New Economist

If you can understand this blog you must be a genius

I had always assumed that the New Economist was a fairly readable weblog. An online readability test suggests otherwise, gving it a 'genius' rating. (Hat tip: Christine Chen at FP's Passport blog)

So how do other popular econoblogs compare? Many are almost as unreadable as mine: try Dani Rodrick (college postgrad), Greg Mankiw (college undergrad), the Economist's Free Exchange (college postgrad) and George Borjas (college postgrad) for starters.

But many econobloggers' writing is more accessible. Alex and Tyler at Marginal Revolution, Mark Thoma, Brad DeLong, Brad Setser, Andrew Leigh, Dean Baker, Angry Bear, Newmark's Door, Tim Harford's FT blog and Megan McArdle's blog at The Atlantic were all assessed as having a high school reading level, while William Polley's blog was at junior high school readability.

And the only other blogs writing at genius-level I could find? John Quiggin and the Becker-Posner blog. I'm honoured to be in such company, though I have neither a beard nor a Nobel prize.

But maybe I'm just too obscure and high-falutin? Should I de-fog my posts? Feedback welcome.

Is there a 'marriage premium' for gay men?

No, according to a new IZA discussion paper by Madeline Zavodny:

Controlling for observable characteristics, cohabiting gay men do not earn significantly more than other gay men or more than unmarried heterosexual men.

But she also finds that:

Cohabiting heterosexual men also do not earn more than non-cohabiting heterosexual men.

Using US data Zavodny estimates that the marriage premium, which accrues only among heterosexuals, is about 18%; this is in line with previous estimates in cross-sectional data.

Why does marriage matter? One possible answer, proposed by Becker, is that it encourages specialisation within couples. But the authors findings seem inconsistent with that hypothesis:

The results indicate a positive relationship between a man’s earnings and the education of his spouse/partner. This is similar to previous research and consistent with both a positive productivity effect and positive assortative mating.

...spouses/partners reduce their own labor supply if their husband/partner earns more. Controlling for this effect by using predicted hours yields results that are more consistent with positive assortative mating than with specialization for all three types of couples.

These results appear consistent with a recent paper by Alison Booth and Jeff Frank of academics and administrators at British universities: Marriage, Partnership, Cohabitation and Sexual Orientation: What Males Gain a Wage Premium? (PDF):

We find a statistically significant male marriage premium, an insignificant positive effect of heterosexual unmarried partnership, and no partnership return to male homosexuals. This suggests that selection may play a limited role in the marriage premium. We also provide results on cohabiting versus non-cohabiting partners, and on the academic versus administrative side of universities.

UPDATE:
Tyler Cowen from Marginal Revolution comments:

Data on cohabitation suggest that the answer is no, whether for gay men or cohabiting heterosexuals.  The standard selection story is that women are more likely to choose the high earning men and marry them.  But why don't women live with these men too?  Does living together not transfer enough resources?  Could it be that real legal marriage is proxying for the ability to commit, which is positively correlated which other determinants of job success?

See his post for comments.

In praise of Alfredo Perez

One of the non-economic weblog's I used to check regularly was the Political Theory Daily Review. Hardly an inspiring name, to be sure - but in fact it was an intellectual treasure trove of daily finds, ranging far wider than the name might suggest. Book reviews, interviews, academic papers, controversies big and small. Richer, more eclectic, more up-to-date and more lively than the better known Arts & Letters Daily.

The blog is no more, but its author, the hyperactive Alfredo Perez, now posts his daily gleanings on the front page of the journal BookForum. The main difference is that they are now grouped thematically. Here is an example of a recent post:

The story of measurement

A review of The Story of Measurement by Andrew Robinson. The first chapter from Benjamin Franklin's Numbers: An Unsung Mathematical Odyssey by Paul C. Pasles. A review of Perfect Figures: The Lore of Numbers by Bunny Crumpacker. Good stories, good math: Young children who show sophisticated story-telling skills go on to demonstrate greater mathematical ability. Alexis Lemaire can calculate the 13th root of a 200-digit number in just over a minute. In fact, he could be the greatest "mathlete" ever, but why does he want to spend four hours a day practising, and what's so special about 37? A review of Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart by Ian Ayres. A video that's worth a million words: Award-winning video reveals the simplicity and beauty of an abstract mathematical tool.

The editors are to be congratulated for hosting such a great public service. And thanks to Alfredo, now approaching his fifth year of daily posts, for an astounding and sustained achievement.

Can China find an 'eastern' model of development?

Not quite heretical - but certainly controversial - comments on China's economic development:

...from my own layman's point of view, I don't believe China will ever manage to find its own uniquely "eastern" model of development. The past is the past, and there is no room for "what ifs". More than 2,000 years passed between the country first being unified under a central dictator in the Qin dynasty (starting in 221 bce) and the overthrow of the imperial system in 1911. In this period, what did China actually develop on its own? Virtually nothing. In the words of Hegel, China "has no history", but merely the cyclical rise and fall of various monarchs, out of which no progress can emerge.

I might have expected these from a western commentator. But from a Chinese journalist and former editor of a supplement to the China Youth Daily? Now that's a surprise. The piece is by Li Datong and appeared on opendemocracy.net: China’s modernisation: a unique path?,

Notable

To appear in the December 2 edition of the New York Times Sunday Book Review, here is a sneak preview of their 100 Notable Books of 2007. Other newspapers publish their own lists, but few do it so well.

Welcome to 2008, the year of free

Another article of note in The World in 2008 is by Chris Anderson, editor-in-chief of Wired magazine and author of The Long Tail. His piece, Freeconomics, explains the merits of giving it away:

..What is getting too cheap to meter is processing power, storage, bandwidth and all the other enabling technologies of the digital revolution. Thanks to the exponential doublings of Moore’s Law and its equivalents for hard drives and communications, the cost of a given unit of computation, storage or transmission is inexorably dropping towards zero.

One of the first to notice this and consider its implications was a Caltech professor named Carver Mead. In the late 1970s he was reflecting on the amazing learning curve that the combination of quantum mechanics and information science had started on the surface of silicon wafers. Like Moore before him, he could see that the 18-month doublings in performance would continue to stretch out as far as anyone could see. But he went one step further to consider what that implied about computers. He realised that we should start “wasting” them.

Waste is a dirty word, and no more so than in the 1970s and 1980s. An entire generation of computer professionals had come to power doing just the opposite. In the glass-walled computer facilities of the mainframe era, they exercised their power in deciding whose programs should be allowed to run on the expensive computing machines.

Among Mead’s disciples was Alan Kay, working at Xerox’s Palo Alto Research Centre. Rather than conserve transistors for core processing functions, he developed a computer that would frivolously throw them at such silly things as drawing icons, windows, pointers and even animations on the screen. The point of this profligate eye candy? It was ease of use for regular folks, a previously neglected market. Kay’s work became the inspiration for the Apple Macintosh, which changed the world by opening computing to the rest of us.

Today the same is happening in everything from bandwidth to storage. The learning curves of technology cut prices at a rate never before seen. The cost of storing or transmitting a kilobyte of data really is now too cheap to meter. Soon the same will be true for a megabyte, and then soon after that a terabyte. And the internet touches nearly as much of our economy as electricity did when Lewis Strauss issued his prediction.

Has the City lost its cool?

It's not quite The Beano Annual, but you know that Xmas is approaching when the Economist's annual glossy hits the newstands. In a pleasant change, most of the content of The World in 2008 is available free online. Another (new?) development is that author's names are now included - still famously not the case in the weekly.

One piece that caught my eye was a short piece by Lionel Barber, editor-in-chief at the Financial Times, warning of "tougher times ahead" for the City in 2008: London loses its cool

Host of the 2012 Olympic games, financial rival to New York, magnet for football-mad billionaires: London’s reputation as cool, classy and cosmopolitan has never been higher. The capital’s dynamic growth has been driven by the City of London, the location of choice for hedge funds, private-equity firms and Wall Street exiles. Thanks to a favourable tax regime, light regulation and an open-armed welcome to foreigners, the City is the bejewelled crown of Britain’s economy.

But that crown is in danger of slipping in 2008. Even before the great credit squeeze of 2007, there were clear signs that mergers and acquisitions as well as private-equity buy-outs had peaked. The return of conservative risk management in the banks and hedge funds will be a prominent theme in the coming year. Inevitably, this will lead to staff culls, lower Christmas bonuses and the disappearance of the more exotic off-balance-sheet financing which proliferated in the era of cheap money.

In 2008 investment banks will still be digesting the more leveraged deals struck at the height of the debt-driven boom. Some of these deals may fall by the wayside; others will have to be renegotiated. As one prominent banker says: “We will still see M&A activity in London, but it will be more of the mid-size and small-cap end rather than the really big deals.”

Private equity, which has enjoyed mouth-watering returns, will have a far tougher time in 2008. Not only has competition increased; the industry’s image has taken a beating amid accusations of asset-stripping and unduly favourable tax treatment. Gordon Brown’s government may tinker further with the tax code, but not enough to drive wealthy partners and non-domiciled London residents to sunnier (or snowier) tax havens such as Monaco or Switzerland.

Supercapitalism or super-hype?

Tony Judt's piece in the latest New York Review of Book, The Wrecking Ball of Innovation, presents quite a telling assessment of Robert Reich's new tome, Supercapitalism: The Transformation of Business, Democracy. While Judt agrees with much of Reich's account of what's gone wrong, he despairs at the lack of an alternative. An excerpt:

This is all well said. But what is to be done? Here Reich is less forthcoming. The facts he amasses appear to point to an incipient collapse of the core values and institutions of the republic. Congressional bills are written to private advantage; influential contributors determine the policies of presidential candidates; individual citizens and voters have been steadily edged out of the public sphere. In Reich's many examples it is the modern international corporation, its overpaid executives, and its "value-obsessed" shareholders who seem to incarnate the breakdown of civic values. These firms' narrowly construed attention to growth, profit, and the short term, the reader might conclude, has obscured and displaced the broader collective goals and common interests that once bound us together.

But this is not at all the conclusion Robert Reich would have us reach. In his version of our present dilemmas no one is to blame. "As citizens, we may feel that inequality on this scale cannot possibly be good for a democracy.... But the super-rich are not at fault." "Have top executives become greedier?" No. "Have corporate boards grown less responsible?" No. "Are investors more docile?" "There's no evidence to support any of these theories." Corporations aren't behaving very socially responsibly, as Reich documents. But that isn't their job. We shouldn't expect investors or consumers or companies to serve the common good. They are just seeking the best deal. Economics isn't about ethics. As the British Prime Minister Harold Mac-millan once observed, "If people want morality, let them get it from their archbishops."

In conversation with Richard Freeman

One of America's most prolific and well respected economists, Harvard's Richard Freeman, talks about his career and his research at UC Berkeley, available on YouTube: Global Capitalism, Labor Markets, and Inequality

Hat tip: BookForum.com

Private equity: who profits?

Private equity has been growing rapidly in recent years, presumably reflecting superior performance? Maybe not. A new study for the European Commission by Oliver Gottschalg from HEC business school in Paris suggests a quite limited improvement in returns, and which is scooped up in management fees. Martin Arnold reports in today's Financial Times: Doubt cast on buy-out firms' huge profits

Based on data from 6,000 private equity deals and about 1,000 buy-out funds, the survey shows that average private equity returns have underperformed the benchmark S&P 500 share index by 3 per cent, after fees charged to investors.

"This does not correspond with the stereotype of the industry making its investors extremely rich," Oliver Gottschlag, who compiled the research, told the Financial Times. "Investors have not had much fun in this asset class, even though they have all been obsessed with gaining access to the best-performing funds."

Excluding fees and carried interest (a widely-used profit sharing scheme), returns from private equity outperformed the S&P 500 by 3 per cent.

"So private equity is generating value somewhere, but its fee structure means the general partners capture double the out-performance they generate," said Mr Gottschlag, who is also head of research at Peracs, an adviser to buy-out investors.

The research was based on data collected from investors in 852 private equity funds raised before 1993, to be sure they had sold all their assets. But Mr Gottschlag said analysis of more recent funds showed their performance had been similar.

In a related piece, Another black mark, Gottschlag explains why reporting of equity returns is misleading:

He argues the internal rate of return (IRR) measure used as a benchmark by most buy-out firms is "misleading" as it exaggerates profits and disguises poor performers.

"Our research shows the way private equity fund performance is most often reported overstates the truth," Mr Gottschlag writes in next month's Harvard Business Review.

The IRR measure assumes that any cash proceeds returned early to investors is reinvested at the IRR rate over the investment period, which risks inflating performance.

Stripping out this inflationary effect - by assuming early cash to investors is invested at a 12 per cent return - Mr Gottschlag said the IRR of the top performing fund in his sample of 1,184 firms fell from 464 per cent to just 31 per cent.

I cannot find the UC paper on the web. But an earlier working paper, Performance of Private Equity Funds, is available online.