Economics – Page 220 – artdiamondblog.com

Fat-Tailed Distributions Seldom Used “Because the Math Was So Unwieldy”

Source of cartoon: online version of the WSJ article quoted and cited below.

(p. C1) Last year, a typical investment portfolio of 60% stocks and 40% bonds lost roughly a fifth of its value. Standard portfolio-construction tools assume that will happen only once every 111 years.

With once-in-a-century floods seemingly occurring every few years, financial-services firms ranging from J.P. Morgan Chase & Co. to MSCI Inc.’s MSCI Barra are concocting new ways to protect investors from such steep losses. The shift comes from increasing recognition that conventional assumptions about market behavior are off the mark, substantially underestimating risk.
. . .
(p. C9) Many of Wall Street’s new tools assume market returns fall along a “fat-tailed” distribution, where, say, last year’s nearly 40% stock-market decline would be more common than previously thought.
Fat-tailed distributions are nothing new. Mathematician Benoit Mandelbrot recognized their relevance to finance in the 1960s. But they were never widely used in portfolio-building tools, partly because the math was so unwieldy.

For the full story, see:
ELEANOR LAISE. “Some Funds Stop Grading on the Curve.” The Wall Street Journal (Tues., SEPTEMBER 8, 2009): C1 & C9.
(Note: ellipsis added.)

Stimulus Recipients “Have Strong Incentives to Inflate Their Reported Numbers”

(p. A19) After reporting GDP, the government released new numbers claiming that the stimulus programs have “created or saved” over a million jobs. These data were collected from responses by government agencies that received federal funds under the American Recovery and Reinvestment Act of 2009. Agencies were required to report “an estimate of the number of jobs created and the number of jobs retained by the project or activity.” This report is required of all recipients (generally private contractors) of agency funds.

Unfortunately, these data are not reliable indicators of job creation nor of the even vaguer notion of job retention. There are two major problems. The first and most obvious is reporting bias. Recipients have strong incentives to inflate their reported numbers. In a race for federal dollars, contractors may assume that the programs that show the most job creation may be favored by the government when it allocates additional stimulus funds.
No dishonesty on the part of recipients is implied or required. But when a hire conceivably can be classified as resulting from the stimulus money, recipients have every incentive to classify the hire as such. Classification as stimulus-induced is even more likely if a respondent must only say that, except for the money, an employee would have been fired. In this case, no hiring need occur at all.
. . .
Net labor market figures do exist. Administrations have always been held to the time-tested and well-understood monthly job numbers put out by the Bureau of Labor Statistics, which reports the unemployment rate and the net job gain or loss for the economy as a whole. It is important to use reliable, accurate and well-understood numbers to determine the true causes of recovery. The unemployment rate, now at 9.8%, has continued to rise, and job losses have remained at high levels throughout the stimulus period. Few will be comforted by the good-news-only claim that the stimulus “created or saved” over one million jobs.

For the full commentary, see:
EDWARD P. LAZEAR. “Stimulus and the Jobless Recovery; Jobs ‘created or saved’ is meaningless. What matters is net job gain or loss, and that means the unemployment rate.” The Wall Street Journal (Mon., NOVEMBER 2, 2009): A19.
(Note: ellipsis added.)
(Note: the online version of the article was dated Nov. 1st.)

“Market Wu” Annoys Maoists and Corrupt Bureaucrats

“Wu Jinglian helped to create China’s market economy, and now he is defending it against conservative hardliners in the Communist Party.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. 1) AT 79, Wu Jinglian is considered China’s most famous economist.

In the 1980s and ’90s, he was an adviser to China’s leaders, including Deng Xiaoping. He helped push through some of this country’s earliest market reforms, paving the way for China’s spectacular rise and earning him the nickname “Market Wu.”
Last year, China’s state-controlled media slapped him with a new moniker: spy.
Mr. Wu has not been interrogated, charged or imprisoned. But the fact that a state newspaper, The People’s Daily, among others, was allowed to publish Internet rumors alleging that he had been detained on suspicions of being a spy for the United States hints that he is annoying some very important people in the government.
He denied the allegations, and soon after they were published, China’s cabinet denied that an investigation was under way.
But in a country that often jails critics, Mr. Wu seems to be testing the limits of what Beijing deems permissible. While many economists argue that China’s growth model is flawed, rarely does a prominent Chinese figure, in the government or out, speak with such candor about flaws he sees in China’s leadership.
Mr. Wu — who still holds a research post at an institute affiliated with the State Council, China’s cabinet — has white hair and an amiable face, and he appears frail. But his assessments are often harsh. In books, speeches, interviews and television appearances, he warns that conservative hardliners in the Communist Party have gained influence in the government and are trying to dismantle the market reforms he helped formulate.
He complains that business tycoons and corrupt officials have hijacked the economy and manipulated it for their own ends, a system he calls crony capitalism. He has even called on Beijing to establish a British-style democracy, arguing that political reform is inevitable.
Provocative statements have made him a kind of dissident economist here, and revealed the sharp debates behind the scenes, at the highest levels of the Communist Party, about the direction of China’s half-market, half-socialist economy.
In many ways, it is a continuation of the debate that has been raging for three decades: What role should the government play in China’s hybrid economy?
Mr. Wu says the spy rumors were “dirty tricks” employed by his critics to discredit him.
“I have two enemies,” he said in a recent interview. “The crony capitalists and the Maoists. They will use any means to attack me.”
. . .
(p. 7) In interviews, Mr. Wu says he feels compelled to speak out because conservatives and “old-style Maoists” have been gaining influence in the government since 2004. These groups, he said, are pressing for a return to central planning and placing blame for corruption and social inequality on the very market reforms he championed.
At the same time, Mr. Wu says, corrupt bureaucrats are pushing for the state to take a larger economic role so they can cash in on their positions through payoffs and bribes, as well as by steering business to allies.
“I’m not optimistic about the future,” Mr. Wu said. “The Maoists want to go back to central planning and the cronies want to get richer.”

For the full story, see:
DAVID BARBOZA. “China’s Mr. Wu Keeps Talking.” The New York Times, SundayBusiness Section (Sun., September 26, 2009): 1 & 7.
(Note: ellipsis added.)

Source of timeline graphic: online version of the NYT article quoted and cited above.

Wind Power is Volatile and Unreliable, Especially When Power Demand is Highest

Graph of total electric power load and total wind power generation from the Bonneville Power Authority (BPA) for a week in late July 2009. Source of graph: http://blog.oregonlive.com/environment_impact/2009/07/real_time_wind.jpg

(p. A14) For more than a century, producing power has been a matter of flipping a switch. Need more electricity? Fire up some fuel. Need less? Dial the flame back down.

Things won’t be that easy in a world that gets much of its energy from renewable sources, which come and go at nature’s whim. Wind tends to blow hardest at night — a problem, since people use electricity mostly during the day. Sunshine can lose its intensity in seconds if eclipsed by a cloud — inconvenient for people who like their air conditioners to run steadily on summer days.
. . .
Most of the electricity in Bonneville’s service area comes from hydroelectric power. To compensate for the volatility of wind, Bonneville tweaks the amount of water it lets through the dams. But that doesn’t work for the most extreme shifts in wind. Sometimes, when the wind is blowing hard, Bonneville releases extra water over the tops of dams without using it to generate electricity. Otherwise, electrical wires might get overloaded. And when the wind is so strong that Bonneville can’t ditch enough water, the utility orders wind turbines shut off.
“Everything changes with wind,” says Bart McManus, a wind expert at Bonneville.
Sudden doldrums can be as troublesome as sudden gusts. That was the problem on Feb. 26, 2008, in Texas, which produces more wind power than any other state.
At 3 p.m. that afternoon, Texas’s wind farms, concentrated in the western part of the state, were throwing off about 2,000 megawatts of electricity, enough to serve about one million households. Then a cold front blew in. By 6:30 p.m. — when electricity demand typically peaks — wind production in Texas had cratered to about 360 megawatts.
Exacerbating matters, Texans began turning up their heat — much of which, in rural parts of the state, comes from electricity. So, just as wind power unexpectedly plummeted, demand for power spiked.

For the full commentary, see:
JEFFREY BALL. “Unbridled Energy: Predicting Volatile Wind, Sun
Utilities Ramp Up Focus on Forecasting When Renewable Fuel Is at a Peak to Avoid Squandering Power That Still Can’t Be Stored.” The Wall Street Journal (Fri., OCTOBER 5, 2009): A14.
(Note: ellipsis added.)
(Note: the last sentence of the quoted passage, appeared in the print edition, but was inexplicably deleted from the online version.)

For an updated “Near-Real-Time” graph of BPA load and wind generation, see:

http://www.transmission.bpa.gov/Business/Operations/Wind/baltwg.aspx

Malaria “Weakly Related to Temperature”; “Strongly Related to Poverty”

(p. A17) In the West, campaigners for carbon regulations point out that global warming will increase the number of malaria victims. This is often used as an argument for drastic, immediate carbon cuts.

Warmer, wetter weather will improve conditions for the malaria parasite. Most estimates suggest that global warming will put 3% more of the Earth’s population at risk of catching malaria by 2100. If we invest in the most efficient, global carbon cuts–designed to keep temperature rises under two degrees Celsius–we would spend a massive $40 trillion a year by 2100. In the best case scenario, we would reduce the at-risk population by only 3%.
In comparison, research commissioned by the Copenhagen Consensus Center shows that spending $3 billion annually on mosquito nets, environmentally safe indoor DDT sprays, and subsidies for effective new combination therapies could halve the number of those infected with malaria within one decade. For the money it takes to save one life with carbon cuts, smarter policies could save 78,000 lives. . . .
Malaria is only weakly related to temperature; it is strongly related to poverty. It has risen in sub-Saharan Africa over the past 20 years not because of global warming, but because of failing medical response.

For the full commentary, see:

BJORN LOMBORG. “Climate Change and Malaria in Africa; Limiting carbon emissions won’t do much to stop disease in Zambia.” The Wall Street Journal (Mon., NOVEMBER 2, 2009): A17.
(Note: ellipsis added.)
(Note: the online version of the article was dated Nov. 1st.)

Calderón’s Decision Is Bigger than Reagan’s Firing of Air Traffic Controllers

“The Mexican Union of Electricians protests the government’s decision to liquidate the state-owned electricity company in Mexico City.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. A19) Eight days ago, just after midnight on a Sunday morning, Mexican President Felipe Calderón instructed federal police to take over the operations of the state-owned electricity monopoly, Luz y Fuerza del Centro (LyFC), which serves Mexico City and parts of surrounding states. The company’s assets will stay in the hands of the government but will now be run by the Federal Electricity Commission (CFE), a national state-owned utility and the major supplier of LyFC’s energy.

The net effect of the move is to dethrone 42,000 members of the Mexican Union of Electricians, which had won benefits over the decades to make Big Three auto workers in Detroit blush. When the liquidation is complete, it is expected that the company will employ about 8,000. To appreciate the magnitude of Mr. Calderón’s decision, think of Ronald Reagan’s firing of the air traffic controllers–only bigger. As one internationally renowned Mexican economist remarked on Sunday, it is “the most important act of government in 20 years.”

For the full commentary, see:
MARY ANASTASIA O’GRADY. “Mexico’s Calderón Takes on Big Labor; Its state-owned electricity company was bleeding the national treasury dry.” The Wall Street Journal (Mon., October 19, 2009): A19.

Despite Importance of Economic Historians, History Departments Hire Fewer Economic Historians

Source of graph: online version of the NYT article quoted and cited below.

(p. C7) Over the last three decades the number of history faculty members at four-year institutions has more than doubled to 20,000-plus, said Robert B. Townsend, assistant director for research at the American Historical Association. Yet the growth has been predominantly in the newer specializations, spurring those in diplomatic, military, legal and economic history to complain they are being squeezed out.

In 1975, for example, three-quarters of college history departments employed at least one diplomatic historian; in 2005 fewer than half did. The number of departments with an economic historian fell to 31.7 percent from 54.7 percent. By contrast the biggest gains were in women’s history, which now has a representative in four out of five history departments.

For the full story, see:
PATRICIA COHEN. “Great Caesar’s Ghost! Are Traditional History Courses Vanishing?” The New York Times (Thurs., June 11, 2009): C1 & C7.
(Note: the online version is dated Weds., June 10.)

Obama Tire Tariff Hurts Poor

“A man walks past a tire store in Beijing on Sunday. A new U.S. tariff on Chinese tires could lead to shortages in the lower-cost-tire market segment as retailers scramble to find alternative sources in other countries.” Source of caption and photo: online version of the WSJ article quoted and cited below.

(p. A3) Consumers who buy low-price Chinese tires — the bulk of the tires China exports to the U.S. — will be hit hardest by the new tariff, as shortages in this market segment cause retailers to scramble to find alternative sources in other countries.

The tariffs, which apply to all Chinese tires, will cut off much of the flow of the more than 46 million Chinese tires that came to the U.S. last year, nearly 17% of all tires sold in the country.
The low end of the market will feel the impact of the tariff most, as U.S. manufacturers, who joined the Chinese in opposing the tariffs, have said it isn’t profitable to produce inexpensive tires in domestic plants.
“I think within the next 60 days you’ll see some pretty significant price increases,” said Jim Mayfield, president of Del-Nat Tire Corp. of Memphis, Tenn., a large importer and distributor of Chinese tires. He estimates prices for “entry-level” tires could increase 20% to 30%.

For the full story, see:
TIMOTHY AEPPEL. “Tariff on Tires to Cost Consumers; Higher Prices Expected at Market’s Low End, Where China Focuses Its Exports.” The Wall Street Journal (Mon., SEPTEMBER 14, 2009): A3.
(Note: the online version of the article has the date Tues., Sept. 15.)

Incandescent Bulb Defended by Light Expert Who Relit Statue of Liberty

(p. A13) The Energy Independence and Security Act of 2007 will effectively phase out incandescent light bulbs by 2012-2014 in favor of compact fluorescent lamps, or CFLs. Other countries around the world have passed similar legislation to ban most incandescents.

Will some energy be saved? Probably. The problem is this benefit will be more than offset by rampant dissatisfaction with lighting. We are not talking about giving up a small luxury for the greater good. We are talking about compromising light. Light is fundamental. And light is obviously for people, not buildings. The primary objective in the design of any space is to make it comfortable and habitable. This is most critical in homes, where this law will impact our lives the most. And yet while energy conservation, a worthy cause, has strong advocacy in public policy, good lighting has very little.
. . .
As a lighting designer with more than 50 years of experience, having designed more than 2,500 projects including the relighting of the Statue of Liberty, I encourage people who care about their lighting to contact their elected officials and urge them to re-evaluate our nation’s energy legislation so that it serves people, not an energy-saving agenda.

For the full commentary, see:
HOWARD M. BRANDSTON. “Save the Light Bulb!; Compact fluorescents don’t produce good quality light.” The Wall Street Journal (Mon., AUGUST 31, 2009): A13.
(Note: ellipsis added.)
(Note: the online version of the article is dated Sun., Aug. 30.)

World Trade Barriers Are Increasing

The small dark blue squares indicate the “number of nations that have imposed protectionist measures on each country” and the light blue squares indicate the “number of measures imposed on each category of goods.” Source of quotations in caption and of graph: online version of the WSJ article quoted and cited below.

(p. A5) BRUSSELS — This weekend’s U.S.-China trade skirmish is just the tip of a coming protectionist iceberg, according to a report released Monday by Global Trade Alert, a team of trade analysts backed by independent think tanks, the World Bank and the U.K. government.
A report by the World Trade Organization, backed by its 153 members and also released Monday, found “slippage” in promises to abstain from protectionism, but drew less dramatic conclusions.
Governments have planned 130 protectionist measures that have yet to be implemented, according to the GTA’s research. These include state aid funds, higher tariffs, immigration restrictions and export subsidies.
. . .
According to the GTA report, the number of discriminatory trade laws outnumbers liberalizing trade laws by six to one. Governments are applying protectionist measures at the rate of 60 per quarter. More than 90% of goods traded in the world have been affected by some sort of protectionist measure.

For the full story, see:
JOHN W. MILLER. “Protectionist Measures Expected to Rise, Report Warns.” The Wall Street Journal (Tues., SEPTEMBER 15, 2009): A5.
(Note: ellipsis added.)

Global Warming Is Least Worry of Vanuatu Island’s Poor

(p. A19) In a warning often repeated by environmental campaigners, the Vanuatuan president told the United Nations that entire island nations could be submerged. “If such a tragedy does happen,” he said, “then the United Nations and its members would have failed in their first and most basic duty to a member nation and its innocent people.”

Torethy Frank, a 39-year-old woman carving out a subsistence lifestyle on Vanuatu’s Nguna Island, is one of those “innocent people.” Yet, she has never heard of the problem that her government rates as a top priority. “What is global warming?” she asks a researcher for the Copenhagen Consensus Center.
. . .
Torethy and her family of six live in a small house made of concrete and brick with no running water. As a toilet, they use a hole dug in the ground. They have no shower and there is no fixed electricity supply. Torethy’s family was given a battery-powered DVD player but cannot afford to use it.
. . .
What would change her life? Having a boat in the village to use for fishing, transporting goods to sell, and to get to hospital in emergencies. She doesn’t want more aid money because, “there is too much corruption in the government and it goes in people’s pockets,” but she would like microfinance schemes instead. “Give the money directly to the people for businesses so we can support ourselves without having to rely on the government.”
Vanuatu’s politicians speak with a loud voice on the world stage. But the inhabitants of Vanuatu, like Torethy Frank, tell a very different story.

For the full commentary, see:

BJøRN LOMBORG. “The View from Vanuatu on Climate Change; Torethy Frank had never heard of global warming. She is worried about power and running water.” The Wall Street Journal (Fri., OCTOBER 23, 2009): A19.
(Note: ellipses added.)
(Note: the online version is dated Thurs., Oct. 22.)