Funny man Austan Goolsbee is Obama's Top Economic Adviser

Take a look at US Pres Barrack Obama's new top economic adviser. The Chair of the Council of Economic Advisers is "funniest celebrity" and "stand-up economist" Austan Goolsbee of the University of Chicago.

This weekend, he did an interview with the ABC's Christiane Amanpour which you can watch here.

And here he is on Jon Stewart's Daily Show explaining the theory behind Obama's policies.

He performed reasonably well, even better than most in the Colbert Report.

Now here he is courtesy of Politico.com doing his stand-up routine awhile back. With poverty in America set to hit 15% (the same as in the 1960s when LBJ launched the "War on Poverty" or the "Fair Deal" and with unemployment still above 9% and with appetite for new stimulus gone sour in the US Congress, perhaps injecting some humour and laughter into the debate would be the best medicine for policymakers and the public at large.

The Price of Happiness

1. The Wealth Report  says that $75,000 is the minimum income threshold that produces happiness in the US based on a study principally led by Daniel Kahneman, a Nobel winning behavioural economist.
2. Real Time Economics goes further by translating this figure on a city-by-city basis.
3. While we are on the subject, this article from Time tells us why drinkers live longer.
4. Finally, this post from Slate shows how inequality has grown in the US over the past 30 years.

Could Austerity Be the Key to Growth?

David Brooks takes his cue from developments in Germany and Great Britain to highlight the merits of austerity which in his terms is the "adult" way of managing the economy. He draws most of his insights from a blog called e21 which posted this editorial on the German economic recovery. Some analysts warn that the below-trend growth that is expected from the US in the coming years is an even worse outcome than a double dip recession that lasts for a few quarters followed by a return to normal growth immediately after. The reason for such stagnancy is the expectation of firms and households that government indebtedness will affect the hip pocket in the coming years. Although the US in all likelihood will avoid a double dip because of its stimulus, is now the time to be thinking about austerity given the seeming ineffectual nature of fiscal spending?

Overconfidence Explains Failure Rates

Thanks to the Nudge blog, I found two interesting reads. They both deal with overconfidence. Overconfidence in our ability to learn as consumers for instance leads us to buy stuff thinking we can easily pick things up, like playing a new sport or a do-it-yourself project. This also explains the high drop out or non-completion rates observed in technical training. Overconfidence also leads entrepreneurs to start new ventures that have a low probability of success.

How would better policies inform the decisions of such actors to produce better outcomes, I wonder.

Not Monty Python

First Obama, then Cameron found a way of absorbing the new theory of Nudge into its agenda. When will libertarian paternalism make its way to Australia?

Why Good Kindies Matter

It was good enough for Greg Mankiw to mention in his blog. This new study out that counters the "fade out" effect that kindergarten had on long-term learning outcomes. The previous method of measuring success used test results. This study uses pay. Although it is yet to be peer reviewed, the findings are potentially explosive.

PM's Clothes Signal Her Intentions

Based on a study from Plymouth University, personal hygiene and cleanliness dispose individuals to deal better with morally questionable situations (if you want to read more on this, go here). Think of Lady Macbeth as she sought to cleanse her hands of invisible bloodstains having convinced her husband to commit regicide against his kinsman in Shakespeare's tragic tale. Think of those characters in CSI dressed in their white lab coats clinically inspecting the compromised bodies of their "vics".

This knowledge made me sensitive to the way PM Julia Gillard has suddenly taken to donning pristine white outfits like the one she wore here after presiding over the political demise of her former "boss", Kevin Rudd. I wonder if there is a wardrobe consultant advising her or if this is a subconscious play on her part as she appeases voters wary of how Mr Rudd's sacking was handled by the Labor party.

As she announced her intentions on climate change (a highly contentious set of policies characterised as being more brown than green), she was again wearing the same suit. It could perhaps be symbolic of her willingness to compromise on what was the "greatest moral challenge of our generation" for the sake of some voters in marginal seats. At any rate, the latest polls showing an expanded lead for Labor over the Coalition on a two party preferred basis and her better ratings as preferred prime minister would show that her clinical approach to the campaign is paying off.

Too much nudging, not enough shoving

The case against behavioural economics being used in public policy ironically has been made by two prominent figures from within the field. I am referring to George Lowenstein and Peter Ubel who have argued in the New York Times against the tendency of taking the politically convenient route of applying nudges which are based on informational cues to improve decision-making to problems which are best solved by traditional tools from traditional microeconomics which use price signals such as taxes and subsidies.

Within the context of the debate over climate change in Australia, the two leading parties, Labor and the Liberals, have opted for "direct action" and balked at imposing a price on carbon immediately contrary to both their platforms in 2007. This is a prime example for how one set of policy tools have been substituted for another due to the inherent unpopularity of the latter with voters. One of the main discoveries made by behavioural economics is that in making lifelong decisions such as whether to make tiny sacrifices today in exchange for a large payout tomorrow, people tend to put a greater weight on the short-term pain.

If left to their own devices, people tend to procrastinate up until the last minute to deal with such questions. That is why savings has been less than adequate from a social standpoint in most advanced economies and why action on climate change has not been forthcoming from governments who are expected to heed the will of the people (who are fickle and irrational according to the theory). Nudge theory is conceived of as being paternalistic libertarian in the sense that it tries to account for human frailties in designing policy interventions without restricting individual choice or socialising the cost of such interventions. The question is whether or not nudging people is adequate in response to existential threats such as climate change or whether a shove is better at least initially to affect the calculations made by individuals over decisions that have long-term consequences.

The end of "Cheap Labour" from China?

Just as the New York times ran a story on the "end of cheap labour" in China with large companies sourcing cheaper labour elsewhere; and as The Economist by Invitation began a conversation on the possibility that it had reached a Lewisian turning point, in South Australia, it was revealed a Chinese contractor was being investigated for allegedly paying its workers as little as $1.90 an hour to dismantle heavy machinery at the former Mitsubishi plant. The current Federal minimum wage is $14.31 an hour.

As Stephen Roach, one of the contributors in The Economist by Invitation made clear

even if Chinese manufacturing wages increased at an average annual rate of 25% over the 2007-10 period—highly unlikely for reasons noted below—the hourly compensation rate would be just $1.98 in 2010. That would boost Chinese compensation to only about 4% of US pay rates—barely making a dent in narrowing the arbitrage with major industrial economies. A similar, albeit unsurprisingly less dramatic, comparison would be evident with the developing world. At $1.98 per hour in 2010, Chinese hourly compensation in manufacturing would still be less than 15% of that elsewhere in East Asia (ex Japan) and only about half the pay rate in Mexico

It is important to stress that this 25% hypothetical wage-inflation scenario is well beyond the outer bound of any conceivable outcome for China. (emphasis added)

It appears that the Chinese contractor at Tonsley overpaid its Chinese workers by China's standards. By Australian standards of course the 24 temporary migrant workers were allegedly underpaid by its employer more than $130,000 over an eight month period. This should put the labor cost arbitrage question into perspective.

Debating Industrial Policy

The Economist has sponsored a debate on industrial policy in which its proposition is that "industrial policy always fails".

In defense of the motion is Josh Lerner of the Harvard Business School, while opposing it is Dani Rodrik of the Kennedy School of Government. So far, opponents of the motion seem to be winning by about a 75 to 25 margin.

This "debate" where the proponents "pretend to disagree" is one that should help illuminate rather than divide audiences about the merits of industrial policy.

From Garbage Can to Dumping Ground

The many disciples of John Kingdon would point to Australia's handling of the asylum seeker/ people smuggling issue as a validation of their espoused "garbage can" theory. According to them, the rational-legal process known as the public policy cycle is a myth, and most government policies are recycled out of the dust bin and given new life via the "policy primeval soup" consisting of problems, policy proposals and political events.

In this case, border protection is the problem (or "the product", depending on how you view things), the "worrying" increase of boat people arrivals and the registered concern within marginal electorates the event, and the discarded Pacific solution of the previous government the policy that has been revived through the collusion of policy entrepreneurs and clever politicians. Mix these ingredients together, and voila! You get a newly minted policy prescription consisting of a regional centre based in the nearby developing nation of Timor-Leste (or Indonesia) to process asylum seekers under the UNHCR's supervision.

The problem is getting one of these nations to accept the responsibility given the image of being branded a "dumping ground" as an unwanted part of the package. Everyone in the region seems to be crying "NIMBY!" (not in my back yard) including New Zealand, which does not really have an incentive to get involved with the issue. This means that whatever solution finally gets hammered out will be a very costly one given that the only consensus of being humane but tough taken by both the ruling Labor party and the opposing Coalition led by the Liberals is a reflection of the community.

If the irrationality at the core of Kingdon's philosophy is the basis for these types of decisions on the part of policy actors (in the garbage can model), it could perhaps spring from some deep seeded evolutionary response to the need for survival. This would explain a lot about the way policy takes shape under these circumstances.

Of Boats and Votes

After the announcement by PM Julia Gillard of her intention to forge a regional solution to the arrival of boat people into Australian shores, Peter Browne asks the question, could the belief that boat people influence the way people vote be one of the great myths of Australian politics? He goes on to provide some anecdotal and historical evidence from the 2001, 2004 and 2007 elections in this Inside Story article.

Keynes vs. Alesina. Alesina Who? - BusinessWeek

A lovely debate over what excites the market's "animal spirits" more, whether spending or spending cuts, is taking place.

The US seems to remain in favor of increased spending in order to prop up its economy and strengthen job growth. Europe and other G20 nations are persuaded that austerity is more fitting. The policy makers on either side have their own set of economists arguing in favour of their approach. On the pro-stimulus side, are the new Keynesians. On the anti-stimulus end are those who support the work of Harvard economist Alesina.

The proponents and their key arguments are summarised in this BusinessWeek article, entitled Keynes vs. Alesina. Alesina Who?.

Economists Behaving Irrationally

Check out this entry by Emmanuel Santos on The Cusp that talks about evidence supporting the view that individuals behave irrationally most of the time, which holds true even among economists the so-called "rationality hawks" of academia. Wild!

Global Ramifications of Aussie Mining Tax Debate

Beyond BRICs in in this entry highlights the global impact of an Aussie mining super profits tax and the important design features in the proposal that do not receive media attention.

(Update) A Perverse Reform Outcome

Bill Easterly a development economist who uses empirical reasoning to refute much of the prevailing wisdom in economic circles debunks the argument of Rodrik (based on an IADB report) regarding the perverse contribution of structural adjustments in Latin America to productivity growth in the decades that followed reform.

He does so in passing as he makes a "clumsy" sports analogy between the World Cup and economic competition among nations. His claim is that in such a tournament type setting, skill trumps luck. The analogy is clumsy in the sense that the length of time covered in the analysis plays a part in determining whether developing the "right" skills in soccer (analogous to developing the "right" policies and institutions) pays off in the end.

Easterly claims that the IADB report's time periods were too short. He means that randomness or "luck" may have played a part in making it appear that the Washington Consensus failed to deliver productivity improvements in the Latin American region. In stating this, Easterly implies that a different time horizon in the report would have revealed the long-term impacts of import substitution policies on the (under)performance of economies in the region.

The New Minerals Race

From a blog maintained by the Financial Times called Beyond BRICs comes this report on the minerals race happening in Afghanistan between India and China. The "ore on terror" as comedian Jon Stewart refers to it means a whole new world of hurt for the people of Afghanistan. 

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Ore on Terror
www.thedailyshow.com
Daily Show Full Episodes Political Humor Tea Party

Stephen Colbert says that this gives the US (and its coalition partners) justification for "staying the course" (see below). He makes reference to the "resource curse" in his usual parodying style.

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
The Word - $tay the Cour$e
www.colbertnation.com
Colbert Report Full Episodes Political Humor Fox News

Reich on the Yuan float

If you've been living under a rock (or your new iPad hasn't arrived yet and you are on a no-news protest until it comes in) you may have missed Chinese government's decision to untie the Yuan from ther US Dollar and float its national currency. former US Secretary of Labor Robert Reich, in his own inimitable style, offers his take on the decision and what it means for the rest of us here.
  

A Perverse Reform Outcome

Dani Rodrik of Columbia University featured the following chart in his blog. It was taken from a report by the Inter-American Development Bank entitled The Age of Productivity. It covers Latin America's experience with industry policy from the 1950s to the 2000s.

Rodrik's comments regarding this chart are worth quoting in full:

Ignore the intermediate period of debt crisis (1975-90) and focus on the differences between the periods of import-substitution (IS, 1950-1975) and Washington Consensus (WC, 1990-2005).  What do we see?

1. Labor productivity under IS grew at a rate that is double the rate under WC.
2. The rate of labor productivity growth within sectors (the component identified as “within” in the chart) was comparable under the two policy regimes.
3. The worse overall performance under WC is accounted entirely by the fact that there was much less desirable structural change -- labor moving from low to high-productivity activities -- under WC than under IS.

For all its faults, IS promoted rapid structural change.  Labor moved from agriculture to industry, and within industry from lower-productivity activities to higher-productivity ones.  So much for the inherent inefficiency of IS policies!
Under WC, firms and industries were able to accomplish a comparable rate of productivity growth, but they did so by shedding (rather than hiring) labor.  The displaced labor went not to higher-productivity activities, but to less productive lines of work such as informality and various services.  In other words, the WC ended up promoting the wrong kind of structural change.
This account reinforces the centrality of structural change in driving rapid economic growth. It should also cause us to be wary of productivity studies that focus on what is happening within manufacturing alone.  After all, productivity within manufacturing can be stellar, but if manufacturing or other high productivity sectors as a whole are rapidly shedding labor, economy-wide productivity performance will be disappointing. 

  

Niall Ferguson on the Sovereign Debt Crisis

Niall Ferguson, Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor at Harvard Business School and author of a handful of very good books including The Acsent of Money, Empire: How Britain Made the Modern World, and Colossus: The Rise and Fall of the American Empire, offers (care of Business Insider - and no, I don't have a financial stake in their wellbeing) a forty-odd frame slide presentation explaining the forces at play that have brought the developed world to the place we find ourselves in today.

Read and let us know if you agree or disagree.
  

So THAT's what a qualified depression looks like...

A while ago on the Ning discussion forum I highlighted a chart over at Business Insider (care of the good people at Calculated Risk) that demonstrated the unemployment trajectories associated with all of the significant recessions in the United States over the last sixty-five years.

Well, the Calculated Risk folks have updated the chart, and written about the continuing bad here.  When America sneezes, Kleenex stocks go through the roof.
     

Hungary the next Greece? Think again

The recent run on Wall Street was partly fuelled by a statement issued by a senior party official on the possibility that Hungary would be the next European economy after Greece to suffer a financial meltdown due to its burgeoning national debt. As this article from the magazine Foreign Policy contends, there are incentives in place that would motivate the new Hungarian government from distorting the true picture of its economy.
   

How the world sees us

Business Insider's "Chart of the Day", is always worth a look - you can get it delivered directly to your inbox through a free subscription, or follow it on Twitter (see the box near the top on the right-hand side of the page).  However, it is usually US-centric in its concerns.

So imagine my surprise when I started going through my email this morning and saw this, a long-term comparison of house-price values between the US and Australia over the last 120 years.  Not as surprised as when I saw the disparity between the "overheated" US market and Australia's positively Vesuvian rise over the last ten years.  When you're living it (paying a mortgage, foregoing some discretonary spending), it seems normal.  When you look from someone else's point of view, suddenly it gets very scary.
   

R-e-S-P-e-c-T, Find out what it means to me!

Originally posted on The Cusp by Emmanuel Santos, this post talks about the proposed Resource Super-Profits Tax. It also provides an analysis of the budget process through the lens of prospect theory.

More of the same

• Originally posted by Jonathon Dyer on January 29, 2010 at 11:00am


The US Senate has just voted to give Federal Reserve Chair Ben Bernenke a second term (haven't those last four years have just flown by). You can get the story and some insightful analysis of what this means at the Washington Post (free, but registration required), and The Australian (free, for now).

Meanwhile, it looks like Australia's going to take the lead internationally, being the only major economy to begin the new year by raising interest rates. They couldn't at least wait for us to pay off the credit cards from the Christmas blowout?
    

AIG - where the money went

• Originally posted by Jonathon Dyer on January 28, 2010


Here is a link to a profoundly simple graphic explaining what happened to all that money from the AIG bailout (and who benefited). Courtesy of Business Insider (and if you haven't subscribed to their "Chart of the Day" mailing list (subscription details on the right hand side of this screen, above the Market movement graphic), you're missing out).
   

So long BRICs, welcome the MAVINS

• Originally posted by Emmanuel Santos on January 15, 2010 Admin Options

The BRICs are to the noughties what the MAVINS are to the teenies. This according to Bloomberg's Vincent Fernando and Joe Weisenthal. Read the article.
 

Best Economic Ideas

• Originally posted by Emmanuel Santos on January 7, 2010

From The New Republic, a list of best economic ideas of the past year compiled in The Stash. The article includes everything from high-end prostitutes and the "economics of happiness", to advancements in fiscal and monetary policy.

Capitalism's failure

• Originally posted by Jonathon Dyer on November 25, 2009
There was an interesting short piece in Forbes magazine earlier this month by regular columnist Sramana Mitra called "Capitalism's Fundamental Flaw".

Don't be fooled by the title; raised on a diet of Ayn Rand, Mitra is a strong supporter of Capitalism, but she isn't blind to its shortcomings. Her article highlights the dichotomy between creation and speculation; to wit, how the Capitalist system neglects the creators of value in preference to the speculators who merely trade on the commodification of that value. Take a moment to read the article. Then take another moment and tell us if you agree or disagree with it.

Sowing the seed

THE CONVERSATION began as a blog - this blog in fact - but it didn't stay that way very long.  Below is the first and only entry that went into this format of THE CONVERSATION.  Within a couple of days we went live on our new home at Ning.  Things went really well there for the better part of a year.  I want to say now that Ning offers an excellent product, and if it wasn't for a change in their monetization policies, coupled with a slow shift in the focus of this "group project", we'd probably still be there.

There's been a handful of people working working in the South Australian Government have been contributing to THE CONVERSATION on and off, with Emmanuel Santos and myself doing most of the heavy lifting.  Ning allows you to post blog entries, but to also put up discussion starters, events reminders and some other cool stuff all laid out on different parts of the page.  With the shift to Ning came a subtle shift in the focus of the discussion, from purely economic issues to a broader public policy forum.  This is the focus we'll be bringing to THE CONVERSATION's new (old) home.

It was always the intention of THE CONVERSATION to be a two-way discussion, rather than a megaphone for the contributors to spout off about whatever was vexing them.  Hopefully we'll be able to keep that alive here, and in future face-to-face events.  In the interest of getting the back-and-forth started, I'll be re-posting here some of the material from the Ning page.  If you want to respond to something, please feel free.  Say what's on your mind.  Tell us we're wrong, if that's what you think.  If you've got something you want to say, send it to me and we'll put it up (so long as it's not defamatory or just straight-out vitriolic).

So read, think, and engage.  And tell your friends, colleagues, etc.