q-Theory of Investment

The above picture plots real investment in private fixed assets in the oil and gas extraction industry and the average real price per barrel of oil in the U.S. over time. The spike in oil prices in the late seventies is accompanied by a large spike in investment in the oil and gas industry.

Here are some casual explanations:

1) The change in value of the oil these firms hold in reserves gets valued as investment. This leads to a correlation between oil prices and investment, although the fact that firms held onto these reserves at a time of such high prices suggests they thought prices were going to stay that high. Basically you'd expect them to disinvest in reserves at this point.

2) The q-theory of investment says that when the ratio of the market value of assets goes above their replacement cost firms will invest.

What's strange about this is that more fashionable models of investment under uncertainty suggest that firms wouldn't react so strongly to a large move like this in oil prices because their future path is uncertain. I would have expected a more muted response, although it's possible that firms believed that oil prices had hit a new permanently high plateau.

More Pop Economics

Pop songs favored along the American coasts and in hip European cities often feature dense lyrics tailored to connoisseurs of world-weariness and subtle relationship problems. By contrast, the average Asian pop song has rather simplistic lyrics, rarely going beyond declarations of mutual infatuation. Genres like grunge and goth have no equivalents in these cultures. Based on this evidence, a Martian student of our pop culture would conclude that there is far more misery in developed countries.

Could pop lyrics be a simple function of per capita income, as opposed to complex cultural factors? Consider Japan, a rich Asian country where the latest in pop despair is celebrated like there's no tomorrow.

Speaking of which....

...does anyone actually know what is the return to education?! There must be a million papers out there trying to find clever ways to estimate it, but I doubt anyone has even a ballpark figure in his mind about the actual return. So I'm perfectly sympathetic to Economagic's suggestion to estimate the impact of development research on actual development. I'm all for exposing the academic research racket.

Impact Analysis of Development Research

I propose running a simple cross-country regression with yearly growth as the dependent variable and a measure of annual development research about the country as the explanatory variable. It can be measured as the number of researchers working on "development" or the number of articles published in high quality journals about "development" in the country. Lags and cross-country spillover effects can also be analyzed.

It's common knowledge that development research isn't focused on countries with the biggest problems so endogeneity shouldn't be an issue.

Why there are more labor economists than laborers

This is a good time to dust off an old concept of mine: the academic ratio. Roughly speaking, this is the inverse of the universal limiting ratio (rigidly adhered to in nature) between a subject and the number of people studying it. The limiting ratio is very large - consider for example, that there was only one Joyce but there are already a million Joyceans, one Jesus Christ but a million Christian theologians, and of course, more labor economists than there are laborers! Of course, it's all mountains of uninspired hackwork but that's what academia's about, baby - if you ain't got game, write a paper about it instead.

The forces of mass psychology control the dynamics of the actual ratio at any point in time. In particular, the dynamics follow an inverse law - an academic discipline grows at a rate inversely proportional to the current ratio. That explains why labor economics is slowing down but development economics is not - there are many more poor people in the world than there are laborers in developed countries.

Iraq War and Stock Markets

I posted an interesting result last night that finds a positive correlation between Egyptian stock market returns and U.S. casualties in Iraq. If we believe that higher U.S. casualties would increase the probability that the U.S. withdraws from Iraq, the result suggests that Egypt may want the U.S. out of Mesopotamia. Buy why? One reason could be that U.S. presence in Iraq is a destabilizing to the region (or at least perceived that way by Egyptian investors). Another could be that Egypt is eyeing for influence in Iraq and is waiting for the US to leave. It would be interesting to estimate correlations for other Mideast markets and Pakistan, Russia and India.

The Second Law of Petropolitics?

According to globalsecurity.org, there have been 3,347 U.S. casualties since the beginning of the Iraq war in March 2003. I decided to merge the casual empiricisms from my previous post and Zero's to analyze the relationship between stock performance and U.S. casualties in Iraq. When I regress monthly US and Israeli stock returns on the number of casualties in Iraq, I find no statistically significant relationship. I think its nice to know that military casualties don't make Wall Street fat cats fatter.

However, when I look at the Egyptian market, I find that a 10% increase in fallen GIs correlates with a 0.2 percentage point rise in Egyptian stocks. Casual empiricism leads me to conclude that I've found the Second Law of Petropolitics (for the First Law, see Friedman's article in Foreign Policy).

Stock Market Decoupling?

Researchers have found that investors under-hold international assets in their portfolio. A couple weeks ago, the front page of the Money and Investing of the WSJ had a small article indicating that the correlation coefficient between the S&P 500 index and the MSCI EAFE indices had dropped from .93 to .63. This "decoupling" further strengthens the argument for investors to hold more international stocks in their portfolio. However, its not clear that holding the MSCI EAFE is the appropriate diversification instrument. The index is a composite of disparate (but developed) countries. I re-checked the correlations between the S&P 500 and indvidual markets. Correlations have fallen for Germany, UK and Hong Kong. Interestingly, the correlations have actually increased for India, China and Japan. Can increased trade with the U.S. explain the rise in correlations for these countries?

America

If you have not yet heard Rufus Wainwright's excellent new song "Going to a town", you should do so at once (here's a youtube link). While you're listening to it, you can also read an interesting (if somewhat erudite) analysis of the song here.

As a casual empiricist in the armchair mould, I decided to collect some hypothetical data on the usage of the word "America" in pop/rock songs. When I regress the usage of the word "America" in pop songs on the bodycount in Iraq using my hypothetical data, I find a significant positive effect. An increase of 5% in the yearly body count raises the probability of the occurrence of the said word in a pop song written in that year by 0.12. Hypothetical sales data confirm that sales of songs with the word "America" are positively correlated with the bodycount.

In an attempt at a more careful analysis, I ran a regression to estimate the partial effects of different catchwords/phrases on song sales and interacted each of these words with the bodycount. The catchwords I considered were "tonight", "laying down the days", "uh-huh", "get down", "yo mami", "how long", "everybody on the floor", "bitches in the backseat", "pocketful of rubbers" and "America" (by no means a comprehensive list, I admit). The results are gratifying: almost all interaction terms other than the interaction of bodycount with "America" were insignificant. Oddly enough, the coefficient on the interaction between "uh-huh" and bodycount was significant and negative. I'm waiting for someone to propose an explanation.

I can see you asking"So why do we care?". Simple: Record company executives should closely monitor the Iraq situation and suggest judicious insertions of the relevant words in pop songs to jog record sales. Methinks they'd be mighty interested in my model.

Quality Growth and Economic Development

This figure appears in the second chapter of my dissertation. It plots the growth in export quality (to the US) by level of development, measured byPCGDP. Export growth is measured as export quality, across all goods (excluding homogenous goods), regressed on a trend (controlling for country-product fixed effects). 95% confidence intervals are also plotted. The figure illustrates two messages. First, lower income countries do experience fast growth in export quality that is on par with the richest set of countries. This is suggestive of a catch-up phenomenon where lower-income countries are imitating existing varieties and developed nations are devoting resources to innovation.

However, the variance in quality upgrading across countries generally declines as the level of development increases. The confidence intervals on the trends become narrower as one moves towards the right of the graph. So while some LICs may experience similar quality growth relative to richer counterparts, their ascent up the quality ladder is far more sporadic. Two exceptions are India and China.

Dani Rodrik talks about specialization and economic development in his post today.

The righteous person's guide to illegal downloading

One more half-baked idea for you folks. Downloading music/movies/stuff illegally is easy. The problem is, it's also illegal. But I think there's a good reason why even souls who have downloaded a few numbers without paying for them may still go to heaven. My point, which is a theory by itself, is that bandwidth is not free. So if lots of people are downloading stuff (whether legally or illegally), that should at some point drive up the cost of a fast internet connection. As a matter of fact, DSL/cable internet prices are pretty high right now. In effect, we needn't feel too guilty about illegal downloading (ID'ing), because we're all paying for it - we're just paying the wrong people! All we need is a transfer from the internet providers to the music companies.

Of course, not everyone is ID'ing, so people who don't ID are subsidizing people who do. So if you're someone who doesn't ID, you're paying for more (via higher internet connection prices) than what you're getting, so to redeem the situation you should probably start doing some ID'ing of your own. Not only is that rational for you, it may also create a positive externality for other ID'ers. Under the right conditions (strict upper hemicontinuity, etc) of all the relevant functions, at the margin, an increase in the number of people ID'ing may reduce the probability of any one person getting caught even though it increases the overall probability that someone gets caught.

An Island Model of Rejuvenation

Ok, so it's not going to get any less rigorous than this post, i don't even have a graph or table. i have a "simple" idea for rejuvenating the moribund discipline of economics. i start with the casual observation that the number of fundamental contributions to economic thinking have been dropping off over the last ten-fifteen years. this heralds a severe crisis for those of us who have any hopes of making a comfortable living in a sterile academic environment.

i propose a start-from-square-one plan: basically, let's pretend that the field of economics has only just been invented and that all the zillions of papers that we know of were never written. so let's stop training students in economics - instead, we let them rediscover all the economic insights of the last two hundred years all by themselves. if all goes well, a generation of untrained economists will produce more interesting insights and ways of thinking about economics than if they had been taught the economics we know. we can also start a couple of journals which will exclusively publish papers by these young 'islanders'.

everybody wins: the island model keeps the game going indefinitely (we can periodically wipe out the past and start over) and meanwhile those of us for whom it's too late can benefit from the reduced competition.

Welcome!

The idea of this blog is to stimulate discussion of economics by using a single figure, table or graph. The rules of the blog are simple: only one exhibit is allowed per entry, preferably (but not necessarily) related to economics. Alternatively, the casual theorist might postulate what the graph should look like. Most importantly, rigorous analysis is not allowed. For example, there should be no discussion of identification or endogeneity. No rigour is de rigeur! Any post that is deemed by our panel of experts to be insufficiently casual will be excised from the blog. The name of the game is half-assed theories.