Global Economics and Management

Astounding Fact of the Day

In principle, if D(t) is public debt at time t, and the public deficit is P(t), then P(t)=D(t)-D(t-1). In other words, the change in public debt in any given year should be exactly equal to the public deficit in that year. That's just a definition. You might be surprised to learn that this identity does not hold in the official data. What is astounding is the extent of the disconnect. If you run a regression of the change in public debt on the public deficit in a panel of countries, the R-squared is 0.07. That is, deficits explain only 7% of the variation in the change in public debt. If you isolate industrialized countries only, the R-squared rises to 50%. That still seems low.

This well-written article in Vox discusses this at greater lengths. The lesson to me is that you simply can't trust deficit figures, particularly for developing countries.

Are Corporations People Too?

Here is a very well-argued post from my colleague Eugene Volokh.

For what it's worth, and irrespective of the merits of the opposition to SOPA/PIPA, I have always thought that Citizens United was correctly decided. Corporations are people too.

Apologies for this foray into constitutional law, away from economics.

A Downgrade of France's Sovereign Credit Rating?

Rumor has it that S&P is about to downgrade the credit rating of several European countries, including France. The next chapter in this saga will be for French politicians to blame the messenger. Every time credit rating agencies threaten to downgrade the credit rating of France, politicians there erupt in outrage over the nefarious intentions of those "Anglo-Saxon, unelected and unaccountable agencies". Instead, a country's credit rating is a symptom of trouble, not its root cause. The same politicians who blame the credit rating agencies are responsible for the run-up in debt and the explosion in government spending that is at the source of the downgrade in the first place.

In the years leading to the collapse of Lehman Brothers, US-based credit rating agencies were much too lenient on the rating of mortgage backed securities. There were serious incentive problems between the underwriters of these securities and the credit rating agencies. The latter were competing with each other for contracts with financial institutions to rate MBS, so they had incentives to inflate ratings in order to drive business volume to them and away from competitors. Competition between rating agencies had the perverse effect of inflating ratings. There is no such issue with the rating of sovereign debt. In fact, here the rating agencies are accused of being too harsh, as opposed to too lenient. I am sure they do not want to repeat the errors of the 2004-2008 period. So while one cannot defend their actions in the runup to the US subprime mortgage crisis, in the case of European sovereigns their stance seems entirely justifiable.

Very Good Sentences

From David Brooks:

"Life is unfair. Republican venality unintentionally reinforces the conservative argument that government is corrupt. Democratic venality undermines the Democratic argument that Washington can be trusted to do good.

(...)

If Democrats can’t restore Americans’ trust in government, it really doesn’t matter what problems they identify and what plans they propose. No one will believe in the instrument they rely on for solutions."

Conflict of Interest Disclosures in the Economics Profession

Here is a very positive step, which I applaud: The American Economic Association (AEA) has adopted a policy of disclosure to avoid conflict of interests and ethics violations in AEA publications (AEA journals are the leading academic journals where we economists publish the fruits of our research). In the aftermath of the movie "Inside Job", there were calls for economists to disclose the source of their funding and the nature of their consulting activities.

I believe that the undeniable financial relationships between financial firms, some government agencies (like Iceland's central bank) and the economics community was only a minor contributory factor to the crisis - it would be hard to make the argument this was a first order cause. However, some of the (quasi-secret) relationships uncovered in "Inside Job" reflected poorly on the economics profession and created an aura of suspicion. So I am happy that we are taking steps, as a profession, to be more transparent.

Incidentally, here is my disclosure statement: My research is and has always been funded primarily by the University to which I am affiliated, in the form of an annual research budget. In addition, I routinely apply (and sometimes obtain) University-sponsored grants. For instance, at Stanford I received a $177,150 three year grant from the office of the University President, and at UCLA I received grants from the Center for International Business Education and Research (CIBER). Last year, I received a small grant from the Banque De France for research on sectoral tranformation. I have never worked as a consultant for a private organization and have never testified as an expert witness in litigation proceedings (I do not intend for this to change). In 1996-1997, as a student, I worked as a short term consultant for the World Bank, and occasionally return there as an unpaid visiting researcher. Twice in the recent past, I taught a 4 hour class (remunerated) at the IMF, for their continuing education program. That's it.

A WSJ Documentary on the European Crisis