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August 7, 2012

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Latest Posts from Economist's View


Posted: 21 Jun 2012 03:24 AM PDT
Evidence for comparative advantage:
Economists find evidence for famous hypothesis of 'comparative advantage', MIT News: David Ricardo's concept of "comparative advantage" is one of the most famous and venerable ideas in economics. Dating to 1817, Ricardo's proposal is that countries will specialize in making the goods they can produce most efficiently — their areas of comparative advantage — and trade for goods they make less well, rather than making all kinds of products for themselves.

As a thought example, Ricardo proposed, consider cloth and wine production in England and Portugal. If English manufacturers are relatively better at making cloth than wine, and Portugal can produce wine more cheaply than England can, the two countries will specialize: England will concentrate on making cloth, Portugal will focus on making wine, and they will trade for the products they do not produce domestically.

Neat as this explanation may seem, it is by definition hard to prove. If England does not make wine, and Portugal does not make cloth, it is very hard to say how efficiently they could produce those goods. The same applies to any country not manufacturing any given product. So does Ricardo's idea resemble reality?

A recent paper by MIT economists Arnaud Costinot and Dave Donaldson uses a novel approach to suggest that Ricardo's hypothesis is buttressed by real-world evidence. ...
Why nations specialize

To arrive at this conclusion, Costinot and Donaldson identified a data source that let them quantify nations' potential productivity: The Food and Agriculture Organization (FAO), an arm of the United Nations, analyzes farming conditions globally, estimating potential agricultural productivity based on factors such as soil type, climate and water availability.

Costinot and Donaldson looked at the numbers from an FAO model of yields of 17 crops on 1.6 million plots of land in 55 countries to examine whether countries specialize in the way Ricardo believed. That is, if a country's terrain allows it to grow wheat more productively than grapes, comparative advantage suggests that specialization will occur. So Costinot and Donaldson compared the predicted output of crops in each of the 55 countries (based on the FAO data and on prevailing prices) with the actual output of those crops.

The numbers show that Ricardo was right — to an extent, anyway. Costinot and Donaldson analyzed the results so that if the real world worked just as Ricardo supposed, the correlation between productivity and output would be 1.000. Instead, the logarithmic correlation they found was 0.212, with a margin for error of 0.057.

"We found a positive and statistically significant correlation," Costinot says.

The paper, "Ricardo's Theory of Comparative Advantage: Old Idea, New Evidence," was published in the May issue of the American Economic Review. ...

Caveats and future directions

That said, Antras suggests a couple of caveats to the paper. One is that agricultural productivity is not purely a function of environmental factors; technical know-how and the availability of equipment also influence which crops are grown where. Secondly, Antras notes, the less-than-total correlation indicates that additional factors affect international trade as well. "The results suggest the theory is validated, but it is also quite clear that there are many other things that drive trade patterns," Antras says.

For their part, Costinot and Donaldson acknowledge these qualifications...And the MIT economists add a third caveat: The data consist of productivity estimates made by agronomists; if those estimates are a bit off, it would affect the bottom-line findings as well.

Still, Donaldson says, "I was surprised at how, even with all the complexity in the real world, there was still this positive correlation between the theory and reality.
Posted: 21 Jun 2012 02:07 AM PDT
Lane Kenworthy:
Why the surge in obesity?, by Lane Kenworthy: The Weight of the Nation is a four-part series on obesity in America by HBO Films and the Institute of Medicine, with assistance from the Centers for Disease Control (CDC) and the National Institutes of Health (NIH). It's been showing on HBO and can be viewed online. Each of the four parts is well done and informative.
Obesity is defined as having a body mass index (BMI) of 30 or more. For a person 6 feet tall, that means a weight of more than 220 pounds. For someone 5'6″, the threshold is 185 pounds. People who are obese tend to earn less and are more likely to be depressed. They are at greater risk of diabetes, heart disease, stroke, and some types of cancer, and they tend to die younger. The CDC estimates the direct and indirect medical care costs of obesity to be $150 billion a year, about 1% of our GDP.
The chart below, which appears several times in The Weight of the Nation, shows the trend in obesity among American adults since 1960, the first year for which we have good data. The data are from the National Health and Nutrition Examination Survey (NHANES). They are collected from actual measurements of people's height and weight, rather than from phone interviews, so they're quite reliable. After holding constant at about 15% in the 1960s and 1970s, the adult obesity rate shot up beginning in the 1980s, reaching 35% in the mid-2000s.
What caused the surge in obesity? The standard explanation is too much eating and too little physical activity, and The Weight of the Nation sticks with this story. But it shouldn't, because the evidence suggests one of these two hypothesized culprits has been far more important than the other.
Here is the trend in eating, measured as average calories in the food supply (adjusted for loss and spoilage) according to data from the Department of Agriculture. This chart too is from The Weight of the Nation. The timing of change matches that for obesity; the level is flat through the 1970s and then rises sharply beginning in the 1980s. An alternative series, measuring energy consumption per capita, goes back to 1950 (see figure 6, chart F here); it too shows little or no change until 1980, and then a sharp jump. The rise in food consumption correlates closely with the rise in obesity.
That isn't true of physical activity. We're less active now than we were half a century ago, but the timing of the decline in activity doesn't match up with the shift in obesity.
We don't have good historical data for a comprehensive measure of activity, such as calories expended, so we have to look instead at individual components. We can begin with the most-often-cited culprit: television. Here too The Weight of the Nation presents data, shown below, with the suggestion that TV watching is a significant cause of rising obesity. But the trend doesn't support that inference. Time spent watching television has increased steadily since 1950. There was no sudden rise in the 1980s.
What about video games, the internet, and smartphones? The internet and smartphones arrived on the scene too late to account for the rise in obesity in the 1980s and most of the 1990s. The timing doesn't work for video games either; they're played mostly by the young, beginning in the 1980s, but obesity rates rose sharply in the 1980s and 1990s among adults of all ages, even among the elderly (see table 2 here).
More Americans now have sedentary jobs and drive to work. Yet as David Cutler, Edward Glaeser, and Jesse Shapiro noted in a paper published nearly a decade ago, these shifts have been going on for a long time, with no acceleration in the 1980s.
"Between 1910 and 1970, the share of people employed in jobs that are highly active like farm workers and laborers fell from 68 to 49 percent. Since then, the change has been more modest. Between 1980 and 1990, the share of the population in highly active jobs declined by a mere 3 percentage points, from 45 to 42 percent. Occupation changes are not a major cause of the recent increase in obesity.
"Changes in transportation to work are another possible source of reduced energy expenditure — driving a car instead of walking or using public transportation. Over the longer time period, cars have replaced walking and public transportation as a means of commuting. But this change had largely run its course by 1980. In 1980, 84 percent of people drove to work, 6 percent walked, and 6 percent used public transportation. In 2000, 87 percent drove to work, 3 percent walked, and 5 percent used public transportation. Changes of this minor magnitude are much too small to explain the trend in obesity."
Another reason to doubt the importance of declining physical activity is that the elderly probably have become more active over time, rather than less, and yet we observe a rise in obesity among the elderly too, similar in timing and magnitude to that of younger adults (again see table 2 here).
In short, the evidence suggests that reduced physical activity has not been a key cause of the surge in obesity in America (more here, here, here, here, here).
This doesn't mean physical activity plays no role in determining which persons become obese. And it doesn't mean an increase in activity won't help reduce obesity's prevalence. But it does suggest that a strategy focused on increasing activity — and The Weight of the Nation leans in this direction — may not get us as far as we'd like. To make serious progress in reducing obesity, we need to significantly reduce the number of calories many of us consume.
[Lane has a follow-up post here: Is rising obesity a product of income inequality and economic insecurity?]
Posted: 21 Jun 2012 01:17 AM PDT
Via Open Economics, "An interview with Amartya Sen":
...The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don't seem to know any economics that was written 25 or 30 years ago.
Is there any hope that this trend can be reversed?
Yes, I'm quite optimistic in this regard. I get the impression that this seems to be getting corrected right now. I'm particularly delighted that the corrective has come to a great extent from student interest. I'm very struck by the fact that at the university where I teach – Harvard – the demand for more history of economic thought has mostly come from students. As a result there is a lot more attempt by the department of economics as well as history and government to look for the history of political economy. Last year, along with my wife Emma Rothschild, I offered a course on Adam Smith's philosophy and political economy. It drew a lot of interest and we got some of the finest students at Harvard.
Posted: 21 Jun 2012 12:06 AM PDT
Posted: 20 Jun 2012 04:03 PM PDT
Tim Duy yet again (which is good since I'm having severe connectivity issues):
Where to Next?, by Tim Duy: This will be my final FOMC post-mortem. At least I hope so. I remain as frustrated at the outcome of this meeting as in the run-up to the meeting. Reviewing what I already wrote as well as comments across the web leaves me with this:
  1. The general argument that supported expectations of QE3 was broadly correct. The basis of this argument was a deterioration in the forecast matched with moderating inflation data and increasing downside risks. A solid argument in light of speeches by Vice Chair Janet Yellen and San Francisco President John WIlliams. And this line of thought was consistent with the Fed's actual projections. The Fed, however, did not follow through on their own projections, which is frustrating. It strikes me as a sloppy communications strategy.
  2. The Fed wants to see more data before making another move. This seemed to be evident in Bernanke's press conference. I suspected this might be the case, but am surprised that while they are sufficiently uncertain of the data to forestall QE, they were certain enough to mark down theirforecasts.
  3. The labor market remains a critical indicator. It is clear from the final sentence that sustained progress in labor market conditions would prevent additional easing, and vice versa. At least this seems clear - arguably, by this metric the Fed would already embraced QE3. Again, they want more data. The possibility that seasonal adjustment issues are at play in the data weighs heavily on their minds.
  4. The Fed is very uncertain about the impacts of additional QE. This uncertainty is probably the most significant impediment to additional easing. It is really the only explanation for Bernanke's hesitation to do more now; clearly the forecast justifies additional action as it indicates the Fed does not expect to meet either its employment or inflation mandates.
  5. The form of additional easing remains uncertain. Like other officials, Bernanke did not close the door on additional asset purchases. I noted earlier, however, that the statement no longersingles out balance sheet operations as the next tool. Arguably, this change was simply necessary to eliminate the "composition" of the balance sheet option, as the Fed's ability to change the composition via twisting will expire at the end of the year. That said, they could still change the composition by shifting between Treasuries and mortgage assets, so the composition tools is not necessarily dead. Or they could be signalling an intention to use communications tools as an alternative to QE; Yellen has suggested this possibility.  My baseline scenario is that if additional easing is deemed necessary, asset purchases will be the likely option. Still, I think it is worth being on the look-out for other options.
Bottom Line: It is as if at each meeting Federal Reserve Chairman Ben Bernanke moves half-way again to additional easing, but never seems to get there. It is one of those philosophical problems. Maybe next time he will make it. If the employment data falters. And he believes the data. And he believe that QE will be effective. And if a blessing of unicorns marches down Constitution Avenue.
Posted: 20 Jun 2012 01:53 PM PDT
Tim Duy once again:
This Is Just Sad, by Tim Duy: The FOMC just released their statement, dashing hopes for QE3. We are still waiting on the press conference, but some quick thoughts. First, the Fed does not appear to be particularly worried by recent weak data:
Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
I suspect that the weak tone to recent data was countered by the relatively solid anecdotal tone of the Beige Book. They do not appear to have marked down their forecasts as substantially as many believed. Also, they may want additional data to confirm any recent weakness.
Second, they continue to state the case for more easing:
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
Yet, despite making a clear case for aggressive policy, they still don't follow it to its logical conclusion. This is indeed maddening and is the primary reason market participants expect sizable QE is coming. The FOMC sets ups the justification for easing meeting after meeting, and then simply does not deliver.
Third, consider the final line:
The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Now compare it to April:
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.
In April they specifically pointed to the balance sheet as the tool of choice. Now they just promise further action. Sounds like they intentionally want to take the focus off the balance sheet. This could be a very important signal about the direction of future policy. Do they view further QE as largely ineffective given low interest rates and constrained credit channels, and now reserve its use for only the most dire circumstances? If not the balance sheet, then what? Communication? Perhaps I am reading too much into this line, but it seems to be a significant change. I sure hope some reporter asks about this line at the press conference. Hint, hint.
Finally, we still have a dissenter, Richmond Federal Reserve President Jeffrey Lacker. The tone of the data was insufficient to change his mind that Operation Twist should end as scheduled.
Bottom Line: Internally at the Fed, the risk/reward trade off still does not favor additional QE.
Posted: 20 Jun 2012 01:48 PM PDT
Tim Duy:
Twist It Is, by Tim Duy: The FOMC just released their statement, dashing hopes for QE3. We are still waiting on the press conference, but some quick thoughts. First, the Fed does not appear to be particularly worried by recent weak data:
Information received since the Federal Open Market Committee met in April suggests that the economy has been expanding moderately this year. However, growth in employment has slowed in recent months, and the unemployment rate remains elevated. Business fixed investment has continued to advance. Household spending appears to be rising at a somewhat slower pace than earlier in the year. Despite some signs of improvement, the housing sector remains depressed. Inflation has declined, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.
I suspect that the weak tone to recent data was countered by the relatively solid anecdotal tone of the Beige Book. They do not appear to have marked down their forecasts as substantially as many believed. Also, they may want additional data to confirm any recent weakness.
Second, they continue to state the case for more easing:
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.
Yet, despite making a clear case for aggressive policy, they still don't follow it to its logical conclusion. This is indeed maddening and is the primary reason market participants expect sizable QE is coming. The FOMC sets ups the justification for easing meeting after meeting, and then simply does not deliver.
Third, consider the final line:
The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Now compare it to April:
The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.
In April they specifically pointed to the balance sheet as the tool of choice. Now they just promise further action. Sounds like they intentionally want to take the focus off the balance sheet. This could be a very important signal about the direction of future policy. Do they view further QE as largely ineffective given low interest rates and constrained credit channels, and now reserve its use for only the most dire circumstances? If not the balance sheet, then what? Communication? Perhaps I am reading too much into this line, but it seems to be a significant change. I sure hope some reporter asks about this line at the press conference. Hint, hint.
Finally, we still have a dissenter, Richmond Federal Reserve President Jeffrey Lacker. The tone of the data was insufficient to change his mind that Operation Twist should end as scheduled.
Bottom Line: Internally at the Fed, the risk/reward trade off still does not favor additional QE.

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