Where have all the posts gone?

Anyone who has been checking this blog for the last while may have noticed the drop-off in blog entries in recent months. My experiment with blogging is coming to an end, at least for now. As a posted back when I began the blog on March 8 2007, "The purpose of this blog is primarily to meet the needs of my students." I believe the blog has served this purpose very well. I've answered questions, written brief commentaries on economic events, and linked to news items that are relevent to my Macroeconomics students.

But for the next year I won't have any students! I'll be on leave from HKU, and will taking up a position at the Bank for International Settlements.

Thanks to those who have read the entries, emailed questions, and posted comments. I'll leave the site up, but for now, HongKongMacro will just have to languish in cyberspace....

Candy Money.....

What happens when an economy runs out of fiat money? Just such an outcome has occured in Argentina. With coins in short supply, stores have taken to using candy in place of small change. If candy can in turn be used to make small payments in other stores, then candy has become a form of commodity money. But if it cannot be used as payment, then the only beneficiaries of this practice will be the dentists! See this Freakonomics link for more.

Unintended Consequences...

Yesterday I discussed the unintended consequences of making it difficult for firms to fire workers: increased unemployment, especially among youth. There are many other examples of unintended consequences as well- see the links below for examples:

Policies to reduce global warming may in fact cause global warming

Increased rights for people with disabilities hurt people with disabilities; and laws to protect the environment hurt the environment.

Discrimination is Costly in Football...

An excellent article by Tim Harford on the economic cost of discrimination....

Reading more....

"I want to read more about economics news. What do you suggest?" -Zheng

There are many excellent resources on the web. For detailed economic discussion of the business cycle, for example (something that we will cover in class later in the year), Econbrower is excellent- although it does focus almost entirely on the US economy. For more general reading, check the Freakonomics blog or the Undercover Economist. For slightly more eclectic discussion of all things economics, see Marginal Revolution. There's also the Economist website where you can read the latest edition of this excellent publication for free. And if you have any more time to spare after all that, don't tell me, or I'll assign more homework! :-)

If you do come across relevant stories that you think other blog readers would be interested in seeing, please send me the link, and I'll post them here as well.

Do you buy or sell an appreciating asset?

This must be "undercover economist" day at HongKongMacro. Here's another facinating post by Tim Harford.

The crux of the post: should you buy an asset that has appreciated in price, or not? Clearly if you failed to buy it when it was cheaper before, and you were rational about your decision then, you should be less likely to buy the asset now. But many financial analysts seem to have different ideas. The fact the price has gone up must mean that it's an asset worth holding.... or something like that.

I shouldn't complain. Markets would be far less interesting if we all invested like economists. There would be no bubbles, and we'd have a lot less to talk about! Just look at the Hang Seng Index, which has dropped almost 15% since October 30.

Benford's Law... and Testing Economics Data

I earlier posted a link on Benford's law, the idea that most data series are likely to have many more observations starting with the digit "1" than "2", and more starting with "2" than "3", etc. The idea was that to get from "1" to "2" requires a 100% increase in magnitude, while getting from "2" to "3" requires only a 50% increase in magnitude.... and so on.

Well, the undercover economist has more... the same principle can be used to assess whether economic statistics are accurate.

Suspician of the accuracy of statistics has a long history. Benjamin Disraeli famously commented that there are three kinds of lies.... "lies, damned lies, and statistics." But maybe this is not fair. At a minimum, most statistics should satisfy Benford's law.

I can think of an excellent application. Many people are suspicious of the macroeconomic numbers generated by Mainland China, especially at the state level. A simple test of whether they're made-up or not would be to see whether the series satisfy Benford's Law.

Of course this would not be a fall-proof test. What if the numbers really were made up, but by statisticians who knew about Benford's law?

Free Lunch....

"There's no such thing as a free lunch" is an idiom, the title of a book by Milton Friedman, and the substance of a wiki page. It's also the idea behind a paper I wrote a few years ago on monetary policy published in the Journal of Macroeconomics.

More recently, we have more proof that very little is in fact free... as the UndercoverEconomist reports here.

Japan's Phillip's Curve....

.... looks like Japan. That's from my former PhD Supervisor and co-author, Professor Gregor Smith of Queen's University. The same is apparently true of the Marshal Islands, the Netherlands, and the Czech Republic (see the links on Smith's homepage). It's not true for HK.... I checked.

Studying the Dismal Science....

Economics is often referred to as the "Dismal Science," a label which is not exactly supposed to reflect positively on economists. But is it a fair label? Are economists really dismal people? Does studying economics increase your dismal-rating, or do dismal people self-select into the discipline?

How about the converse? Maybe economists are a happy lot, deriving pleasure from using economic analysis to understand the world around us, and as a result of our outlook on life, gaining insights that are a mystery to most of the world's population.

Marginal Revolution, one of the most popular economics blogs, recently put this question to their many readers. Does studying economics make you happier? Read more and offer your comments here.

My conclusion: Maybe we're not such a dismal lot afterall!

The Collateral Damage of Trade....

Yesterday I posted on the link between trade and disease. Trade results in other risks as well... like creating racial offense from poor translations!

Having read the english translation on the instructions of many items made in China over the years, I can see how easy it is for this to occur. In some cases, I've found that the instructions are worse help than my own intuition! I am sympathetic to this problem, as translation is inherently a tricky activity. I can still recall coming late to a French class many years ago and apologising in French. The class laughed. I'd mistakenly described myself as retarded (retarde) instead of late (retardataire)!

As China continues to develop and move further up the value chain, I am sure that this is a problem that will be consigned to history. It will become worthwhile for Chinese manufacturers to pay native English speakers or professional translaters to write their English language documentation and labels, rather than rely on cheap but inaccurate computer software.

Trading Diseases.....

Economic integration, in the form of the flow of goods, people, and capital is generally perceived to be unambiguous good to economists. Non-economists are sometimes more skeptical, pointing to increased carbon dioxide output due to shipping goods across the globe, and loss of cultural uniqueness as the world becomes increasingly homogenous.

The first of these could be easily rectified with an appropriately implemented carbon tax, while the second is very hard to quantify, or rectify. And since economic integration is a natural phenomena that occurs when individuals are able to freely trade with each other, it's impossible to argue that preventing such integration is not itself costly to society.

But there are other unintended effects of integration as well. Remember SARS? It started in southern China and spread into Hong Kong, one of the most globally integrated regions anywhere. From there it spread far and wide, with over 8,000 patients falling ill in 25 countries in short order.

An even more serious case of integration leading to the spread of disease can be found in Africa. According to a recent study from Emily Oster (thanks to Marginal Revolution for the link), "a doubling of exports leads to as much as a quadrupling in new HIV infections" in Africa. Increasing trade flows result in increased movements of transient workers, who themselves are high risk, and take their diseases with them.

I wouldn't interpret this as evidence that trade is bad per se- it's just one more component to weigh up when deciding how to steer an economy. And remember that HIV infections are just one component of economic welfare. Trade also allows many members of society to improve their living standards, and in poor parts of Africa, this is likely to have a large positive effect on overall health and welfare.

Nobel Prize Winners in Economics

Hurwicz, Maskin and Myerson won the nobel prize in economics for "Mechanism Design." What on earth is that, I hear you ask? Alex Tabarrok of Marginal Revolution provides some excellent examples here.

The HKMA is On Top of Things....

The Hong Kong Monetary Authority, Hong Kong's de facto Central Bank, is on top of things... literally! In fact, being housed in the top 11 floors of IFC2, the world's 7th tallest building (and Hong Kong's tallest.... at least until the new ICC building going up across the harbour adds a few more floors).

Of course that's just a play on words, and an excuse to post a photo taken from the 84th floor of IFC2 (below). I'm currently spending a few hours a week at the Hong Kong Institute for Monetary Research, an institute funded by the HKMA, writing a paper on Hong Kong's deflation.

Hong Kong has a unique experience of deflation, as the graph below shows. Out of all developed economies, none other has experienced as large and persistent a deflation in recent times as Hong Kong- Japan is included in the graph as a comparison. I am using this unique Hong Kong data to improve our understanding of the business cycle.





The reason why this data is unique to Hong Kong is in large part due to Hong Kong's monetary policy. With a currency board, the central bank cannot respond to a negative shock by loosening monetary policy, so the economy experiences the full force of the shock. Additionally, the exchange rate cannot adjust (that's what the currency board is designed to keep fixed); prices must adjust in their stead for Hong Kong to regain competitiveness after a negative shock. In the case of Hong Kong's deflation, there were actually four negative shocks in quick succession that resulted in continuous deflation for 68 months (from November 1998 until June 2004): a massive wealth shock, as the property bubble burst (residential real estate lost 70% of this value peak-to-trough), the Asian Financial Crisis, the dot-com bubble bursting, and SARS all contributed to Hong Kong's deflationary experience.

And here's the promised picture from the 84th floor, looking towards Sheung Wan, on one of those all-too-rare days in August when the pollution levels were low, and you realise that there are islands visible on the horizon that you haven't seen for years! (Click on the photo to enlarge).

Sports, sentiment, and cycles....

I can't sit here, as a native-born Kiwi (New Zealander) and not make a comment on the shocking result in the Rugby World Cup in the early hours of the morning, HK time. Completely against expectations, the world's top rugby team, and the most successful in the history of the sport, lost to France in the quarter-finals. There are many things I'd like discuss (like the refereeing), but I'll leave that to the experts. The fact is, based on current form, the All Blacks (as the NZ team are called) should have won by a large margin.

Let me first address the apparent contradiction of the top team failing to win the World Cup, and then get on to the macroeconomic implications of sports, and implications for China.

Rugby teams have different styles of play. Some are flamboyant, occasionally producing amazing results, but in the long run are likely to disappoint (like hedge funds); others play excellent, exciting rugby, win more often than not, but sometimes suffer major lapses (like equities); and others are dead boring, able to grind out a modest return under most circumstances, but fail to inspire in the long run (like bonds).

Of these three types, I'd characterise the All Blacks as the top equities fund of world rugby. For over 100 years, they have out-performed all other funds across all asset classes on average, but they've had significant set-backs along the way, in particular failing to win some crucial games at world cups! But maybe that's just a result of the structure of the world cup. To win, a team must beat three competitors on three consecuative weekends in sudden-death matches. Winning two by a large margin is irrelevant if you lose the remainder.

Consider the analogy of investing. Suppose your objective was to have the highest return in three consecuative pairwise comparisons with randomly selected alternative funds. Would the top equities fund win? There's a good chance of that if all the competitors were also equity funds. But the probability drops as the investment strategies of the opposition diverge from equities. For example, equities may have out-performed bonds consistently for as long we we've had data (and have now started out-performing hedge funds as well), but I'd expect equities to beat bonds in three consecuative periods (months, say) with a probability of less than 50%, since bonds consistently outperform equities in a falling market.

Of course that doesn't completely explain the Rugby World Cup: with one victory in 5 world cups, the most dominant team is running at a lowly 20% success rate! But at least it's a start.

The semi-finals of the cup include England (bonds) versus France (hedge fund) and the winner of South Africa (equities)/Fiji (hedge fund) versus the winner of Scotland (underperforming bonds)/Argentina (inexperienced hedge fund). As with investments, it's impossible to be sure what the outcome will be.

But lets get on to the macroeconomics of sport, since this is supposed to be a macroeconomics blog! New Zealand has a small population that is completely rugby obsessed. This obsession starts at birth, and aflicts nearly all members of the population, whether they've ever picked up an oval ball or not. Perhaps more so than in any other country, the performance of the national rugby team affects the mindset, optimism, and outlook of the population.

So what happens when the national team losses unexpectedly? National mourning and stunned disbelief. But maybe more. How about a recession?

Remember that expectations and optimism play a major role in the consumption and savings decisions of consumers. In the case of New Zealand, the current phase of the business cycle would suggest that this is particularly so. As with the United States until recently, the economy has been booming, largely on the basis of the "feel good" factor. This has fueled increases in house prices to historically unprecedented levels, which has in turn fueled large increases in consumption spending and investment (in new houses), driving the economy to new heights. The end result is unsustainable, with the current account deficit at worse than 8% of GDP, and record household debt levels.

This ponzi scheme of inflated real estate prices driving excessive consumption must at some point come tumbling down. Could a shock to expectations, in the form of the worst ever performance of the All Blacks at a world cup trigger such a correction? Time will tell.

Coming closer to home, the Chinese market is a "bubble of bubbles" according to some commentators. Hype about the coming olympics may be helping to drive up asset prices above fundamental levels. What happens when the olympics is over, especially if China fails to impress with a record medals haul? It's the final straw that breaks the camel's back, and the smallest pin that bursts the largest bubble....

Dilbert the Economist...

Some time ago, I commented that Scott Adams, the creater of Dilbert, understands marginal utility.

The plot thickens.... it turns out that Scott Adams trained as an economist, and thinks that economics confers mild super-powers! No wonder I enjoy reading Dilbert so much!

See the links here for more.

Thanks to Newmark's Door for the link.

Lecturing for Profit....

How could a Professor make money off rational students, and what lessons does it hold for Iraq?

See here for more details.

The Wit and Wisdom of Government....

I cannot verify that the following is true, but here is a reputed quote from a British Columbia Utilities Commission publication:

"The high cost of having several companies instead of a monopoly is evident if one contemplates the possibility of several sets of electrical wires connected to each customer".

If you cannot tell me what is wrong with that statement (and more importantly, the implications of that statement), then I would strongly advise you against taking ANY economics course- as you will fail! Unless of course one of the following applies....

1) you're still wearing nappies/diapers, and have not yet learned to talk
2) you're currently in a coma, from which you will recover before taking the course
3) for some other reason you're temporarily lacking full command of your mental faculties.

Actually, given what I understand of BC (I lived there for a year.... diligently studying Economics), maybe 3) can help to explain this.....

Predicting Financial Crises....

Financial crises are rare events that seem to creep up on us, and then unleash a torrent of turmoil, laying financial waste to the macroeconomic environment. They seem unpredictable - in part because the final trigger of a crash may be something seemingly minor, and of little real financial consequence it its own right. Yet our inability to predict them doesn't stop analysts from trying. At any given point in history, there are sure to be some predicting a crisis just around the corner!

Sometimes it's a useful thought experiment to consider the state of the macroeconomy and try to figure out risks to its continued growth, and growing imbalances that might lead to future crises. It forces us to spell out our underlying model of the macroeconomy, and the implicit assumptions we make about financial markets.

For your bedtime reading, Mark Gilbert outlines one such thought experiment in the context of a story on Bloomberg here.

Related Reading: "Why Stock Markets Crash."

Evidence of Competence

How much Faith should you put in the Government? Xavier Sala-i-Martin, an economist at Columbia, says not much, and points to this as the reason why.

I'm not sure that we can blame all those examples on the Government, which doesn't have a monopoly on incompetence. But they're funny anyway!