New Economist

Is the BoE inflation fan flawed?

Kevin Dowd at Nottingham certainly thinks so. In an article in the March 2007 Journal of Macroeconomics, Too good to be true? The (In)credibility of the UK inflation fan charts, he argues that the Bank of England's model overestimates inflation risk:

This paper presents some simple methods to estimate the probability that realized inflation will breach a given inflation target range over a specified period, based on the Bank of England’s RPIX inflation forecasting model and the Monetary Policy Committee’s forecasts of the parameters on which this model is built. Illustrative results for plausible target ranges over the period up to 04Q1 indicate that these probabilities are low, if not very low, and strongly suggest that the Bank’s model over-estimates inflation risk.

Here is an ungated version.

I have always found it a tad ludicrous that the Bank's central CPI projection invariably manages to revert to the inflation target two year's out. Implied message: current rates are always appropriate. Could they not either use the fan to indicate upside or downside medium-term risks to their outlook, or as some other central banks do, publish their internal interest rate forecasts rather than just talk about implied market forecasts? Like Dowd, I'm not a great fan of the fan.

Pupils pay the price of peer presure

Many university students' subject choice is swayed by their peers. But at what price? Giacomo De Giorgi (Stanford), Michele Pellizzari (IGIER-Bocconi) and Silvia Redaelli (Bocconi) find it is quite sizeable, in their new paper Be As Careful of the Books You Read as of the Company You Keep. Evidence on Peer Effects in Educational Choices (PDF). They find that peers’ behavior does have an important and significant effect on the choice of college major:

Using a unique dataset of students at Bocconi University and exploiting the peculiar organization of teaching at this institution, we are able to identify the endogenous effect of peers on such decision, circumventing the crucial identification problems in studies of social interactions.

Results show that, indeed, one is more likely to choose a major when many of his/her peers make the same choice. We estimate that, when it diverts students from majors in which they seem to have a relative ability advantage, this effect leads to lower average grades and graduation mark, a penalty that in the labor market could cost up to 871 euros (1,117 USD) a year.

For those in England, you can catch Michele Pellizzari present the paper next Monday afternoon, 5 March, at an ISER Seminar at the University of Essex.

Neither Frida nor Georgia

I would have staked my money either on Georgia O'Keeffe or the ubiquitous Frida Kahlo. But it seems I'm wrong. According to a new NBER paper by University of Chicago art economist David Galenson, the most popular women artist of the 20th century is American photographer Cindy Sherman:

Recent decades have witnessed an outpouring of research on the contributions of women artists. But as is typical in the humanities, these studies have been qualitative, and consequently do not provide a systematic evaluation of the relative importance of different women artists. A survey of the illustrations of the work of women artists contained in textbooks of art history reveals that art historians judge Cindy Sherman to be the greatest woman artist of the twentieth century, followed in order by Georgia O'Keeffe, Louise Bourgeois, Eva Hesse, and Frida Kahlo.

The life cycles of these artists have differed greatly: the conceptual Sherman, Hesse, and Kahlo all arrived at their major contributions much earlier, and more suddenly, than the experimental O'Keeffe and Bourgeois. The contrasts are dramatic, as Sherman produced her greatest work while in her 20s, whereas Bourgeois did not produce her greatest work until she had passed the age of 80. The systematic measurement of this study adds a dimension to our understanding of both the role of women in twentieth-century art and the careers of the major figures.

I like Sherman's work. But I doubt it retain its dominance over the next few decades. These days, there are just too many imitators, wherease O'Keeffe and Kahlo were both one of a kind (and with amazing bios too). Let's face it, how many leading women actors want to make a film about Cindy's life story? As for Bourgeois, while at times her work is very innovative, most of it leaves me underwhelmed.

The NBER paper is Who Were the Greatest Women Artists of the Twentieth Century? A Quantitative Investigation; unfortunately I can't find a non-gated version.

UPDATE: Tyler Cowen also has posted about the paper: he opts for Eva Hesse. Colin Stewart at the Arts of Innovation blog also comments.

Happiness 1, 2, 3

Here are three important new papers on happiness economics. Some light weekend reading for you...

Bernard M.S. van Praag: Perspectives from the Happiness Literature and the Role of New Instruments for Policy Analysis, February 2007 (CESifo Working Paper No. 1912)

After having been ignored for a long time by economists, happiness is becoming an object of serious research in 21st century economics. In Section 2 we sketch the present status of happiness economics. In Section 3 we consider the practical applicability of happiness economics, retaining the assumption of ordinal individual utilities. In Section 4 we introduce a cardinal utility concept, which seems to us the natural consequence of the happiness economics methodology. In Section 5 we sketch how this approach can lead to a normative approach to policy problems that is admissible from a positivist point of view. Section 6 concludes.

David G. Blanchflower and Andrew Oswald: Hypertension and Happiness across Nations (NBER Working Paper No. 12934)

A modern statistical literature argues that countries such as Denmark are particularly happy while nations like East Germany are not. Are such claims credible? The paper explores this by building on two ideas. The first is that psychological well-being and high blood-pressure are thought by clinicians to be inversely correlated. The second is that blood-pressure problems can be reported more objectively than mental well-being. Using data on 16 countries, the paper finds that happier nations report lower levels of hypertension. The paper's results are consistent with, and seem to offer a step towards the validation of, cross-national estimates of well-being.

David G. Blanchflower and Andrew Oswald: Is Well-being U-Shaped over the Life Cycle? (NBER Working Paper No. 12935)

Recent research has argued that psychological well-being is U-shaped through the life cycle. The difficulty with such a claim is that there are likely to be omitted cohort effects (earlier generations may have been born in, say, particularly good or bad times). Hence the apparent U may be an artifact. Using data on approximately 500,000 Americans and Europeans, this paper designs a test that makes it possible to allow for different birth-cohorts. A robust U-shape of happiness in age is found. Ceteris paribus, well-being reaches a minimum, on both sides of the Atlantic, in people's mid to late 40s. The paper also shows that in the United States the well-being of successive birth-cohorts has gradually fallen through time. In Europe, newer birth-cohorts are happier.

Are women economists still stick in the ghetto?

The gender distribution of research fields in economics has been heavily skewed, with women tending to favour certain fields - health, education, labour, economic history, development economics - and eschewing others. A recent paper by Juan J. Dolado, Florentino Felgueroso and Miguel Almuniac examines whether this gender segregation has fallen over time - and if so, why?

The paper uses a new dataset about researchers working in the world top-50 Economics departments, based on rankings from Econphd.net. Both the PowerPoint presentation and the paper, Do men and women-economists choose the same research fields? Evidence from top-50 departments  (PDF) are available online.

Our main findings are that the probability that a woman works in a given field is positively related to the share of women in that field (path-dependence), and that the share of women in a field at a given department increases with the sizes of the department and field, whereas it decreases with their average quality. These patterns, however, are changing for younger female faculty members.

The main findings are reasonably encouraging, showing an "evolution toward desegregation": (1) the proportion of economic PhD graduates who are women has risen to almost one-third; (2) segregation by research field has halved over the past two decades, and (3) gender gaps are slowly narrowing in many fields.

The joys of employee ownership

For Chris Dillow and other advocates of employee ownership, the last few days have been heady indeed. On Saturday it was revealed that the boards of the UK's two biggest co-operatives have agreed the terms of a merger that would form the world's largest consumer co-operative group, with a combined workforce of more than 87,000 staff and more than 4,500 sites. On Sunday The Observer reported that John Lewis plans massive expansion:

John Lewis Partnership is embarking on a highly aggressive expansion strategy which will see the employee-owned business create 35,000 new jobs and double its turnover to £12bn. ...A 10-year business plan, signed off by the partnership board in recent days, will see the retail concern boost its total workforce to 100,000 by 2017. The plan envisages John Lewis significantly increasing its 26 department stores and 184 Waitrose supermarkets.

Yesterday the Employee Ownership Association has published a new paper by Richard Reeves, CoCo Companies: Work, Happiness and Employee Ownership (PDF). Its argument, previewed in the latest New Statesman in a piece called We love capitalism, is that co-ownership is not only a better alternative to public limited companies (or private equity), it is also a potential answer to the UK's productivity problem:

Most policy-makers view the co-ownership sector in the same way as the royal family: a good thing, slightly anachronistic . . . and a bit wet. But firms where workers not only own a real stake but also play a real role in running the firm - where the co-owners are also co-creators - are not for the soft-hearted. These are not reheated co-operatives: pay differentials tend to be lower than in comparable firms, but there is no expectation that everyone will get a same-sized slice of the pie.

One of the sources of higher productivity in these "CoCo" companies is tougher peer policing: it is harder to "pull a sickie" when the co-workers who "welcome" you back will be poorer as a result. Information-sharing and innovation levels look to be higher in CoCo firms.

The best study undertaken of relative performance suggests a 19 per cent productivity lift from co-ownership. Applied across the economy, co-ownership would make the UK the most productive nation in the world. In a survey of managers in co-owner firms, 72 per cent reported that staff worked harder than in competitor companies, and 81 per cent that they took on more responsibility.

Of course, bottom line is the usual 10-point list of demands, including tax breaks. But it seems to me they have a better case than most industry sectors, if the evidence on productivity, employee commitment and job satisfaction in the report proves robust.

Economist couple of the week: George Akerlof & Janet Yellen

Choosing my first 'economist power couple' wasn't hard. Both are famous and influential West-coasters. Berkeley professor George Akerlof won the Nobel Prize in 2001, while his partner Janet Yellen, Berkeley professor, former Chairman of the Council of Economic Advisers, and President of the San Francisco Fed, must surely outdo him in clout.

Although Akerlof is best known for his article, "The Market for Lemons", their most famous joint work was on efficiency wages.

Akerlof describes how they met in his autobiography, prepared for the Nobel prize:

In between Berkeley and the LSE I spent a year at the Federal Reserve Board in Washington, D.C., where I met Janet Yellen. We liked each other immediately and decided to get married. Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics. Our lone disagreement is that she is a bit more supportive of free trade than I.

We decided to get married hastily, not only because we had so little doubt about each other, but also for practical reasons. I had already accepted a professorship at the LSE for the coming year and if we were to avoid being separated, Janet would also need to get a job in England too. Luckily, she also was given a tenure-track lectureship at the LSE. There seemed to be no question about her tenure since she had already published several distinguished articles on the economics of bundling and advertising.

After a year in Washington, we left for England. We very much liked both the LSE and London, but both of us had problems of identity: we were American, not English. Luckily, Berkeley had never accepted my proffer of resignation when I left for the LSE, so I was still nominally on the faculty. And Janet got a tenure-track job in the business school with a promise of early review for tenure.

We had met at the Fed in the Fall of 1977, married in June 1978, and left for the LSE in September of that year. We came back to Berkeley in August 1980. Shortly thereafter, in June 1981, our son Robert was born.

A decisive couple, clearly. But not identical. A 1997 Business Week article on Yellen describes their different personal styles:

In academic circles, Yellen and Akerlof -- who met in 1977 as young Fed economists and were married the next year--have won acclaim for the originality of their research, to say nothing of their clout. ...colleagues say Akerlof often comes up with breakthrough ideas, but it is Yellen who supplies the academic rigor. Akerlof ''is more interested in the inspiration than the hard work of putting it together in a professionally plausible form--he's off to the next idea,'' says Tobin. ''She provides the discipline that makes them go.''

Nominations welcome for next week's economist couple.

The economics of the Stern Review

For those interested in the economics of climate change, Birmingham University's Economics department and the Institute for Energy Research and Policy are holding a one day workshop on The Economics of the Stern Review.

The purpose of this workshop is to understand why Stern emerges with policy prescriptions which appear to differ from those supplied by previous economic analyses of the climate change problem. Did earlier analyses neglect important aspects of the climate change problem which Stern has managed to address or has the economic and scientific literature upon which they relied moved on? Or is the case that the Stern Review itself is in some respects deficient? The workshop brings together leading members of the Stern Review, contributors to the Review process and economists who have been openly critical of the Stern Review.

It is billed as "an academic debate between the proponents and opponents of the Stern Review of the Economics of Climate Change". The workshop takes place on Friday 9 March at 0930-1745.

Economics: a family business?

Last month the New York Times' David Leonhardt published a fascinating article, listing 13 young (untenured) US-based economists in his piece The Future of Economics Isn’t So Dismal. It's already been given a god run in the econoblogs. The reason I'm writing about it more than a month later is the accompanying table (click on it to see a larger, clearer version).

Of the 13 up-and-coming academic economists, six are married to each other. For example, Chicago's Emily Oster is married to fellow Chicago economist Jesse Shapiro. Not only that, Dr Oster is the daughter of two economists, Yale's Ray Fair and Sharon Oster. Talk about keeping it in the family. The other two couples were MIT's Amy Finkelstein and Harvard's Benjamin Olken, and Berkeley's Ulrike Malmendier, and Stefano DellaVigna.

Wharton's Justin Wolfers, by the way, has a partner with a PhD in economics from Harvard, who worked for two Federal Reserve banks and who is now an Assistant Professor of Business and Public Policy at Wharton: Betsey Stevenson. So that means over half (7 out of 13) of the rising US economic stars have an economist as partner.

The piece raises an question: Is this plethora of economist 'power couples' simply a reflection of the rising participation of women in academic economics, and the tendency for like to marry like? Or do partners in the same profession have higher joint productivity, compared to couples with differing careers? Personally, I suspect such 'power couples' do often perform better in their chosen profession. Comments are welcome.

In the meantime, continuing with this theme, I also plan a weekly post on 'economist couple of the week'. Nominations welcome.

UPDATE: Tyler Cowen at Marginal Revolution blog has linked to this post: Assortative mating

Going for growth?

Economic reforms is, in most places and most of the time, a long hard slog. The anual OECD report Going for Growth 2007, published this week, explains why structural reform is still necessary. Now in its third year, the latest report "highlights the weaknesses that are holding back OECD economies from raising material living standards". Some common priorities emerge:

• For much of continental Europe the main focus is on improving labour market performance to reduce unemployment and lift labour force participation.
• For lower-income countries, as well as in Japan and Switzerland, raising productivity is the main challenge. Priorities focus more on liberalisation of product markets, especially in network industries and in services.
• English-speaking countries generally display good labour market performance but need to raise skill levels, in particular through improvements in secondary education.
• Many EU countries need to strengthen higher-education systems to improve graduation rates and, in some cases, the quality of teaching and research.

The handout for journalists (PDF) provides a good summary. The Chapter 1 Overview (PDF) is available free online, as are the individual recommendations for each OECD country in Chapter 2's Country Notes. For the United Kingdom (PDF), the main priotities are to: (1) further reform disability benefit schemes, (2) improve the education achievement of young people, and (3) improve public infrastructure, especially for transport. One can hardly argue with those.

The report also looks at the political and economic impediments standing in the way of structural reforms. Today's Economist piece, The art of the possible, focusses on this issue - explaining how crises have often provided the impetus for structural reform:

The report's most disheartening conclusion is that reform must often wait for the sting of a crisis. This is borne out, it says, by the experiences of Britain in the late 1970s, the Netherlands and New Zealand in the 1980s and by Italy in the early 1990s. Governments seem more likely to loosen their product and labour markets when GDP is more than 4% below potential.

Policymakers may think this finding is of little use: calling forth catastrophe is an odd way of promoting prosperity. However, it does serve as a useful warning. Desperate times will make reform unavoidable. Better then, to carry it out during less painful interludes. One reason is that a full treasury can help to compensate the losers.

By the same token, it is much harder to carry out structural reforms at the same time as tightening the budget. That said, fiscal consolidation can pave the way for reform by setting aside some money in advance. In the 1980s, for example, Denmark and Ireland put their public finances in order before liberalising product markets and shaving the tax “wedge” between what workers take home and employers pay out.

In the report's introduction OECD Chief Economist Jean-Philippe Cotis welcomes buoyant Eurozone growth - but also warns it may lead to complacency over reform. “Governments should resist the temptation to ease up on reforms aimed at boosting productivity and creating more jobs”. Indeed they should resist - but who really expects that they will?