic debate after so long in the cold?

UK productivity growth - up or down?

It's not all doom and gloom in Blair's Brown's Britain. Labour productivity is trending up, unit wage costs down - according to a release from the ONS today:

In the second quarter of 2006 whole economy productivity growth (measured by output per worker) was 1.8 per cent compared with the same quarter a year ago, up from growth of 1.5 per cent in the previous quarter. The rise in annual productivity growth was due to an increase in output.

...Whole economy unit wage costs in the second quarter of 2006 were 2.0 per cent higher than the same quarter a year earlier, down from a growth of 2.2 per cent in the first quarter of 2006. The slower rate of unit wage cost growth was due to a decrease in the growth rate in average wages and salaries together with an increase in the growth rate of output per worker.

So productivity growth has picked up. Or has it?

The alternative measure of productivity – output per hour worked – showed that hourly productivity grew by 1.7 per cent in the second quarter of 2006 compared with the same quarter a year ago, down from 1.8 per cent growth in the previous quarter.

Output per hour worked is a better measure than per worker, as changes in average working hours (e.g. from the growth of part-time work) distort that series. So on the best available measure, UK labour productivity actually slowed marginally in the second quarter. But the gradual decline in unit costs is good news for inflation.

Measuring competitiveness

How should we measure competitiveness? A new IMF working paper by Peter Neary, Measuring Competitiveness, argues that indices based on marginal shares may be the answer:

This paper reviews alternative approaches to measuring an economy's cost competitiveness and proposes some new measures inspired by the economic theory of index numbers. The indices provide a theoretical benchmark for estimated real effective exchange rates, but differ from standard measures in that they are based on marginal rather than average sectoral shares in GDP or employment. The use of the new indices is illustrated by some simple calculations that highlight the potential exposure of the Irish economy to fluctuations in the euro-sterling exchange rate.

 

Another ONS howler...

The Monetary Policy Committee worries about rising inflation. Market commentators mutter dire warnings. Then the ONS - surely the Frank Spencer of national statistical agencies - reveals there's, err, been a bit of an error. Sorry about that. The FT's Chris Giles reports the error makes rate rise less likely:

The Office for National Statistics on Wednesday admitted to an error that dramatically reduced the worry over inflation in the economy and makes a further interest rate rise less likely.

The ONS slashed its estimate of annual inflation in export prices from 3.8 to 0.6 per cent after it found it had introduced an error into the calculation. After the change to export prices, the ONS’s estimate of overall inflation for goods and services produced by British companies and government went down from 3.4 to 2.2 per cent.

After correcting its mistake, the ONS now says the cash value of national income grew by an unsurprising 4.8 per cent annual rate in the second quarter rather than the unsustainable 6 per cent rate it estimated last month.

A companion piece explains how an attempt to fix a small problem created a bigger one:

The mistake by the ONS in August, in raising the second-quarter growth of cash gross domestic product to an annual 6 per cent rate, highlights the need for producers and users of statistics to be cautious about accuracy.

That private sector economists and Bank of England analysts failed to spot something funny in the figures at the time of this month’s monetary policy committee meeting is almost as embarrassing as the ONS mistake.

MPC members must regret writing in the minutes of the meeting that although GDP deflators were often erratic, “annual growth in nominal GDP had been increasing and was now estimated to be 6 per cent, a level consistent with average consumer price inflation a little higher than its target”.

The ONS did not come fully clean about its error in published documents on Wednesday, prompting Richard Alldritt, chief executive of the independent Statistics Commission, to comment that “more explanation would have been welcome”. When prompted, however, ONS officials were open about how the error crept in.

It is a tale that can send shivers down the spine of anyone who has worked with large statistical datasets. In an effort to eliminate a minor problem with the treatment of value added tax fraud in the national accounts, the statisticians introduced a big error into its modelling.

The minor problem was that before June, any changes in Revenue & Customs estimates of VAT fraud could lead to a small change in GDP growth through differences in the export and import deflators, which measure price changes of goods and services leaving or entering the UK, applied to the cash estimates of the fraud. This was obviously unsatisfactory. But in rectifying it, a computer glitch ensured the export deflator was pushed up artificially, raising the nominal demand and nominal GDP growth.

The error will have repercussions. The ONS will once more have to prove the value and accuracy of its statistics. For the Bank, one of the pillars supporting higher interest rates has been knocked away. There will be no mention of record rises in nominal GDP in the October MPC minutes. The Bank’s attention will again turn to figures outside the national accounts to evaluate the state of the economy.

This will clearly make it harder for the MPC to raise official UK rates - though with other data mostly printing on the strong side, one can expect at least one more 25 bp hike. Worth noting though is that new MPC member Danny Blanchflower, in his first speech since being appointed, thinks Britain’s jobs market will weaken and the Bank of England risks an economic slowdown if it presses on with interest-rate rises

While all statistical agencies will make the occasional error, the ONS do seem accident prone. In part this appears to stem from a reluctance seriously to question unusual numbers. More critical in-house scrutiny of outliers might have saved them this embarrasment.

An economic history of bastardy

There are a lot more English bastards these days than there used to be. Professor John Ermisch at ISER, University of Essex, explains why in his fascinating new working paper: An Economic History of Bastardy in England and Wales (PDF). Here's the summary:

A remarkable feature of English demographic history is the explosion in childbearing outside marriage during the last quarter of the twentieth century, after 400 years of relative stability. Over the period 1845-1960, the percentage of births outside marriage moved within a small range, averaging about 5%. The paper finds that, up to the First World War, higher unemployment discouraged marriage and increased non-marital births, with a recovery in marriages in the subsequent year.

This pattern is consistent with poorer labour market conditions discouraging marriages among pregnant would-be brides, thereby increasing bastardy. During the inter-war period, higher unemployment continued to produce postponement of marriages, but non-marital childbearing was no longer linked to unemployment, nor is there a clear link to unemployment in the post-war period.

After 1960, when the contraceptive pill was introduced, childbearing outside marriage began to climb slowly, and it exploded after 1980, reaching 42% in 2004. This was partly driven by a steep increase in the age-specific non-marital births rates of women aged 20-34 from the mid-1970s to the early 1990s, after which they stabilised at a high level. At fixed average non-marital and marital age specific birth rates, this increase in the proportion of births outside marriage can be mainly accounted for by a large fall in the proportion of women aged 20-34 who are married, which is in turn associated with a dramatic rise in cohabiting unions. These unions are short-lived before either dissolving or being converted into marriage.

But this begs the question: why didn’t average non-marital fertility rates fall when more women cohabited? Women had the means (contraception and legal abortion) to avoid nonmarital childbearing if they wanted to do so, and so the substitution of cohabiting unions for marriages need not have raised non-marital fertility.

A theory of marriage market search (courtship) in which out-of-wedlock childbearing is an option suggests why it may be a rational choice, even when fertility can be controlled. A woman’s welfare as a single mother is likely to be influenced by the prevalence of single mothers in the population, which may reflect social stigma against single mothers. When their prevalence is low, nonmarital childbearing is discouraged. A temporary change in the determinants of non-marital childbearing that raises it, like the large rise in unemployment in the late 1970s/early 1980s, can produce rapid erosion of the stigma and a self-reinforcing rise in childbearing outside marriage.

This dynamic is likely to be concentrated among a segment of the population who already had stronger incentives to have a child before marriage. If this social influence model is valid, then it is likely to be the case that socio-economic differences in the chances of having a child before marriage widen as childbearing outside marriage becomes more common, and the paper provides evidence that this has happened.

An alternative, or complementary, explanation stresses the role of the rise in cohabiting unions and delay in partnership. These generated an increase in non-marital births by increasing the unmarried  population. This view also points to the operation of a social influence model in explaining the dramatic rise in cohabitation, and the paper provides evidence of a diffusion of cohabiting unions from the better educated to the less educated population.