Portrait of the Economist as a Young Man

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Blog 2.0: “Open-Source” Economic Research – Time-Series Analysis of the 2012 Presidential Election

Last night I set the tone for the new incarnation of my blog. This morning I realized what the blog’s main purpose should be. I actually really should have thought of this months ago, but the idea just occurred to me. 

Over the course of the year, as I’ve started doing my own original research, I’ve found that some projects grow into bigger projects that could potentially become publishable research and other times you hit a point where you’re just not sure where to go with the project so you turn to the ones that are progressing faster. In the latter case, you often have some interesting results but because of the uncertainty about how to develop the project, the results just languish on your computer. What I realized this morning is that this is a perfect forum for me to put up research that falls into the second category so that maybe someone else will find a good use for the research idea that I haven’t thought of.

So with that in mind I have created a page for a small article I wrote entitled “A Time-Series Analysis of the Factors that Influence Presidential Elections.” You can find the page with the article in  full (7 pages) above. The paper contains all of the relevant technical econometric details and the statistical results that I’ve consider thus far. For those of you not interested in those details, I will just provide the abstract and the conclusion here along with a quick, informal summary. Also, my plan is to put my code and the data online so that if someone, someday wants to move forward with the research in some way, shape, or form, everything is there for the taking. So without further adieu, I bring you:

Open-Source Economics Research Project#1: A Time-Series Analysis of the Factors that Influence Presidential Elections


In this research I wanted to know how changes in different factors like economic performance (captured by unemployment) and voter sentiment (captured by polls) effect the probability that a President is re-elected. Before Intrade was effectively shut-down (an issue I will blog about at some point in the future) I acquired data on the probability that President Obama was re-elected over the course of the election cycle where this probability is captured by the price of an Obama Futures contract on Intrade. I then combined this with Bureau of Labor Statistics unemployment data and Gallup Poll measures of the President’s disapproval rating to represent the economic and the sentiment factor. 

From a  technical perspective, which is discussed more in the paper, when working with observational time-series data (non-experimental data that varies with time) there are a number of issues that the researcher needs to be careful to deal with appropriately. To try and summarize these issues as painlessly as possible, the basic issue is that in any normal statistics class you only work with data that was assumed to be independent and identically distributed. However, the President’s Intrade price today is not independent of the President’s Intrade price yesterday. Thus, in this research I make a first attempt at dealing with some of the statistical issues that one encounters when dealing with time-series data of this nature.

If your eyes haven’t already glazed over, then you’re a brave soul and I welcome you to continue the adventure by downloading the article which has its own page at the top of the blog. For everyone else, here is the introduction and my tentative conclusion.


A number of papers have argued that the prices listed on Intrade for presidential election futures contracts can be interpreted as the probability that a candidate will be elected president in an upcoming election (Wolfers & Zitzewitz 2004, 2006). This paper uses this premise as a foundation for analyzing the economic and non-economic factors that drive outcomes in presidential elections. The idea that economic factors drive presidential elections has a long history in economic research (Fair 1978). However, in the absence of real-time, observable variation in the probability that a candidate is elected, much of the justification for this proposition has either been theoretical or predicated on the notion that since economic factors effectively predict presidential outcomes such factors must have a direct impact on election outcomes. The idea that non-economic factors like voter sentiment drive election outcomes most likely dates back to the invention of Democracy. However, it seems that most often the relationship between non-economic factors and outcomes is presumed rather than based on any sort of rigorous analysis. Despite the fact that Intrade has existed for the 2004, 2008, and 2012 American elections it seems that no one has yet to use the real-time variation in Intrade prices to assess the factors that drive presidential election outcomes. The purpose of this paper is to demonstrate an initial attempt perform such an analysis.


Both economic underperformance and negative voter sentiment seem to have been associated with reductions in the probability that the President was re-elected. The second panel results indicate that polling results may be subject to momentum effects. Also just as one would expect, increases in unemployment are associated with increases in in the President’s disapproval rate. Finally, none of the lagged-differences affect unemployment which is consistent with the intuitive premise that large-scale macroeconomic phenomena like unemployment are not determined by the forces that determine polling results and the President’s price on Intrade.



Economics Blog Redux?

For some reason, in the last few weeks I’ve gotten a few comments on my blog despite the fact that its been dormant for the last year and a half. It sort of made me realize that I miss writing about economics but there is a problem…

So upon logging into WordPress for the first time in a long time I noticed two things that upset me. First of all, the format is totally different than I was used to. Although I realize that I should expect that, I’m really not happy about it. It’s sort of a stupid thing to note, but the reason I mention it is that it leads to the real purpose of this entry.

I just re-read the “letter to prominent economists” that I had up on my blog that I looked at again for the first time in a long time. So the most obvious thing one MIGHT suspect was wrong with the “letter” is that it was a blatant  attempt to increase blog readership at a time I was trying to do that. The thing is I make NO apologies for that. I mean I got Brad DeLong to respond to my blog a few times and that was a lot of fun. It of course should be noted that nobody other than a graduate student would care about Brad DeLong responding to their blog, but it was pretty cool at the time.

Also, to be honest, anyone who writes a blog wants attention, so a device for getting attention which semi-works isn’t really something I regret.

So why am I disowning the “letter” and, even worse, discussing so many feelings when there are obviously so many far superior blogs for the consideration of feelings? Well the reason is that since I’ve actually learned more about economics, the real issue is that the idea behind the “letter” was really the wrong direction to go in.

The economics that people are exposed to from blogs really has nothing to do with what one actually does when they study economics. There’s good reason for that because what we actually do in economics these days involves a lot of math and, more importantly, a lot of nuanced reasoning. Nuance isn’t something that the economic pundits I was trying to emulate really deal in so that leads to the main problem with my letter. It was a request for nuance from people who shouldn’t be expected to deal in nuance. Also, it was a plea from someone who didn’t know enough math to have the economic logic explained in a way where we could really evaluate the content of what people were arguing.

There’s a lot to say about all of this that I hope in the future I can begin to explain. Also, because I’m doing a lot of research I’m really excited about I don’t know how frequently I’ll be able to blog. But I really miss all of you who actually read this thing and quite frankly I miss writing words as opposed to equations so I’m going to try blogging again on a less frequent basis. But what I really hope to embrace in my blog from here on out is NUANCE. Its a hard goal to achieve because it often asks us to question things we fundamentally believe  in. But, with nuance and modesty my hope is that I’ll at least help myself to make economics a useful tool in my own evaluation of the world. Maybe it will work for you too?

Anyway, I hope the “letter” is heretofore deleted. For the 4-5 of you who read this and look at the blog please let me know if I accomplished this. 


Building a Better Tax System

Time for a non-macro post. This Saturday in the New York Times Greg Maniw had an editorial about reforming the tax system. He discusses a lot of issues that I frequently find myself trying to address in conversation and he does so in a very concise and lucid manner. The editorial isn’t very long so I recommend just reading the whole thing, but I’m going to crib my favorite parts.


On the mortgage deduction:

“Consider the deduction for mortgage interest. The policy is politically popular, but economists have long thought it has little justification. Because of this provision, among others, our tax system gives a better treatment to residential capital than it does to corporate capital. As a result, too much of the nation’s saving ends up in the form of housing rather than in business investment, where it could have increased productivity and wages.

This efficiency cost might be worth bearing if the deduction had a benefit from the standpoint of equality, but it fails there as well. Subsidies to homeowners are, in effect, penalties on renters — after all, someone has to pick up the tab. But there is nothing wrong with renting. And once one acknowledges that renters are poorer, on average, than homeowners, the mortgage interest deduction becomes even harder to justify.”

On consumption taxes:

“Almost four centuries ago, the philosopher Thomas Hobbes suggested that taxes should be based on consumption, not income. Income measures a person’s contribution of labor and capital to society’s production of goods and services. Consumption measures the quantity of those goods and services he gets to enjoy. Hobbes reasoned that because consumption better reflects the benefits a person receives as a member of society, it is the proper basis of taxation.

Much modern economic theory confirms that conclusion. In standard models, a consumption tax allows the economy to achieve the best allocation of resources over time, whereas an income tax needlessly discourages saving, investment and economic growth.”

Taxing “bads” rather than “goods” (this is an argument I find myself trying to explain a lot):

“A good rule of thumb is that when you tax something, you get less of it. That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth. The alternative is to tax those things we would like to get less of.

Consider the tax on gasoline. Driving your car is associated with various adverse side effects, which economists call externalities. These include traffic congestion, accidents, local pollution and global climate change. If the tax on gasoline were higher, people would alter their behavior to drive less. They would be more likely to take public transportation, use car pools or live closer to work. The incentives they face when deciding how much to drive would more closely match the true social costs and benefits.

Economists who have added up all the externalities associated with driving conclude that a tax exceeding $2 a gallon makes sense. That would provide substantial revenue that could be used to reduce other taxes. By taxing bad things more, we could tax good things less.”


From a political economy perspective, I think if the President wanted to seriously address  the issue of climate change, he would introduce a carbon tax as part of a broader plan to lower taxes. I bet if sold as part of a broader tax reduction policy a lot of conservatives would come on board.

Also I was recently discussing with someone how annoying it is when people advocate a carbon tax, but don’t specify the size of the tax.  I really like that Mankiw actually specifies a baseline figure of $2 per gallon making it a much more serious policy proposal.


Paul Krugman to the Rescue (I’m serious…but even more so Milton Friedman to the Rescue)

So I promised I’d stop blogging about the debacle in the macro-blogosphere, but to tie things up I have to do one final post. One reason I have to do this post, is because it gives me an opportunity to praise Paul Krugman something which hasn’t happened that much on my blog yet. But more importantly, I finally feel like I have some answers to the questions I’ve been confused about.

For those following, there’s been a major battle on the macro-blogosphere, which in its most recent iteration has gotten the usually staid Scott Sumner very riled up taking on Paul Krugman (and crew). In a number of posts Sumner tries to demonstrate to Krugman and Krugman’s fellow Keynesians why he is right (the particular issue itself isn’t important to my blogpost) using a bunch of Keynesian style examples. In his most recent post, Sumner summarizes his argument: http://www.themoneyillusion.com/?p=12753 and suggests that he won’t stop pushing this argument until Krugman acknowledges or at least confronts his actual argument directly. Now, I definitely understand Sumner’s position and I really hope he does get the acknowledgement, but I don’t think he will. And the reason it will he hard to get that acknowledgement is that the arguments that have been made throughout this process have been made in an un-rigorous fashion. Actually, it’s worse than that, as the arguments have proceeded as follows:

Someone makes a non-rigorous statement giving the idea behind why they think an economic principle is the case. Someone else on a different part of the ideological spectrum criticizes adding an element of rigour without specifying all of their assumptions. Someone else uses some of the remaining lack of rigour to add a new argument…and it goes on and on.

Now in a move I definitely didn’t see coming, yesterday, Paul Krugman madethe argument that what this debate really needs is a rigorous foundation:


Krugman provides a link to an academic paper that not only summarizes the New Keynesian model that Krugman prefers but also the neo-classical model associated with U Chicago types.  Here is the paper by the eminent macroeconomist Michael Woodford: http://www.columbia.edu/~mw2230/G_ASSA.pdf

Now in fairness this whole debate started when Krugman jumped on some comments Robert Lucas made in a speech given two years ago in a totally non-rigorous setting. In the speech, Lucas essentially argued that the efficacy of fiscal stimulus was limited and gave the following example:

“But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.”

Krugman criticized creating a stylized example of his own, and then John Cochrane of the University of Chicago joined the fray.

So why do I now say that Krugman has come to the rescue? Because this one paper does a very good job of demonstrating that the ultimate points being made by all of these economic giants are grounded in real economics and what we really just have is a battle of models.

What’s ultimately being debated here is the size of the Keynesian multiplier. If the Keynesian multiplier is above 1 then fiscal stimulus not only causes the economy to grow because of the increase in government activity but also induces expansion in the private sector. If the multiplier is less than one, then the economy measured as a whole grows because the public sector grows, but there is some shrinkage in the the private economy through reductions in investment or consumption. In other words the private economy is crowded out to some extent.  Finally, if the multiplier is zero then any resources used by the government are totally offset by resources taken out of the private market and stimulus has no effect on growth. In the traditional Keynesian model the multiplier is always greater than one in a recession.

So now to the paper. In the first part of the paper, Woodford shows us a basic version of the neo-classical macroeconomic model based on the assumptions of Ricardian equivalence and prices and wages that instantly adjust. Woodford shows that in this model the multiplier must be smaller than one.  Furthermore, he demonstrates that under certain conditions the multiplier will tend toward zero, for instance, when the marginal cost of employing resources in production is sharply increasing. So what we see from this is that there certainly is a basis for the arguments made by Lucas and Cochrane. Now specifically what set off Krugman (and Brad De Long) was Cochrane’s assertion that the basis for his and Lucas’ opinion could be found in the principle of Ricardian equivalence. But looking back at what Cochrane wrote: http://johnhcochrane.blogspot.com/2011/12/krugman-on-stimulus.html#more, he clearly invokes the idea of Ricardian equivalence and “a well-functioning economy.” By well-functioning economy I think it’s clear he means one where wages and prices adjust quickly. And of course since the marginal cost of government employing resources should be related to how “well-functioning” the economy is, I think that pretty much explains where Cochrane was starting from.

Moving on, Woodford’s paper goes on to show that when there are rigidities in the economy like sticky wages and prices multipliers can be above one. However, as Scott Sumner has often argued, the model also shows that the fiscal multiplier being above one depends on the possibility of monetary expansion. Woodford writes, “the size of the multiplier [in the New Keynesian model] depends crucially on the monetary policy response.” So both Krugman and Sumner can be seen to be on firm footing as well in terms of the logical consistency of their general economic outlook.

What this demonstrates pretty clearly to me at least is that the arguments being made by econ giants like Krugman, Lucas, Cochrane and Sumner are based on consistent economic reasoning. So I want to say Thank you Professor Krugman for finally putting up a rigorous model that puts all the cards on the table! Would I still like more information in terms of responses to my “Letter to Prominent Economists.”? Definitely. But this is a very good start.

So what to make of all of this? Surely I can’t be saying that these economists with mutually exclusive policy prescriptions are all right about fiscal policy?

My point is that there is rigorous logic behind all of the major schools of economic thought. That’s how they got to be major. And what’s clear is that logic isn’t enough. In his seminal essay, the Methodology of Positive Economics, Milton Friedman argues that economics can only advance as a science when models are empirically tested. Large scale empirical testing isn’t possible on an economics blog, but rather than engaging in these arcane quasi-theoretical disputes and accusing each other of not understanding economics, economics bloggers do the most to support their beliefs when they present empirical evidence in support of the theories favored by the authors.


Brad DeLong Posts on My Blog Again & Some Context for My last Post

So I was pretty shocked when Brad DeLong responded to this post of mine: https://robekulick.wordpress.com/2012/01/11/team-old-keynesian-versus-team-chicago/#comments

For the few of you out there following this, here is his response:

“Say, rather, some of their arguments are simply wrong *in the model that they are using*–the quantity theory of money does *not* state that velocity is unresponsive to bond market conditions, Ricardian Equivalence does *not* state that consumption falls to fully offset a temporary boost to government purchases, and some of their arguments are incoherent in that they require that two different (and contradictory) models be true at once.”

First of all, I just want to say that it’s very cool that DeLong takes the time to respond to a post from a graduate student whose blog has a very small circulation. But of course, as is my nature, once he posted this comment all I wanted to do was ask him more questions. And then I started thinking that I have pretty much the same set of questions for just about every prominent economist. And so came about yesterday’s post: https://robekulick.wordpress.com/2012/01/12/a-humble-request-from-a-student-of-economics/, a letter to economists that I think would provide a lot of context for understanding their opinions

Now, I don’t actually expect that people as busy as the people who my letter targets are going to drop what they’re doing to fill out this questionnaire. But maybe if I keep at this blog thing long enough and as I advance through graduate school someone will eventually respond. And if one big name economist responds maybe a few others will respond. And maybe from there…well you get the idea. I just think it would be so interesting and informative to know what inspires the way the big name economists think and also to know what they see as their most serious ideological competition. So what I’m doing is I’m putting the letter up as a page on my blog with a link right next to the “about” page. That way the letter will just be there and maybe I’ll get a pleasant surprise someday.

A Humble Request from a Student of Economics

Dear [Prominent Economist],

Students of economics need your help! A few years ago, macroeconomics was  a relatively placid  field within economics where it seemed like there was a large amount of agreement on how to formulate macroeconomic policy. Since the financial crisis, however, any semblance of consensus has eroded and we have entered a new period of intense disagreement between various schools of economic thought. The financial crisis and the economic stagnation that ensued have served to remind students of economics that macroeconomic policy has very real consequences for real people. Thus, it is imperative for those of us who constitute the next generation of economic thought to thoroughly understand the current macroeconomic debate.

The growth of economics blogs has undoubtedly been both a consequence of and a catalyst for the discord among macroeconomists. I think overall the proliferation of economics blogs has been very positive for students of economics. We have unprecedented access to the thoughts of leading economic thinkers. Furthermore, blogging often allows students and lay-people to have direct engagement with leading economists which would not have been possible in the past. However, one of the first lessons that any undergraduate learns while studying economics is that there are “no free lunches” and this principle applies to the current state of economic discourse. Because blogs are generally written in a polemical style rather than an academic style it is often hard to distinguish established economic opinions from the personal beliefs of bloggers. So I thought it might be helpful for prominent economists, especially those who frequently express themselves through blogs, op-eds, or other popular writings to fill out the following questionnaire, which will orient and provide context for students of economics trying to follow the current debate. Any participation is immensely appreciated!

Question 1: Do you identify with a particular macroeconomic school of thought? Briefly explain.

Question 2: In a few sentences please explain whether you believe fiscal policy and/or monetary policy has a role to play in ameliorating the current economic situation?

Question 3: (Very Important Question!):

a) Please identify the theoretical academic papers that you view as the most important for explaining your beliefs in the potential efficacy of fiscal and monetary policy in general.

b) Please identify the empirical academic papers that you view as the most important for explaining your beliefs in the potential efficacy of fiscal and monetary policy in general.

Question 4: Please explain in a few sentences what you view as the primary determinants of the business cycle?

Question 5):

a) Please identify the theoretical academic papers that you view as the most important for explaining your beliefs as to what are the primary determinants of the business cycle.

b) Please identify the empirical academic papers that you view as the most important for explaining your beliefs as to what are the primary determinants of the business cycle.

Question 6: Please explain in a few sentences what you view as the primary determinants of long-term economic growth.

Question 7:

a) Please identify the theoretical academic papers that you view as the most important for explaining your beliefs as to what are the primary determinants of economic growth.

b) Please identify the empirical academic papers that you view as the most important for explaining your beliefs as to what are the primary determinants of economic growth.

Question 8 (Another very important one!):

What are the most important theoretical and empirical papers defining the economic viewpoint contrary to your viewpoint on fiscal and monetary policy?

Question 9 (Final Question): Please share any other relevant thoughts.

To anyone who fills out this questionnaire or even gives it a little bit of thought, I want to say how much I appreciate your consideration of these questions. I believe knowing your answers to these questions would be of inestimable value for current students of economics. Also, for anyone who reads this, please feel free to suggest ways that I can improve the questionnaire.


Robert “Robe” Kulick

First Year Graduate Student in Economics at the University of Maryland



Team Old Keynesian versus Team Chicago

Scott Sumner has a good article about the debate between Old Keynesian economists (Paul Krugman et al.) and the Chicago Economists (Robert Lucas et al.) that led to my housewives/star wars blog posts:


In this post, Sumner asserts that the problem in the recent debate between team Old Keynesian and team Chicago is that team Keynesian is assuming that the Keynesian model is correct when criticizing team Chicago. I’m very glad Scott Sumner posted this because it gives me a good opportunity to try and express what’s confusing me about this whole debate.

Essentially, in an economic debate like this one there are two different senses of being wrong:

First, you can argue someone is wrong because their argument exhibits a logical flaw that would be erroneous in any of the major categories of economic model.

Second, you can argue that someone is wrong because although their beliefs are logically consistent within the model they’re using, their model is not apt for the situation under consideration.

So here is what is really confusing me about the recent blog war between team Old Keynesian and team Chicago. Usually when an argument like this erupts between Nobel Prize winners and other eminent economists, the second statement is what’s really at issue. In other words, what the economists are arguing about is which logically coherent model to apply to the situation. Ultimately there isn’t enough systematic  empirical evidence out there yet (maybe someday there will be) to make an absolute case for one macroeconomic model being true in the sense that the Einstein’s theory or relativity is true. Hence Nobel Prize winners disagree and their disagreements revolve around finding ever more pieces of evidence that they believe provide empirical support for their position.

But in this most recent debate, that is not my perception of what the Old Keynesian economists are arguing. Recall that this all started when Paul Krugman argued that Lucas and Cochrane do not understand Ricardian Equivalence:


Now Ricardian equivalence is not an element of the old Keynesian model that informs Krugman’s opinions. And at other points he and Brad DeLong and others  have argued that Lucas and Cochrane don’t have a coherent model in mind when making their arguments. So it seems to me that team Old Keynesian is asserting that Lucas and Cochrane are wrong not just in the Keynesian model, but in every reasonable economic model. So that leads to my first question, am I right about the Krugman argument? Or is it just the case that what team old Keynesian is arguing is that team Chicago is employing the wrong model? If it’s the latter than I can stop being confused.

Now if it is the case that Krugman et al.  are arguing that Lucas et al. are wrong at the logical flaw level, my question is this, is it true that the statements made by Lucas and Cochrane are wrong in pretty much all models? Have they really made a mistake in applying Barro’s Ricardian Equivalence theorem?

I’m just a semester into advanced macro right now, so I don’t feel like I have the technical ability yet to wade into the literature and figure it out. But for a number of reasons I’m skeptical of the charge that there is no logic behind Lucas and Cochrane’s arguments. Hence it seems to me that Scott Sumner is ultimately correct that this is a battle of models.

(1) From, what I know of real-business cycle models, Lucas/Cochrane’s argument seems pretty consistent with that sort of logic.

(2) Robert Lucas seems to be just about the most important person in modern macroeconomics, since just about everything we learn in macro is tied to him.

(3) One of the the major arguments here is that Lucas and Cochrane have misapplied Robert Barro’s Ricardian Equivalence Theorem. However, Barro has also argued forcefully that the multiplier is zero. Is the argument also that Barro doesn’t understand his own theorem?

So I end this post in a plea for one of the more nuanced economics bloggers, in the off chance they read this, to pick up these questions.

Help us Scott Sumner/Tyler Cowen, you’re our only hope! (A last little bit of Star Wars humor).


The Economics of Budget Deficits

I just finished reading this essay by Greg Mankiw on the economics of budget deficits:


It’s concise, clear, fairly easy to read, and avoids mathematical pyrotechnics. Since there’s been a lot of discussion of deficits recently, it’s a very good introduction to economic thinking on the subject.

Although most people think of a country’s budget deficit as similar to debt incurred by a household, this isn’t necessarily an apt metaphor. Mankiw considers the economics in terms of a dichotomy between national deficits under normal conditions, ie when the debt to GDP-ratio does not undermine faith in financial markets, versus deficits in times of fiscal strain, ie when debt to GDP-ratios become sufficient to raise the specter of default.

A quick summary of Mankiw’s points:

Under normal circumstances , the effects of a deficit are the crowding out of investment, as money that would have gone into private investment is instead loaned to the government, and increased holding of US assets by foreign investors. However, the deficit allows consumption to increase in the near-term.  This situation leads to sets of winners and losers in the economy, but there is no clear determination as to whether we are worse off as a whole.

Since the decrease in capital causes interest rates to rise, holders of capital, that is holders of wealth benefit. Since labor is a complement to capital, a decrease in capital causes the productivity of labor to fall and thus real wages fall.  Since the holders of capital tend to be wealthy and workers tend to be less wealthy, deficits redistribute income from the poor to wealthy in the future which many would view as an undesirable consequence.

Furthermore, since deficits reduce national income in the future but increase present consumption, deficits are effectively a transfer from the future to the current population. You can view this as taking resources from posterity but you can also reason that since people in the future will be richer as a result of better technology, it is fair for us to use greater resources now. Economics doesn’t really provide a simple answer to this question.

So under normal circumstances, deficits have mixed economic effects. Many people will find these effects unpalatable, but there isn’t a definitive answer as to whether deficits are bad are good.  One final note is that some economists have postulated that the level of technological advance in an economy is directly related to the accumulation of capital. To the extent this is how technology evolves (I’ve always subscribed to this view) the crowding out of investment reduce technological advance which is another negative factor.

However, when deficits become very large as a percentage of GDP, the economic consequences of deficits can become much more clearly negative. Although Mankiw wrote this in the 1990s, the economics of unsustainable budget deficits are playing out in Europe as we speak.

Essentially there are two major problems with unsustainable budget deficits. The first is that since the burden of a deficit is very much tied to economic growth, what seemed like a sustainable budget deficit may very quickly become unsustainable in a time of recession. A country (Greece) may very well find itself unable to finance itself leading to a dramatic decrease in consumption (austerity) precisely when consumption has already taken a substantial hit because of recession.

Second, the bonds issues by governments to create deficits are a crucial piece of the banking system. The reserves that banks hold are very often government bonds. Default by governments can then lead to a financial crisis.

I’ll sum up by quoting the last paragraph in Mankiw’s paper because it ties the issues together very well:

“Previous sections of this paper have described well-understood and quantifiable effects of budget deficits, such as crowding out of capital and intertemporal shifts in tax burdens. By contrast, this section has been highly speculative. We can only guess what level of debt will trigger a shift in investor confidence, and about the nature and severity of the effects. Despite the vagueness of fears about hard landings, these fears may be the most important reason for seeking to reduce budget deficits. If the main effects of deficits are moderate redistributions across generations and groups of people, perhaps they should not be a central concern of policymakers. But as countries increase their debt, they wander into unfamiliar territory in which hard landings may lurk. If policymakers are prudent, they will not take the chance of learning what hard landings in G-7 countries are really like.”


A $105,000 Bar Tab?

This article in the WSJ about someone racking up a $105,000 bar tab at a club in Dubai caught my eye:


Here is a list of items on the bill:

– One 6 liter bottler of Cristal Champagne – $35,000

– Two 2-liter bottles of Cristal for $19,000

– 13 Bottles of Roederer Cristal for $23,000 (or about $1,800 each).

– 24 Diet Cokes at $6 each.

– 10 Red Bulls at $7.80 each

– One 3 liter bottle of Cavalli vodka at $1,341.

– Four bottles of Chivas for $1,181

The cake slice was the bargain of the night, coming in at only $32.”

After finishing my undergrad thesis I bought a bottle of Roederer Cristal for $200 at a liquor store. Here is a link to POV’s bottle service menu,  an open air lounge at the W hotel in Washington that’s pretty swanky http://pointofviewdc.com/menus/new/Bottle-Service-Selections.pdf. They list a bottle of Cristal at $560 (presumably Roederer). According to this Harvard Business School study a bottle of Cristal at Marquee, a club in New York renown enough to have an HBS study dedicated to it, is $900 (http://www.noahtepperberg.com/wp-content/uploads/Harvard-Business-School-Case-Study.pdf).

So here is the economic question: economic theory indicates that in a market with no barriers to entry like the market for bars/clubs, no firm will be able to make above persistent above market returns. This means that at places that charge higher prices for the same product, ie a bottle of Cristal, these clubs must also be offering some other service, that is sufficiently costly to negate any extra profits earned by charging more for Cristal. So what services is this club in Dubai offering to justify prices double that of Marquee? Or is the cost of doing business in Dubai just that much higher than it is in the US?

The Effect of Romney’s Nomination on President Obama’s Chances for Re-election: Some Evidence From Intrade

Awhile ago, I used data to from Intrade to show that the there is a strong negative relationship between the probability of a recession in 2012 and the probability that President Obama is re-elected. In this post, I ask the question what is the relationship between the probability that President Obama is re-elected and the probability that Romney is nominated controlling for economy. If this relationship between the Obama and Romney probabilities is negative and statistically significant than this suggests that Romney is perceived by the market to be a strong candidate relative to other challengers.

First a graph of the overall data:

The three data series are (1) President Obama’s re-election chances in red with a dashed trendline, (2) Romney’s chances of getting the nomination in blue with a solid treadline, and (3) the chances that the economy goes into recession in 2012 in green with a dotted trendline.  The data are intrade closing prices from Jan. 1, 2011 – Jan. 5, 2012.

Just from casual observation, two things are noticeable. First, the President’s chances of re-election have decreased over the year as  the probability of Romney’s nomination has increased and the probability of a recession in 2012 had increased.

To parse this relationship more rigorously, I ran a regression of the natural log of the President’s re-election chances on the natural log of Romney’s nomination chances and the natural log of the economy going into recession. Using the natural log allows the regression coefficients to be interpreted as percentages. These are the results:

Linear regression                                      Number of obs =     370

F(  2,   367) = 1074.45

Prob > F      =  0.0000

R-squared     =  0.8355

Root MSE      =  .03819


|               Robust

lno |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]


lne |   -.222992   .0082341   -27.08   0.000    -.2391839   -.2068001

lnr |  -.0385798   .0063549    -6.07   0.000    -.0510763   -.0260833

_cons |   4.890662   .0194852   250.99   0.000     4.852345    4.928978


Both coefficients are  negative and highly statistically significant, indicating that an increase in the probability of a recession and an increase in the probability of Romney’s nomination decrease the probability that President Obama is re-elected. Specifically a 1% increase in the probability that the economy goes into recession results in a -0.22% decrease in the probability President Obama is re-elected and a 1% increase in the probability that Romney is nominated results in a -0.04% President Obama is re-elected.

Now what’s clear here is that although both effects are statistically significant, the Romney effect is quite small. This suggests that the economy plays a much larger role in the chances of President Obama’s re-election than the choice of the Republican candidate. On the other hand, since increases for Romney come at the expense of the other Republican candidates it also suggests that Romney is a stronger choice for the nomination than other Republican candidates in aggregate.