New Economist

Fitting data curves

One of the problems with standard economics training is that the econometrics focuses on linear regression and tends to skip over non-linear functions. Most economists would never consider a curve may be, say, a Poisson distribution. Many sem to think adding a squared or cubed term to their model is the height of sophistication!

Part of the problem is that few economists seem to eyeball the data before crunching it. Now there's a tool to help. In a new post on the Statistical Modeling, Causal Inference, and Social Science blog, Aleks Jakulin at Columbia University points us to a great online tool, ZunZun. It lets you use 2 and 3 dimensional 'Function Finders' to "help determine the best curve fit for your data".

I've tried it and it works. Of course, one needs to avoid over-fitting the data. But the developer of the software, James R. Phillips, has promised to add the AIC sooon; this will help select the more parsimonius function. 

Preview: UK Budget 2007

Shortly after noon tomorrow Chancellor Gordon Brown delivers his eleventh and final Budget speech. He does so against a backdrop of worrying inflation numbers and an explosive interview by a former Cabinet Secretary accusing him of 'Stalinist' behaviour.

Newspapers have been awash with pre-Budget previews. Press reports have signalled a lean budget, some 'green' tax measures, and an above-inflation boost to education spending. The Comprehensive Spending Review numbers for 2008 to 2010 will be released. I also expect the announcement of a cut in company tax rates. Chris Giles at the Financial Times says the Chancellor to bow out with ‘big Budget’:

Gordon Brown will bid farewell to the Treasury on Wednesday with what senior officials have described as a “big budget” that will not only see education placed at the centre of his political programme but which one insider said would also herald changes to the corporate and personal tax systems.

With public finances tight, the changes will be introduced in a revenue neutral package over many years. Any reductions in tax rates will be offset by tax increases or spending cuts elsewhere. Many at Westminster on Tuesday night predicted changes to corporation tax after the chancellor told the FT last week that this would be a “budget for business” and following a series of warnings that companies might relocate to lower-tax jurisdictions.

So sure are the Conservatives that the chancellor is planning a cut in corporation tax that they announced pre-emptively their own proposal for a 3 pence in the pound cut this week.

...To ease some of his problems on the public finances, he will also privatise a large chunk of the £16bn student debts owed to the exchequer. But the main focus will be on tax. The Treasury has indicated it will align vehicle excise duties closer to carbon emissions, raising taxes on 4x4 gas guzzlers. Mr Brown is likely to increase the annual limit for savings in individual savings accounts from £7,000 to £7,300 and extend his pet R&D tax credits scheme for large and small companies.

Peter Walker at the Guardian News Blog has helpfully summarised this year's newspaper predictions: Papers predict lean and green budget from Brown

A Stalinist in our midst?

On the eve of Gordon Brown's last Budget, this morning's Financial Times front page features a very blunt assessment by disgruntled ex-mandarin Lord Turnball. A former Treasury and Cabinet Secretary, he accused Brown of behaving in a 'Stalinist' manner:

Gordon Brown has exhibited a "Stalinist ruthlessness" in government, belittling his cabinet colleagues whom the Treasury treats with "more or less complete contempt", according to the man who was Britain's top civil servant until two years ago.

In an interview with the Financial Times, Lord Turnbull, permanent secretary to the Treasury for four years under Mr Brown before becoming cabinet secretary in 2002, accused the prime minister-in-waiting of a "very cynical view of mankind and his colleagues".

"He cannot allow them any serious discussion about priorities. His view is that it is just not worth it and 'they will get what I decide'. And that is a very insulting process," Lord Turnbull said.

"Do those ends justify the means? It has enhanced Treasury control, but at the expense of any government cohesion and any assessment of strategy. You can choose whether you are impressed or depressed by that, but you cannot help admirethe sheer Stalinist ruthlessness of it all."

Lord Turnbull praised achievements including the independence of the Bank of England, the three-year spending round, much of the fiscal framework and targets for departments, which had been "a net strong plus" and "quite a revolutionary step".

But Lord Turnbull noted that Bank of England independence would have suited Mr Brown by allowing him to disavow responsibility for interest rate rises. "The chancellor has a Macavity quality. He is not there when there is dirty work to be done."

...In some areas, Lord Turnbull said, the Treasury had become itself the policymaker and guardian over a set of policies such as tax credits. The chancellor, he said, had kept control of those budgets "entirely to himself".

"That has been impressive, but in a sense reprehensible. There has been an absolute ruthlessness with which Gordon has played the denial of information as an instrument of power."

Departments learned only just before Budgets "this is what you are getting and here are your public service agreements".

Such comments are unusually direct for a former senior civil servant. But should we really be surprised? Political leaders do tend to be strong-willed and at times ruthless. They don't get to the top by being nice. Margaret Thatcher's abrasive and autocratic leadership style has been roundly condemned, as has Tony Blair's 'sofa cabinet'. Chicken Yoghurt agrees - wondering what all the fuss is about now we have evidence  Gordon Brown is human after all

I say that comes as a huge relief. Hell, I could name two or three dozen bloggers, off the top of my head, who have built their reputations on exactly that interpretation of the New Labour cabinet over the last few years. It’s just nice to see that Gordon’s been part of the real world all this time.

The make-up of the Cabinet over the last ten years merely reflects the dearth of talent, first class minds and imagination in British politics. In turn, Brown’s attitude toward his colleagues is merely the reflection - the admission - of that.

Dave's Part takes issue with the claim of Stalinism:

Gordon Brown is not - whatever Lord Turnbull would have you believe - a Stalinist. Joseph Vissarionovich Djugashvili at least advocated socialism in one country. That's one country more than Mr Brown.

Guardian editor David Walker says that while Lord Turnbull's criticism of the chancellor is instructive, it is the civil service itself which must change: We must look beyond Brown

Once, someone in Turnbull's position would have thought structurally and devoted their experience to a reflective critique of the system. ...Instead, he personalises the issue as if it were Brown at fault rather than the system, which necessarily includes the culture and capacity of the civil service.

It's as if he - along with Lord Butler and the former cabinet secretary Lord Wilson - want to deflect attention from the shortcomings of the senior civil service in the 21st century. Blair and Brown are serial abusers of power - but so are all prime ministers and chancellors. If what's changed is that they get away with it, the explanation must lie with the absence of checks and balances or the ineffectiveness of the machinery of state beneath them. And that is surely the responsibility of cabinet secretaries.

...This intervention shows just how much we need to re-arrange the way we are governed at Westminster and in Whitehall. Let civil service reform start here.

Fair cop. But I doubt the need for civil service reform is the only issue raised here.

UPDATE: The FT interview has sparked plenty of commentary. The Financial Times leader comments Ruthlessness has a place in politics, but so too does trust

The worst-kept secret in Whitehall is that Gordon Brown hates to delegate. The UK chancellor and probable next prime minister is known across government for his reluctance to involve other ministers in decisions. Now Lord Turnbull ..has offered a unique public insight into how Mr Brown’s management style affects policymaking.

Middle class values and the rise of capitalism

Values and culture are under-appreciated in the study of economic growth. New work by UCLA's Matthias Doepke and Zurich's Fabrizio Zilibotti may help to redress the balance, by providing a mechanism for explaining the emergence and transmission of heterogeneous preferences. Their paper, Occupational Choice and the Spirit of Capitalism (PDF), takes as its example the emergence of a hard-working, thrifty entrepreneurial middle class in Britain. Here is the abstract:

The British Industrial Revolution triggered a reversal in the social order of society whereby the landed elite was replaced by industrial capitalists rising from the middle classes as the economically dominant group. Many observers have linked this transformation to the contrast in values between a hard-working and frugal middle class and an upper class imbued with disdain for work.

We propose an economic theory of preference formation where both the divergence of attitudes across social classes and the ensuing reversal of economic fortunes are equilibrium outcomes. In our theory, parents shape their children’s preferences in response to economic incentives. This results in the stratification of society along occupational lines.

Middle class families in occupations that require effort, skill, and experience develop patience and work ethics, whereas upper-class families relying on rental income cultivate a refined taste for leisure. These class-specific attitudes, which are rooted in the nature of pre-industrial professions, become key determinants of success once industrialization transforms the economic landscape.

It's an interesting approach, demonstrating how economic conditions and culture are mutually interlinked. As they point out in the conclusions, the theory developed in this paper could be applied to other open questions in macroeconomics and economic growth.

Hail the new empiricism

How do economists know what they know? In a call for a new empiricism, Barbara Bergmann asserts that economists mainly make it up. Her column, Needed: A New Empiricism, is published in The Economists' Voice Volume 4, Issue 2. Nice to see her mention Truman Bewley's pathbreaking work on wages and recessions:

The most intensive interaction with business people so far seems to have been carried out as a solo venture by Truman Bewley who interviewed about 300 business managers, asking why they don’t lower wages in a depression. The failure to do so, which may (or may not) be an important reason for the failure of unemployment to dissipate rapidly, has long been a subject of speculation among economists. Bewley’s book lists no less than 25 published theories that economists had invented to explain thephenomenon, 24 of which were wrong. Bewley was the first who dared to go out and ask those making the decisions what they did and why. They told him that to lower wages would create severe morale problems, and so would interfere with the operations of their firm.

This study was indeed daring. As if business people could know better than economists why they behave. The presumption! (For more details see Bewley's book, Why Wages Don't Fall During a Recession, and discussion papers). Bergmann concludes:

While observation-less theorizing is still the most common way economists think to advance the science, the new interest being shown to behavioral and experimental methods at places like Princeton and Harvard is an encouraging sign. But actual observation of business behavior has barely started. Whether it will flourish depends on whether an ever increasing corps of economists willing and able to do the work of observation gets trained and then finds jobs.

A few years ago I had occasion to ask Truman Bewley whether he was training students at Yale to carry on research like that he did on wages. His answer, I am sorry to report, was, “No, that would ruin their careers.”

Sriperumbudur: India's Shenzhen?

If you build it, will the investors come? Bloomberg columnist Andy Mukherjee ask whether Sriperumbudur in India's Tamil Nadu state may be India's answer to Shenzhen. If so, it will need political will and administrative savvy, he writes:

There's much optimism in India about the transformation of a small hamlet of paddy fields and wetlands in the south of the country into a global electronics hub. Local media say India may have found its equivalent of China's Shenzhen, or at least a miniature version of it.

It's indeed possible that Sriperumbudur in India's Tamil Nadu state may start churning out as many mobile phones in three years as Shenzhen in southern China does now. That won't be a mean feat, considering Shenzhen makes one out of eight handsets sold anywhere in the world.

The question is whether India has the political will and the administrative savvy to take Sriperumbudur to its full potential. It took a leader of Deng Xiaoping's foresight, and the might of China's command-and-control economy, to create Shenzhen. Who will bat for Sriperumbudur, which sends one lawmaker to the 545-member parliament, in democratic India?

Learning from sociology

As a partial mea culpa to Will, a link to a post from the orgtheory.net website: what economists should learn from sociology (hat tip: Tyler Cowen).

I was giving a talk about my research on the politics of the anti-war movement at the GMU econ department’s public choice seminar. At lunch, my good friend Bryan Caplan and his colleague Ilea Rainer asked me: what are five things that economists should learn from sociology? We didn’t get through all five, but here are three that came up:

1. Sociologists have a deep appreciation of imitation and conformity as a basic feature of human behavior. Economists rarely model this explicitly. If it is so important, as sociologists have shown, then economists are really missing the boat.
2. Social networks/social structure matters. Simple idea but few economists sit around and model the effects of social structure. Usually the best you get is a recognition that “norms” matter. My argument is that economists should care because social structures produce opportunities (e.g., you hear about jobs through networks). Most models assume that information/resources are out there but few wonder or model how networks/institutions create them.
3. Collect some real data. Most economists are “data downloaders.” They are afraid to get out there and survey or observe people, which limits your questions to what major data sets have asked. Experimental work is an improvement, but it is still a highly artificial construction. Go out and observe some markets with your eyes and get your hands dirty. Live a little!

What would you add?

See also my previous post: "The economy is social". Discuss

How should immigrants be integrated into the labour market?

The OECD has published four new Social, Employment and Migration Working Papers which provide accounts of how Germany, Sweden, Australia and Denmark have have handled their post-war migrant intakes. Each have different histories and policy responses, and while none could be considered an unequivocal success, Australia seems to have done better than most. The Danish government has actively promoted integration but employers appear to treat even the children of OECD immigrants badly. Sweden is still stuck with the legacy of the scarring effect the 1980s economic crisis, while Germany faces high levels of inactivity amongst Turkish women and a 'second generation' problem. Here are long excerpts from the executive summaries:

No. 47. The Labour Market Integration of Immigrants in Germany (PDF) by Thomas Liebig

Germany is currently in the process of a major restructuring of its complex integration framework. Under the new Immigration Act which came into force on 1 January 2005, there is a uniform introduction programme for all permanent immigrants.

As in the past, integration services focus largely on language training. There is little evaluation with respect to the effectiveness of this kind of training and it is generally not linked to labour market needs. Indeed, the scarce empirical evidence suggests that language training in Germany may not be very effective as a means of labour market integration. In addition to the regular integration services, there is a multitude of innovative projects. However, these are often locally-based and time-limited, and seldom designed in a way that would enable proper evaluation.

With respect to employment and unemployment rates, and particularly given their low educational attainment and the current economic situation, the labour market integration of immigrant men is relatively favourable in international comparison. However, immigrant women, and particularly those of Turkish origin, have very low employment rates. This is partly an outcome of policies which limited the labour market access of spouses. Most of these legal obstacles have been removed under the new Immigration Act.

The situation of the so-called “second generation” is of concern, as they have very low educational outcomes. This hampers their access to vocational training, which appears to have an even stronger impact on their employment prospects than on those of natives. The low educational attainment of the second generation seems to be at least partly attributable to structural features in the German education system, such as the early streaming which puts migrants’ children in a lower track. Especially problematic is the relatively late starting age for kindergarten and the prevalence of half-day education in kindergarten and school, which limits exposure to the German language at a crucial age. Immigrants’ access to self-employment is hampered by legal obstacles and a lack of information and subsequent access to financial credits.

Despite positive experiences with temporary employment as a labour market integration tool for immigrants in other OECD countries, immigrants are not a focus group of the Federal temporary employment programme.

No. 48. The Integration of Immigrants into the Labour Market: the Case of Sweden (PDF) by Georges Lemaître

The past fifteen years have seen a higher share of humanitarian migration in Sweden than in the past. This is a form of migration for which labour market integration appears to be slower than for other forms of migration in all countries. At the same time there has been a growing diversification of migration away from “Western” countries to those with a greater cultural distance.

With 1985 came the introduction of social assistance for refugees for an eighteen-month introductory period, the transfer of responsibility for integration away from the Labour Market Board and the refugee dispersal policy in which refugees were assigned to municipalities throughout Sweden to relieve the pressure on the large agglomerations, with local economic conditions not always being taken into account. The dispersal policy had a negative effect on immigrant outcomes, particularly with respect to those arriving during the economic crisis, for whom the effects seem in many cases to be persistent.

With the severe economic crisis of the 1990s, asylum seeking in Sweden continued and those asylum seekers that were recognised and granted a residence permit were met with a labour market situation that was highly unfavourable and where considerable numbers of native-born Swedes with domestic formal qualifications and work experience were also looking for work. At the same time, the crisis struck immigrants already present and employed disproportionately. The re-integration of immigrants into the ranks of the employed was rendered all the more difficult by the fact that some two-thirds of jobs, in the Swedish labour market appear to be filled through informal methods.

The situation of immigrants has improved significantly since the trough of the economic downturn, especially for new arrivals. The relatively favourable impact on employment of a minimum amount of language training and of vocational training for this group and the relatively low take-up of these suggest that there is room for improvement with regard to labour market outcomes in the early years of residence, which can be expected to persist with continued residence.

The situation for immigrants having arrived since the mid-eighties and having suffered the brunt of the economic crisis of the nineties remains unfavourable. It is difficult to see how the continuing employment problems of this group can be turned around without a strong economic expansion, given the re-enforcing nature of further non-employment on both inactivity and employer perceptions. If targeted measures are politically infeasible, then general measures that provide especially favourable results for immigrants need to be encouraged and expanded.

...What employers recognise and reward seems to be Swedish work experience and successful integration tends to be associated with early contact with the labour market. Results seem to suggest that the benefits of early employment experience on later employment are much stronger than those of Swedish vocational education. Improving the efficiency of language instruction so as not to overly prolong labour market entry and ensuring that proficiency requirements reflect actual occupational needs are matters of some importance.

No. 49. The Labour Market Integration of Immigrants in Australia (PDF) by Thomas Liebig

Overall, the labour market integration of immigrant men in Australia can be considered to be relatively favourable in international comparison. This is partly attributable to selection policy and the prevalence of the English language in many parts of the world. Even with similar socio-demographic characteristics, skilled migrants tend to perform better than other migrant groups. In contrast to the positive outcomes for immigrant men, the labour force participation of immigrant women is not high in international comparison.

Socio-babble

I like sociology. Some of my best friends are sociologists. But when they start writing uninformed babble like this post on the 'coming housing crash', I just have to respond...

The globalisation of managerial pay

While many complain about globalisation in the West, in developing economies it is seeing rewards for managerial and professional staff take off. Andrew Taylor reports in the Financial Times that Pay to ‘race ahead’ in Asia and E. Europe

The pay gap between professional staff and managers employed in emerging Asian and eastern European economies and those working in more mature markets is narrowing rapidly after taking inflation into account, according to research published on Monday.

Forecasts of wage increase in more than 50 countries, published by global consultants Hay Group, reveals that real pay, after allowing for local cost of living, is predicted to race ahead in Asia and eastern Europe this year compared with the “developed old economies” of western Europe and the US.

Faster wage growth reflects “the wealth creation being generated by rapid economic acceleration in China, India, the former Eastern Bloc and the Baltic states,” says Hay.

...According to Hay’s research, the real pay of senior mangers in China is forecast to rise by “an impressive” 8.9 per cent this year. Earnings of professional staff after adjusting for inflation are predicted by 7.9 per cent administrative workers and by 7.8 per cent for professional staff.

Extremely high pay rises in India last year also look set to continue in 2007 with real earnings of senior managers forecast to rise by 6.9 per cent, it says.

Real pay in eastern Europe is also rising “at a rate far above that in the west,” The biggest rises this year are expected in Bulgaria where average real increase of 6 per cent are predicted for managers, professional staff and administrative workers.

Scott Marlowe, general manager for Hay in the Czech republic says: “While wages are growing from a much lower level for manual and administrative workers, pay levels for managers are closer to western standards.

...Salary increases in western Europe by comparison are forecast to be much “ much more moderate” this year. Real pay rises for managers, professional and administrative staff are expected to average less than 1.5 per cent in Germany, Italy, Spain and France and just 1.5 per cent in Britain.

US workers are also expected to fare worse “with predicted increases of just 1.4 percent across all three categories. ...“Much like their colleagues in Europe, American employees cannot look forward to stellar pay rises in 2007.”

A classic example of supply and demand at work. This will not only reduce the brain drain in those countries, it also increases the rewards for human capital - which can be no bad thing.