Word of the Day

APOPLITHORISMOSPHOBIA

"The fear that an economy would suffer from a general decline in the prices of goods and services."

One of the things I learned from Mark Thornton.

Why governments exist

It used to be that the main reason why governments exist is because of market failures. Well, that is true. Then again, it could also be because we don't live in a utopian world where we don't worry about our rights and our possessions and where we trust each other so much. That's why government exists because sometimes other people don't respect other people's rights and properties.

In their latest paper in The Quarterly Journal of Economics entitled, "Regulation and Distrust," Philippe Aghion, Yann Algan, Pierre Cahuc and Andrei Shleifer has empirical proof that this is indeed the case on why government regulations exist:

"Distrust creates public demand for regulation, whereas regulation in turn discourages formation of trust. A key implication of this model is that individuals in low-trust countries want more government intervention even though they know the government is corrupt. We test this and other implications of the model using country- and individual-level data on trust and beliefs about the role of government, as well as on changes in beliefs during the transition from socialism. In a cross section of countries, government regulation is strongly negatively correlated with measures of trust."

Sometimes in economics, it's difficult to measure preferences or values. So immediately you'd be curious as to how they measure trust. They actually use a very interesting (and ongoing) dataset, The World Values Survey (WVS):

"The WVS is an international social survey consisting of four main waves, 1981–1984, 1990–93, 1995, and 1999–2003, denoted henceforth 1981, 1990, 1995, and 2000. This survey provides a range of indicators of distrust in others, in markets, and in institutions for a large sample of countries."

So I commend the authors for an ingenious way of making use of this dataset for a subject that is quite relevant. And the message of which, of course, goes without saying. We go back to why there are institutions--why there is rule of law. These things are simply a part of why government is there. Man seems inherently not that trustworthy. And the only way for us to sleep well at night is to have these regulations in place.

Never mind if the trust wasn't there in the first place. Institutions will place that trust and make sure that that will stay in place.

Something to take note before taking that job

I think all of us have this same experience: when face with a new job prospect, we either bargain first for the salary (what we call in economics wage bargaining), or we just take the salary that is offered (what we call in economics wage posting). Of course, it also depends on the opportunity given--some who are able to would bargain for a higher salary, while other firms would offer a take-it-or-leave-it salary that would leave the employee no choice.

In their latest NBER working paper entitled, "Evidence on the Determinants of the Choice between Wage Posting and Wage Bargaining," Robert Hall and Alan Krueger points out that there are significant differences between these two types of job entrants and how they eventually end up with:

"Our analysis of the distribution of wages shows that wage dispersion is higher among workers who bargained for their wages. Wages are higher among bargainers than non-bargainers, after adjusting for the differing compositions of the groups. These results on wages support the job-ladder model: that is, workers who had the option to remain at their earlier jobs when they took their current jobs can earn higher wages than those without that option."

The authors surveyed a representative sample of 14,000 U.S. workers to inquire about the wage determination process at the time they were hired into their current or most recent jobs. One third of their survey respondents reported undergoing wage bargaining, while one third underwent wage posting.

Among their other significant findings are:

1. College graduates and those with professional training are rather unlikely to hold posted-wage jobs. Thus, wage posting appears to be much more important in the jobs that are available to those with less education.

2. Jobs held by women are more likely to have been posted-wage positions.

3. Twenty-eight percent of those who did not graduate from high school report bargaining over wages, versus 56 percent of those with professional degrees. Bargaining is also more common among minority workers (over 40 percent) and less common for women (24 percent)."

4. Among knowledge workers (those with a post-college education whose work involves problem solving) almost all (86 percent) report bargaining. Among blue-collar workers, only 5 percent report that they bargain over the wage.

5. In considering a new job opportunity, having the option to keep the current job, which about half of job-seekers do, will substantially influence one's tendency to establish a wage through bargaining. This is especially true for more educated, problem-solving workers.

6. For observationally similar workers, wages resulting from bargaining may be higher than posted wages.

7. When the distinction between wage posting and bargaining is meaningful, wage inequality among workers who accept posted wages is lower wage inequality among those who bargain.

Well, these findings are not really that surprising. It all boils down to two words: human capital. Human capital in this case can be used as leverage. The higher your human capital, the more attractive you are to employers--now you can demand higher wages.

Terrorism may be more than ideology

Sometimes we think terrorism is rooted in ideology. But it can also be because these terrorists have nothing else to do. They're mired in poverty, and can escape it. The worst part is they don't know who to blame.

In their recent NBER paper entitled, "Economic Conditions and the Quality of Suicide Terrorism," Efraim Benmelech, Claude Berrebi and Esteban Klor have shown that poor economic conditions may lead more able, better-educated individuals to participate in terror attacks, allowing terror organizations to send better-qualified terrorists to more complex, higher-impact, terror missions:

"Using the universe of Palestinian suicide terrorists against Israeli targets between the years 2000 and 2006 we provide evidence on the correlation between economic conditions, the characteristics of suicide terrorists and the targets they attack. High levels of unemployment enable terror organizations to recruit more educated, mature and experienced suicide terrorists who in turn attack more important Israeli targets."

Remember, the existing empirical literature shows that poverty and economic conditions are not correlated with the quantity of terror. What Benmelech et al. have shown is that poverty and poor economic conditions may affect the quality of terror

This really brings us back to what other economists have saying: economic development can help lessen acts of terrorism. I'm sure culture and other social factors play roles, but economic development can help put peaceful solutions farther.

The only bigger problem is, for these terrorist-active countries, where do you start?

More on the unattractiveness of government debt

Well, remember one of my previous articles about the problems government debt can cause? That was for Europe alone. Well the World Bank has extended it further to more countries. This new paper supports the results of the European Central Bank publication.

In a paper by Mehmet Caner, Thomas Grennes and Fritzi Koehler-Geib entitle, "Finding the tipping point -- when sovereign debt turns bad," the point of threshold beyond which public debt starts to negatively affects growth is 77% debt-to-GDP ratio. This is just about the range reported in yesterday's paper. The threshold is even worst in developing countries--64% debt-to-GDP ratio:

"[The] study [is] based on a yearly dataset of 101 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points."

And the worst part is, based on their study, the cumulative effect on real GDP could be substantial.

'Nuff said.

R.I.P. Takeshi Watanabe

I just want to take this moment to honor the "Father of Asian Development Bank."

Takeshi Watanabe, the first President of the Asian Development Bank (ADB), passed away in Tokyo, Japan, on Monday, 23 August at the age of 104. Mr. Watanabe played a pivotal role in moving ADB from an idea into a reality, and was unanimously elected as first President at ADB’s inaugural meeting in Tokyo in 1966. He served in the role for six years until 1972.

Government debt not good for growth

We already have the pre-conceived notion that government debt is bad. Now there is a new study that shows that government debt is indeed bad--at least in the European Union setting.

In their latest working paper from the European Central Bank entitled, "The Impact of High and Growing Government Debt on Economic Growth: An Empirical Investigation for the Euro Area," Cristina Checherita and Philipp Rother have even put some figures to show how bad it is:

"This paper investigates the average impact of government debt on per-capita GDP growth in twelve euro area countries over a period of about 40 years starting in 1970. It finds a non-linear impact of debt on growth with a turning point—beyond which the government debt-to-GDP ratio has a deleterious impact on long-term growth—at about 90-100% of GDP. Confidence intervals for the debt turning point suggest that the negative growth effect of high debt may start already from levels of around 70-80% of GDP, which calls for even more prudent indebtedness policies."

My Masters in Development Economics paper actually dealt with how the level of Philippine government debt has starting to become a danger to monetary policy, making it ineffective in boosting the economy during recessions (a'la Thomas Sargent and Neil Wallace's "Unpleasant Monetary Arithmetic"). So in that case, government debt is ex post, or "reactive," if you will.

This time, government debt is attacking head on. It doesn't wait for recessions in making monetary policy ineffective. It has become more proactive and is maybe actually causing the recessions.

Does more money make you fat?

Now this is a very amusing question. That answer is somewhat yes--for adolescents and young adults, that is.

In their latest Institute for the Study of Labor paper entitled, "Does More Money Make You Fat? The Effects of Quasi-Experimental Income Transfers on Adolescent and Young Adult Obesity," Randall Akee, Emilia Simeonova, William Copeland, Adrian Angold and Jane Costello examine how exogenous income transfers during adolescence affect contemporaneous body mass index (BMI) measures and young adult obesity rates using evidence from the Great Smoky Mountains Study of Youth.

Their finding is, it depends on the initial socio-economic status and they also actually find an inverted U-shaped relationship between initial income and BMI:

"Youths who resided in families that had high pre-treatment annual incomes experience no change in young adult obesity rates as a result of the income transfers, while the BMI of poorer children increases. Adolescents coming from worse-off households experience an increase in weight only, without the corresponding change in height."

The thing also is, the effect is continuous as the individual gets older:

"The cumulative effects of the increase in household income persist for several years into young adulthood."

It seems there is no behavioral aspects to their analysis, which should be worth considering. But this surely has serious implications for government policy regarding child obesity. The worst part is, if you believe in this study, you're not going to look at government income transfers to poor households the same way again.

King--or queen--of the household

Who really makes the decision in the family? Does even one spouse discuss the decision with the other one? Well, the answer may depend on where you are, but Fredrik Carlsson, Haoran He, Peter Martinsson, Ping Qin and Matthias Sutter has some very interesting experimental findings from rural China family samples. In most cases, we can easily say it's the husband. But then again, it depends on the economic status of the family and which one is older:

"This raises the question about spouses' relative influence on joint decisions and the determinants of relative influence. Using a controlled experiment (on inter-temporal choice), we let each spouse first make individual decisions and then make joint decisions with the other spouse. We use a random parameter probit model to measure the relative influence of spouses on joint decisions. In general, husbands have a stronger influence than wives. However, in richer households and when the wife is older than the husband, we find a significantly stronger influence of the wife on joint decisions."

A more interesting result that is related to above is their finding that increasing wealth improves the relative power of women in households regardless of who's older. Although they didn't elaborate on the channels through which this is the case, this results is indeed realtively new and fascinating.

Well, as I mentioned earlier about where you are situated, I know for one that it depends on the prevailing culture or social networks surrounding the family. The authors acknowledged this fact by stating that their results of having majority of the husbands being more influential reflect the traditional Chinese norm that husbands are mainly in charge of household decisions. Again, it's easy to assume initially that the husband really has the stronger influence, particularly when we always say, "It's a man's world out there." But on the part where the older wife in a rich household has more influence, it is yet to be confirmed if this is true in all societies. We're just looking at rural China here.

It may be true in the U.S. particularly if an older woman in a rich household is usually associated with the term "cougar." But seriously speaking. One thing we can get out of Carlsson et al.'s paper is the methodology they used to get these findings. Now we can verify if here in the U.S., cougars are more influential in household decisions.

Until what age do you expect to work?

That is a very basic yet very interesting question to which the answer is, "we really don't know." Good thing, though, Ana Rute Cardoso, Paulo Guimaraes and José Varejão have provided us with some basic numbers to help answer that question. In their latest paper from the Institute for the Study of Labor entitled, "Are Older Workers Worthy of Their Pay? An Empirical Investigation of Age-Productivity and Age-Wage Nexuses," they find that work productivity of an individual increases until the age range of 50 to 54. More important to productivity is, of course, how much you're being paid for productivity. Their finding? Wages peak around the age 40 to 44.

Now their paper is a product of good research as they use longitudinal employer-employee data spanning over a 22-year period. So their results are really something that you should think about when planning for your way ahead retirement.

Their paper actually centers around one important question, which is also equally interesting and is worth anyone's attention: "Are older workers worthy of their pay?" Their answer? Yes, indeed:

"At younger ages, wages increase in line with productivity gains but as prime-age approaches, wage increases lag behind productivity gains. As a result, older workers are, in fact, worthy of their pay, in the sense that their contribution to firm-level productivity exceeds their contribution to the wage bill."

Now, most of us really don't stop and seriously think about the future. I mean, only older people do that, right? . We really don't know when we're going to retire because it depends on a lot of things: do you like your work? do you like your work environment? will you still be needing money at that time? "Most of us" because for the rest, they have the ability to look forward and plan ahead--making goals for themselves on what to do at this age or that.

Well now, because of Cardoso et al.'s paper, we have a number to look forward in terms of retirement: 44.

Or 54.

It actually depends on two things by the time you're considering retirement: if you like the pay more than your work, retire at 44. But if you like your work more than your pay, retire at 54.

Current sad state of education

In a new article from the Economist, a paper by the American Enterprise Institute finds that students nowadays are spending less time studying than they did a generation ago.:

"Study time for full-time students at four-year colleges in the United States fell from twenty-four hours per week in 1961 to fourteen hours per week in 2003, and the decline is not explained by changes over time in student work status, parental education, major choice, or the type of institution students attended."

The thing is, it's hard to explain why this is happening. It's not because of improvements in education technology, student's work status, parental education, major choice, nor is it due to the type of institution attended. But the said Economist article shared one book by Andrew Hacker and Claudia Dreifus that puts forward one explanation: the professors teaching aren't doing their jobs good enough because of their research activities:

"[P]rofessors are spending less time with their students (while also charging them more) in order to give themselves more free time to produce worthless research."

From the field of economics, part of this theory is true. That part is where economics professors are indeed undertaking research at the sideline while teaching economics courses. But that's natural, and in fact, it should be encouraged. It's not so much that they can get extra income from their research (above what their receiving from their teaching work). They get to be more specialized in their field and that's part of getting professional development. It also prevents their economic knowledge from being stagnant. Pursuing research helps them be aware of what is the latest in the economics field.

As for the other part, we may never know really if the professor consciously do not concentrate on their teaching as how they should be. We'll have to rely the different checks and balances instituted by the school--student evaluation, department evaluation, etc. It might really well be the case that there are just some bad apples in the mix of otherwise excellent ones. It would really be unfair for economic professors who find satisfaction in encouraging student opinions (or ideas) about current economic trends. And there are a lot of those.

Trade liberalization may not be for everybody

Tariffs has been one of the major revenue sources of governments in many countries. So it's no surprise that in this age of increasing globalization and trade liberalization, one of the reasons for trade protectionist policies is the loss of revenue source for the government. So unless the government can find alternative sources of revenue, trade liberalization may be a slow process in these countries.

Well, Thomas Baunsgaard and Michael Keen have managed to keep track of how countries have fared in finding alternative sources of revenue (specifically domestic taxes), now that these countries are opening up to international trade. Their finding:

"For high income countries, the answer is clearly ‘yes.’ For middle income countries, there are robust signs of strong replacement both concurrently with the revenue loss and—essentially dollar-for-dollar—in the long run. Signs of significant recovery by low income countries are flimsier, however, and their experiences appear to have varied widely."

It's no surprise, rich and middle-income countries can easily recover tariff revenues from domestic taxes. It may also be the case that there is a secondary effect which help recover loss of tariff revenue from domestic taxes: it has already been empirically proven that trade liberalization contributes to economic development. And considering tax revenues is pro-cyclical, such trade liberalization can improve tax revenues. And so the process becomes endogenous.

For low-income countries, the different results is also expected. Baunsgaard and Keen points out that the results are varied and in many cases are incomplete. Still, for them, even with incomplete consensus, the loss of revenue for these governments still do not give reason to deny the benefits of trade liberalization.

I may have to agree. Again, it depends on many things, institutions and rule of law among them, and the channel of trade liberalization and economic growth may be different. So this is one area that need to be explored. What is the general equilibrium effects of trade liberalization to economic development in low income countries? Because it seems, trade liberalization may not be for smaller countries with weaker institutions.

Giving land titles to the poor

Back in the Philippines, squatters (poor households setting up houses in lands that they do not own) have been one of the perennial problems in urban settings. Of course, in some instances, probably to make the government more popular to the masses, the government eventually awards land titles to some of these families. Well, it seems there's a social benefit to it.

In their latest paper in the Journal of Public Economics entitled, "Property rights for the poor: Effects of land titling," Sebastian Galiani and Ernesto Schargrodsky suggested that giving land titles to the poor can be an important tool for povery reduction through the slow channel of increased physical and human capital investment--channels that should help to reduce poverty in future generations:

"In 1981, squatters occupied a piece of land in a poor suburban area of Buenos Aires. In 1984, a law was passed expropriating the former owners' land to entitle the occupants... Using data from two surveys performed in 2003 and 2007, we find that entitled families substantially increased housing investment, reduced household size, and enhanced the education of their children relative to the control group. These effects, however, did not take place through improvements in access to credit."

I just have two comments on this. First, such positive effect depends on which sector is involved. If it's in the urban sector, as the case with squatters in Buenos Aires, the result is plausible and economically reasonable. But if it's in the rural sector, the story may be different. Again, the Philippines is a good example. Years of agrarian reform, of which involves transferring lands to several households for farming, has actually led to nothing. In some cases, these owners of small farming lands eventually sell their lands to bigger farms simply because they really can't compete.

Second, as mentioned, such land titling may be an incentive for these poor households to invest for their future generations. But what about the incentive of attracting more squatters? There is a serious case of adverse selection that will be happening. Knowing that there's a chance they will be awarded land titles by the government, more and more poor households will start squatting more and more privately-owned properties. What about the rights of the original landowners. The rule of law will definitely be in jeopardy if original landowners can't protect their lands from being given to these squatters.

So like most economic policies, there has to be some middle ground. It may seem to have a positive effect on poverty alleviation, but giving land titles of privately-owned properties may do more harm than good.

Strong family ties inhibit trust

This is the finding in the latest Journal of Economic Behavior & Organization paper by John Ermisch and Diego Gambetta. They provide that that is the case, but add that the mechanisms that underlie this effect revolve around the level of outward exposure of these families:

"[F]actors that limit exposure limit subjects’ experience as well as motivation to deal with strangers."

So, it's not really because family ties is strong, but it's really because of lack of experience in interacting with strangers. And it makes sense. So it's okay to have strong family ties. Just makes sure that you don't isolate your kids.

Gender differences in work again

Well in a 2003 paper, Uri Gneezy, Muriel Niederle, and Aldo Rustichini put forward an explanation for the existing wage gap between men and women. They say it's because women react less to competitive incentives. And since that means men react more to competitive incentives, men have relatively higher wages.

Now a team of economists led by Christina Gunther is saying there is something incomplete about that result. In their latest paper from the Journal of Economic Behavior & Organization entitled "Women can’t jump?—An experiment on competitive attitudes and stereotype threat," it actually and significantly depends on the kind of tasks. Is it male-oriented task? Female-oriented? Or gender-neural? Gneezy et al.'s results were based on a male task. Gunther et al. are now introducing into the experiment a gender-neutral task and a female task. It turned out they were correct:

"For the male task we replicate their results, but for the neutral task women react as strongly to incentives than men and for the female task women react stronger than men."

One implication of their results is the existence of a "stereotype threat explanation." This provides the adjustment to Gneezy et al.'s theories--women react less to competitive incentives only for task that are meant to be for men:

"Women tend not to compete with men in areas where they (rightly or wrongly) think that they will lose anyway – and the same holds for men, although to a lower extent."

That means also, by further implication, that gender wage gap will always exist as long as there really are tasks that are for men and tasks for women--which is one fact of life. For jobs that are fit for male, we should expect male wages to be higher than women wages. For jobs that are fit for female, we should expect male wages to be lower than women wages. For gender-neutral jobs, it's a toss-up between men and women.

This could also explain why in NASCAR, which we can safely say a male-oriented sport, there are only very few women drivers. And for those women drivers, they seem to have lesser success that men drivers. Take Danica Patrick, for example. There's no doubt the competitiveness is there. But she seems to be only making the headlines whenever she has her race crashes.

Well, now we should make serious changes to the often-cited phrase, "It's a man's world out there."

A note on carrots

In trying to give incentives to get what you want, how you give the incentive may actually matter. I mean, for example, if you want to hire a kid to do some menial tasks for you for a week, you can give the kid $5.00 a day, or you can simply and randomly give the kid a one-time payment, like $35.00, at any one day for that week. The fact that it's random means the kid won't know when he's going to be paid, only that he will be paid. Robin Hogarth and Marie Claire Villeval actually have shown an economic validity to this.

In their latest paper from the Institute for the Study of Labor entitled, "Intermittent Reinforcement and the Persistence of Behavior: Experimental Evidence," Hogarth and Villeval points out that attention should also be given to the effects of regularity and frequency of giving incentives:

"We contrasted three ways of rewarding participants in a real-effort experiment in which individuals had to decide when to exit the situation: a continuous reinforcement schedule (all periods paid); a fixed intermittent reinforcement schedule (one out of three periods paid); and a random intermittent reinforcement schedule (one out of three periods paid on a random basis)."

Their findings? Intermittent reinforcement led to higher total effort, while continuous reinforcement led to decrease in efforts dramatically:

"Overall, intermittent reinforcement leads to more persistence and higher total effort, while participants in the continuous condition exit as soon as payment stops or decrease effort dramatically. Randomness increases the dispersion of effort, inducing both early exiting and persistence in behavior; overall, it reduces agents’ payoffs."

It actually justifies one of Machiavelli's famous quotes, "Benefits should be conferred gradually; and in that way they will taste better." Benefits conferred gradually means you don't shower your subjects with benefits all the time. Much like the opposite of a continuous payment scheme where incentives are given periodically. Conferring benefits gradually is similar to not letting know your subjects when you're going to give them benefits.

The authors also made one application that makes sense: the experiment may prove why agents persist in activities although they lose money, such as excess trading in stock markets. But it actually has many applications. Bottom line is, if the kid expects to be paid frequently, the kid'll get sloppy. If you withold information about the payment method, the kid'll straighten up otherwise the kid might not get paid.

So the carrot can also be used as a stick. Go figure.

The paradox of a resource-rich country

That is what the paper of Frederick Van der Ploeg published by the Center for Economics Studies is telling us, entitled "Natural Resources: Curse or Blessing?" This is specially true if such a country has bad institutions--public or private. In fact, Van der Ploeg gives us a couple of reasons why some natural resource-rich countries haven't taken advantage of their blessings:

1. "[The reasons] include that a resource bonanza induces appreciation of the real exchange rate, deindustrialization and bad growth prospects, and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law, corruption, presidential democracies, and underdeveloped financial systems."
2. "Another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad, induces corruption especially in non-democratic countries, and keeps in place bad policies."
3. "Finally, resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets."

One thing seems to be common--bad institutions and lack of rule of law. And I'm afraid I have to agree with the paper. Having analyzed the Philippines, a natural-rich resource country but which is, at one point in time (and maybe still is), labeled as the "Sick Man of Asia", Van der Ploeg's reasons are not that hard to agree.

Back in the 1960s, the growth rate of the country is among the best in Southeast Asia--only Singapore is better. Now, it has lagged behind the countries of Thailand and Malaysia by a wide margin. The martial law regime of the late President Ferdinand Marcos in the 1970s, the series of coup d'etat during the 1980s and 1990s, the rise of oligopolistic families, and the persistent existence of graft and corruption in the public may have significantly contributed to the country's slow growth since then.

I tell you, having a natural resource-rich country does not automatically guarantee economic development. That's why the Philippines and Japan has always been the perfect example of the two opposite sides of this is case.

Start of the jobless recovery

The Economist shares a chart that some economists have been dreading for a while now. The U.S. is recovering, but many people still have no jobs (or worst, are losing it):

"In July, 52,000 fewer people were employed on non-farm payrolls than in July 2009, the month in which it is estimated the American economy climbed out of recession."

One of the commentators of the above article contrasts the current case with that of the Great Depression. Jobs grew then because the stimulus package involved creating public infrastructure, such as highways, which caused the increase in employment. In the current case, it is the opposite--the government is cutting its spending (e.g. shutting down some municipal services) which of course resulted differently.

And speaking of the stimulus package, it would have been effective in stimulating the economy (that involves increase in employment) if each household receiving the stimulus package had spent all of it. This would cause businesses to be up again and so might retain or increase its employment. But as we learned recently, not all households are spending much of it. Yes, it's the return of the Barro-Ricardian Equivalence: households seems to be smarter now--they know that a stimulus package now would mean higher taxes in the future, so they'd rather save most of the money given them. That's one explanation I didn't mention before.

Globalization has also been cited as one of the reasons. But globalization itself is not the cause. Globalization would cause a structural change in the economy. If a recession happens in this age of globalization, we can't blame companies going into offshoring just to cut some costs--but this doesn't mean workers who lose their jobs this way can't find another. They can move to other manufacturing and service sectors. Such is the structural change. Now the thing here is that such labor mobility will not be quick. It takes time, but it will get there. That means employment will eventually pick up. And so this is one bright light that the U.S. should expect. Jobless growth will end and employment will eventually catch up.

Maybe it's just the nature of the recession that the U.S. has recently experienced. Unlike most previous recessions, this one is due to a massive financial bubble. One of the significant impacts is the loss of credit. Unable to find ways to finance operations (or the fear of it happening) forces firms to consider major changes in their operations that they haven't done before just to stay afloat in this economy.

The dreadful thing is upon us. Let's just hope that things will indeed get better for the thousands of unemployed.

Eat, drink and be merry, for tomorrow it ain't coming no more

I sometimes find myself having some perplexing economic behavior. For one case, whenever I am faced with a choice of saving if I get one-time extra money, I don't. And that's the perplexing part: I spent all of it. It's like, whenever I get that one-time extra money, some crazy voice begins talking in my head saying, "Well, if you're going to spend it eventually, why not spend it now and be done with it."

Well, it looks like it's not such a strange economic behavior at all. In their latest NBER working paper entitled "Check in the Mail or More in the Paycheck: Does the Effectiveness of Fiscal Stimulus Depend on How It Is Delivered?," Claudia R. Sahm, Matthew D. Shapiro, and Joel Slemrod try to quantify the spending response to two different policies (2009 economic stimulus package delivered either as a one-time payment or as a flow of payments in the form of reduced withholding) and examines whether the spending response differed according to the two channels. According to their paper, people who are receiving the stimulus package one-time are more likely to increase spending than those receiving the stimulus package in flows (and quite discretely I might say):

"Based on responses from a representative sample of households in the Thomson Reuters/University of Michigan Surveys of Consumers, the paper finds that the reduction in withholding led to a substantially lower rate of spending than the one-time payments. Specifically, 25 percent of households reported that the one-time economic stimulus payment in 2008 led them to mostly increase their spending while only 13 percent reported that the extra pay from the lower withholding in 2009 led them to mostly increase their spending."

Maybe it's just the notion that, if you fully realize you're getting extra money, it's kind of a jolt in your daily routine and so as a response, you also somewhat change your economic behavior. But if it were the case that such extra money were given to you a little bit discretely, such as through a reduction in your tax, you might not feel that difference and so still think that things are normal. As such, there's no need to change your spending habit.

Such economic behavior is perplexing because instead of being prudential and save money for a "rainy day," a person would spend income that will only come for one time. But for people expecing to receive such income in subsequent flows, they're the ones spending less. I mean, if you know you're still going to receive money, why not increase you spending? And for a person who won't be expecting anymore extra money, why not save it?

Like I say, maybe it's the notion of why linger on: let's spend it and be done with it.

One of those quantity over quality thingies...

I used to be one of those believers of quality over quantity, particularly when we're talking about education. "Used to" because now I've become more skeptical after reading Victor Lavy's latest NBER entitled, "Do Differences in School's Instruction Time Explain International Achievement Gaps in Math, Science, and Reading? Evidence from Developed and Developing Countries." In a nutshell, Lavy finds that for education, quantity actually matters. In estimating the effects of instructional time on students' academic achievement in math, science, and reading:

"[t]he evidence from a sample of 15 year olds from over fifty countries that participated in PISA 2006 consistently shows that instructional time has a positive and significant effect on test scores."

Of course, like all things increasing, such increases in intructional time should have a marginal effect. That means there is an optimal level of instructional time where the benefits are maximized--anything more would be economic waste. This is somewhat evident in one of Lavy's other findings:

"However, the estimated effect of instructional time in the sample of developing countries is much lower than the effect size in the developed countries."

Now, I'm saying that this is evidence of the law of diminishing returns because, being a product of an educational system of a developing country, I have observed first hand one of the differences, in terms of instructional time, between the U.S. and a developing country.

In the Philippines, education starts at age 4 with Pre-school, 5 with Nursery, 6 with Kindergarten, and then Elementary Grades 1 to 6 starting at age 7. Then we have four years of high school. That means 9 years of pre-high school education (13 years pre-college). By most standards, that's high in terms of instructional time. Furthermore, we already start learning Mathematics and Science at first grade (age 7). So, it may not be a surprise that Lavy's finds that the estimated effect of instructional time in developing countries is much lower than that of developed countries--the level of instructional time may be high enough already that any additional time would definitely lead to lower effects.

Well, granted that Philippines is not one of the developing country samples in Lavy's study, but chances are we can see similar education systems among developing countries as that of the Philippines.

Just one caveat. Okay, I give in--quantity matters. But still, let's not forget about quality. If the quality of those extra quantity is of low value, then such increase in quantity may not matter at all.

Haha. One more point for the "quality" team.

Don't worry, be happy... I mean, seriously

A new and interesting paper from NBER has some pointers for high school kids and parents of high school kids. Don't be sad, or worst, don't be depressed, otherwise your school grades will go down.

I mean, such relationship between these two is not surprising, but again, with the power of economic thinking, Jeffrey DeSimone has managed to quantify such relationship. Examining the past year relationship between GPA and experiencing a combination of two primary depression symptoms, feeling sad and losing interest in usual activities for at least two consecutive weeks, among high school students during 2001–2009, DeSimone finds that sadness lowers the probability of earning A grades and raising the probability of receiving at most C grades by over 15%. The worst part is the effects are significantly larger than those of having considered or planned suicide and equivalent to having attempted suicide (which seemingly signify more severe depression).

So the point really is other factors can affect the performance of a student that is not related to his or her cognitive or non-cognitive skills. The environment has a crucial role to play, and when I mean environment, it includes what's going on with the family, the student's relationship with his or her peers, and things like that that are outside the student itself. But then again, the student's cognitive and non-cognitive skills may also play a part--how he or she reacts or responds to these outside forces may be important in determining how much of these factors are negatively affecting him or her.

The (Impending) plutonic economy of U.S.

Well, we already have an idea that the U.S. is on its way to becoming a plutonomy--an economy dependent on the spending and investing of the wealthy. Now, we have some numbers to back it up.

In a recent article in the Wall Street Journal by Robert Frank, the top 5% of the Americans by income account for a whopping 37% of all consumer outlays, which include consumer spending, interest payments on installment debt and transfer payments. By contrast, the bottom 80% by income account for only 39.5% of all consumer outlays.

And the thing is, this has been the pattern of the last 20 years.

This trend would have been okay if we find the ideal pattern of development where eventually, the middle and lower classes would shrink and move upwards. This, however, has not been the case. For the top 5% by income, they're share in consumer outlays was 25% in 1990. Since then it started to inch up to 30%, until it found itself having a larger share of the pie.

The recent recession doesn't help either. According to the article, the middle- and lower-income groups are struggling to pay off debt and stay afloat amid rising unemployment.

Of course, this reflects the other ugly side of income inequality, which has been the main economic contribution of economists Emmanuel Saez and Thomas Piketty. As of 2007, they find that the top 10% of earners captured about half of all income.

It is really something to worry about. We've already arrived at an age where massive social unrest is rare in developed economies. The U.S. might be heading that way.

Bad times for the middle class

In a recent Yahoo!Finance article, Michael Snyder is reporting that the middle class is fast shrinking and he blames it on globalism and "free trade." Being the editor of the blog The Economic Collapse, this is no surprise coming from Snyder (being the stereotypical dismal economist that he is).

Among the interesting statistics he shares are:

* The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.
* The top 10 percent of Americans now earn around 50 percent of our national income.
* 66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.
* In 1950, the ratio of the average executive's paycheck to the average worker's paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
* In America today, the average time needed to find a job has risen to a record 35.2 weeks.
* Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.
* More than 40 percent of Americans who actually are employed are now working in service jobs, which are often very low paying.
* The top 1 percent of U.S. households own nearly twice as much of America's corporate wealth as they did just 15 years ago.

Now, first of all, you start asking which jobs are we talking about that corporations are instead looking at low-wage, labor-intensive foreign countries for manpower? Well, according to Snyder, it's not really because most companies are outsourcing manpower (because if you think about it, corporations that do so are mostly firms from the I.T. industry). It's because companies are moving operations out of the U.S. What remains are traditional service sector industries (e.g. retail) who pay lower wages. So who benefits are the rich, the owner of these corporations.

It's hard to deny the facts put forth by Snyder, and as I've already mentioned, globalization can lead to increasing inequality. Because face it, what is happening is also a symptom of increasing inequality: disappearing middle class can lead to widening income, since what is left are the rich, on the one side, and the poor, on the other. From my recent paper with Rana Hasan, Rhoda Magsombol and Ajay Tandon, we mentioned that increases in inequality may well be a part and parcel of the growth process of a developing economy.

Or maybe it's not really about that at all. We were analyzing India, a developing country. But U.S. is already developed.

The thing then is, some other factors in the economy might be contributing to this diminishing middle class. Paul Krugman at an Economic Policy Institute's 2007 conference suggested looking at the U.S. tax and social insurance system:

"But the amount of inequality in the United States is substantially less than it would be if we did not have still at least somewhat progressive taxation, and still a pretty extensive, though not nearly extensive enough, system of social insurance. And that makes a big difference. Certainly if you're looking at say the United States versus Canada, a lot of the difference between the two countries is just that Canada has more of a better safety net financed by somewhat higher taxation.

And if you're looking for a progressive agenda, certainly from my point of view, a large part of that ought to be straightforward orthodox stuff, which is still very hard to do politically. It would be essentially restoring progressivity of the tax system, and using the revenue to improve social insurance and, above all, health care."

Well, the whole point is, we don't need to go back to that "blame globalization" routine again, because it may not be the case. The diminishing middle class is actually not new. Discussion of such issues have been around since the 1980s. Charles Beach in his 1989 paper "Dollars and Dreams: A Reduced Middle Class? Alternative Explanations" cites four reasons for the diminishing middle class that stand out--and none of them is about globalization (Beach's thesis is that it has something to do with structural changes in the economy).

Globalization does have its benefits. And it has costs. But I don't think it is solely to blame for the upcoming (and hopefully avoidable) extinction of the middle class.

More bad news for single parents

Over the long run unmarried fertility is positively associated with murder and property crime.

Wow.

This is the finding in the paper by Todd Kendall and Robert Tamura entitled, "Unmarried Fertility, Crime, and Social Stigma." I'd like to think that it should be more than due to the single parenthood situation, and that it may also have to do with the neighborhood and peers surrounding the child. Kendall and Tamura's theory goes like, "[c]hildren born to unmarried parents may receive lower human capital investments, leading to higher levels of criminal activity as adults. Therefore, unmarried fertility may be positively associated with future crime."

Futhermore, their paper has a particularling interesting application to developing countries (particularly countries with the majority of the population being religious), where single parenthood is not that common and where there is somewhat a social stigma attached to it:

"[I]n an environment in which social stigma attached to nonmarital fertility is high, many low‐match‐quality parents will marry, and children reared in these families may actually be worse off than if their parents had not married."

It does make sense. The pressure from the social stigma may force an unmarried parent to choose a partner in haste, who may turn out to be an imperfect partner. In addition, imagine what it will do to the child. Being brought up in a society where a complete family is everything, when all of a sudden you're introduced to a new father or mother without going through a slow but effective transition introducing the child to the parent. What a shock it would be for the child. Imagine what that will do to a child's core of values.

In an age where women empowerment is a trend--and single parenthood seems okay--this paper is saying that might not actually be the case. On the bright side, though, this is one good promotional material for dating websites.

It "pays" to have a credit card

Well, if you don't have a credit card, you probably find yourself sometimes thinking if you should get one. You're probably caught between anticipating the joy of being able to buy something even if you don't have the cash, or worrying that you will find yourself in a situation where it will be hard for you to pay off your credit.

Well, Scott Schuh, Oz Shy and Joanna Stavins of the Federal Reserve Bank of Boston may be suggesting that you're better off getting the credit card.

In their paper "Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations," there is actually an implicit money transfer from non-card users to card users because merchants cannot recoup discounts for credit card reward programs from card holders, and instead, take it from non-card users. They say on the average, "each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year."

It does make sense, and there's nothing really non-card users can do about it. I mean, except for not buying the goods these merchants are selling. But then again, it's a cost and benefit decision on the part of the merchants: is the benefit of gaining credit card purchases (which is more likely than not, from richer people) outweigh the cost of losing purchases from non-card holders?

It can also be economies of scale, particularly when you consider how these merchants will promote their product. If they target credit card holders, they can "join forces" with the credit card companies (and sometimes, other merchants too) in reaching out to credit card users. If they target non-card users, they would end up doing all the promotion on their own.

Seems unfair, huh? Well, you would think Schuh and the team is out to promote credit card use, but of course they're not. They're pure economists. And the solution they're suggesting? Reduce merchant fees and card rewards, and this would increase consumer welfare. So the card companies have to think of other ways of making their product more competitive and attractive.

New playground for economists

The internet is starting to become an economists dream laboratory. I came through this story about a person managing to eventually trade an old celphone into a Porsche convertible! He did this while bartering in Craig's List. There's even another person who managed to eventually trade a red paperclip into a two-story farm house. Well, I said eventually because it took more than two or three trades before they eventually got the big prize. But then you can see from the story that some people would trade valuable items that for them is less valuable than what they are looking for--a thing which in most cases should be of lower value. The example given is a musician traded his Toyota car for a MacBook simply because at that point, the Macbook is more important for the musician. Like what?

That is why I am so intrigued about how different people value goods. I mean, it's definitely not unexpected, but it seems examples are now becoming more common to find. And it would really be interesting to study and analyze this individuals--how they go through their decision process and what factors have shaped how they value such goods. As an economist, these are things worth studying.

So the internet, specially trading sites such as Craig's List, is going to be one big playground for economists. They can come up with different studies relating to the behavior of list members, how they interact, the values and prices they put into their things up for trade, and so on and so forth. Economists can even analyze the whole structure itself--how the internet and trade sites such as these have enabled this new form of transactions.

Wow talking about coming full circle. The internet has already done so much. Now, it is putting bartering back in the map. To barter now with someone at the other side of the country has become a very less inefficient form of transaction.

You wanna' trade? Speak English!

Of course, you can't trade if you can't communicate, right? That's a no-brainer. But Hyejin Ku and Asaf Zussman has helped that discussion further by quantifying it. In their paper in the Journal of Economics Behavior and Organization entitled "Lingua franca: The role of English in international trade," they find that the better the countries speak English (what we consider as the lingua franca in international trade), the more "connected" they are to international trade:

"By constructing and employing a new dataset based on a standardized test of English and using an augmented gravity model we find that English proficiency has a strong and statistically significant effect on trade flows."

Like I said, it goes without saying that you have to have a common language to start trading with other countries. But what's interesting to me is that this paper finds that the more proficient the country is in speaking English, the higher the trade. Of course, this takes into consideration other factors that might affect the size of trade. But still, this is interesting finding.

I mean this proves one point that I was reflecting on before. I remember back then someone telling me that it would help to start learning how to speak Chinese given the rising economic influence of China in terms of world trade. In a nutshell, she's saying Chinese will be the next lingua franca. But I have my reservations on that. For non-English speaking countries, it would cost more than benefit for countries to learn Chinese especially after years of learning English. In any case, the Chinese has already began to learn to speak English for some time now, so why go the other direction?

No my dear. English has started it, and English is here to stay.

Trade Liberalization and Labor Mobility

Sticking to the topic of inequality, there's a good paper by Rana Hasan and Karl Robert Jandoc (the former my mentor and the latter a former colleague) published by the University of the Philippines School of Economics. Entitled "Trade Liberalization and Wage Inequality in the Philippines," the paper examines the role of trade liberalization in accounting for increasing wage inequality in the Philippines from 1994 to 2000—a period over which trade protection declined and inequality increased dramatically.

Now this result of increasing openness to trade and at the same time increasing inequality is much like the case in India, and is consistent with a growing body of literature that has found trade liberalization to lead to increases in inequality.

But the interesting thing is, at least for the Philippines, Hasan and Jandoc actually found little evidence to suggest that trade liberalization itself had an important role played in increasing inequality. More specifically, "the effect of trade on industry wage premia and industry-specific skill premia were found to account for very little of the increase in wage inequality." Instead, most of the "trade-induced" increases in inequality were captured by the "employment reallocation effects" of trade. In particular, "reductions in protection appear to have led to shift in employment to more protected sectors, especially services where wage inequality tends to be high to begin with and increased still further."

Now that is interesting: opening the economy to trade resulted in laborers moving to more protected industries. How did that happen? Hasan and Jandoc did not provide explanations and suggested to other economists for future work. I would guess that the answer is already there. Laborers go to where higher wages are. Never mind for the moment that between the three primary sectors of the economy, the services sectors give the highest wages. Even if we consider it generally, the benefits of opening an industry to international trade is lower prices in the products. Even after considering economies of scale, chances are, lower prices of goods would mean lower wages for workers.

Naturally, what else can you do? If you find the guy across the block is earning more working for another firm, you'd want to join him working for that firm.

Although granted that the study only limits to the country of the Philippines, it would be interesting to know if other countries exhibit these effects of trade liberalization on labor mobility.

Education and Inequality

Oh by the way, permit me to indluge you with a discussion about my latest paper. I forgot to announce last March that my paper with Rana Hasan, Rhoda Magsombol and Ajay Tandon were already published in the journal World Development. Entitled "Accounting for Inequality in India: Evidence from Household Expenditures," we utilize household-level consumption expenditure data from India to examine the evolution of inequality during the period of 1983 to 2004.

Like what is already a trend in most countries today, inequality in India increased, specially in the decade between 1993 to 2004. (As a sidenote, an also similar current trend is the fact that even with rising inequality among countries, poverty levels have gone down--even if more people have begun to eat the pie, some eat way more than others). Now the thing is this phenomenon of increasing inequality is more prevalent in the urban sector, and more interesting is that we find this to be accounted more for by increases in returns to education.

What does this mean, you say? Well, the economic liberalization that happened in India during the 1990s have resulted in the rise of education-intenstive service industries where the highest level of job compensation can be expected. But of course, not anyone can immediately be hired for such occupations. It requires heavy investment in education on the part of the individual. And so, of course, such situations are accessible to only a few--either the rich or the more intelligent or talented that has a better chance of getting a scholarship from the government or from some charitable organization.

But this is always the case, isn't it? Any economy in their history underwent the same situation. Their economic growth first witness a few benefiting and then eventually, the benefits would gradually spread to the rest of the population. That is why we also raised this question in the paper: if it is a natural progression of a growing economy, then we should leave it to the "market" and let it evolve naturally. Or should we? Should governments take a hand in minimizing this negative effect (growing inequality) of increasing GDP?

The fact is, there is also what we call inequality in abilities (i.e., the intelligent and the talented), and since the higher-paying jobs are more accessible to them, this does give rise to inequality in opportunities. This is one area that a government may need to intervene. Furthermore, leaving economic development to the "market" may lead to development of only one sector, i.e. the service sector, leaving the other sectors underdeveloped, i.e. industry and especially the agricultural sector, where the majority of the population is. Then it becomes a vicious cycle--being underdeveloped means income is low in these sectors (as is naturally), leaving workers in these sectors with little or no income needed to help put their children to good schools. Not having the right education needed to enter the high-paying service sector, these children will grow up and remain working for these underdeveloped sectors. In this case, the solution is for the government to come in and help develop these sectors.

Child Obesity and Sex

NBER recently released two somewhat related papers that is very interesting. First, having overweight children is actually worst than it is. Susan Averett, Hope Corman and Nancy Reichman found that "overweight or obese teenage girls are more likely than their recommended-weight peers to engage in certain types of risky sexual behavior but not others." I think it's actually sad because the way I see it, obese children may be aware of stigma associated with being fat (less attractive, etc.). So I suppose engaging in sexual activities makes them feel better about themselves. I'm not making excuses for them. In fact, I think this paper is one reason for parents to control their children's excessive eating behavior.

Related to obesity is Christopher J. Ruhm's paper pointing out that obese children may not be thinking rationally when they're binge-eating. Being a rational person, you would be aware of the negative effects of being obese (medical and social). But Ruhm proposes that the reason why obese people doesn't do so is because there are also biological considerations. In particular, he says that "eating behaviors reflect the combined influences of a utility-maximizing deliberative system [the economic part] and an affective system that responds quickly and often impulsively to external stimuli, without accounting for the long-term consequences [the biological part]." Excessive eating results when the "affective system" dominates the deliberative system. Now what is beautiful about this paper is that, like others, it tries to incorporate other scientific fields to explain why man may not be rational (one of economists' century-old mantra). And in this case, it actually makes sense. Now obese people do have some scientific basis for saying in front of a large entree of food: "I can't help it."

Learning from a giant

Wow. At last. I've finally managed to listen to a lecture delivered by a Economics Nobel Laureate.

Yesterday, as part of the plenary session of the first day of the Tenth Annual Missouri Economics Conference, Finn Kydland (UC-Santa Barbara) delivered a lecture entitled "Nominal Anomalies." Kydland won the 2004 Nobel Prize in Economics with Edward Prescott (Arizona State) "for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles." And boy, it was an honor and privilege to listen to him.

However, it's not just about being in the presence of a Nobel Laureate. Yesterday, it was also about the lecture that Dr. Kydland delivered. Basically he presented his latest research with Espen Henriksen (UC-Santa Barbara) and Roman Sustek (Iowa) on international business cycles. It is a continuation of their recent NBER publication where they document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are much more synchronized across countries than fluctuations in real GDP. Well, given that domestic nominal variables are determined largely by domestic monetary policy, I can't help but think is this a reinforcement of the classical dichotomy? Mmm, something well worth discussing with my students...

But then again, Dr. Kydland hinted that it may not be that way. They use a parsimonious international business cycle model to account for this aspect of cross-country aggregate fluctuations. The reason: technology shock spill overs across countries. Because of these shocks, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that turn out to be quite sychronized across countries even when output is not.

Still, according to Dr. Kydland, there are still some anomilies that exist in nominal data relative to the model, and he quickly went through this quickly at the latter part of his lecture because, unfortunately for us, he was running out of time. In a nutshell, most of these anomalies are in the forms of leads and lags in fluctuations as compared with what their basic model predicts.

Well, I'll be keeping track on where Dr. Kydland's research will lead to. As of now, I just want to savor the experience I got, again, being in the presence of a giant. I just hope there will be more giants coming in the way.

Small updates

I've nothing much to share lately. I've been very busy with academic work. But just to show I'm still into blogging, I'm adding a new link to the Oikonosphere: David Friedman's blog. Just in case you don't know him, he has written many good economic books (not the textbook types) lately. Also, being the son of Milton and Rose Friedman doesn't hurt either. Check out his blog.

I've also found this excellent, excellent website, "Economy Professor." It's a good place of resource for the non-economists wanting to know more about, well, economics stuff. As the website says, the website is "[a] Dictionary of Economic Terms, Concepts, Theories & Theorists." Go check it out also.

Economist Debates: Financial innovation

There's an exciting online debate hosted by the Economist. It's about financial innovation: "Does financial innovation boost economic growth?"

I voted yes, of course. I expressed the following view:

"Financial innovations decreases transactions costs so that the financial sector becomes more efficient in transferring funds from those who have funds but do not have productive use of it to those who do not have funds but have productive use of it. Therefore, financial innovation leads to economic productivity and growth.

The problem comes in when individuals or groups take advantage of financial innovation to seek personal gain without regard to the negative effects--adverse selection and moral hazard problems. And this is the sad thing because this is the nature of the market. That is why regulations are crucial in making sure that financial innovations are run the way they are supposed to run.

Do not blame financial innovation. Blame people who take advantage of financial innovation for personal gain. Blame lack of regulation if these people do succeed in taking advantage of financial innovation and causing financial crisis left and right."

By the way, it's not just true for the U.S. or any developed nation. Financial innovation is widely beneficial in some developing countries as well. Check out the recent publication by the Asian Development Bank.

So what do you think? Share your views, join the Economist debate.

One argument against patents--or those who take advantage of it

Here's one case where patents can delay innovation more than they can innovate it. It all boils down to people becoming greedy and want to make profit out of it rather than help induce techonological advancement. Exactly what the article says: unless they can produce the actual goods, better not give them the patents. It does give the impression that they're buying patents non-existing but very big potential technology with the purpose of selling them later at a higher price to those who actually discovered means of creating the technology. Much like old problems of the financial sector--some asymmetric information is brewing: do they really have the technology or not? Additional government regulation, anyone?

Chris Blattman

I apologize for not posting lately. I've been busy with work and study at the same time. But here's something new. I added a link in the Oikonosphere nav to Chris Blattman's blog. I consider Prof. Blattman of Yale University one of the top development economists out there. His blog is not that bad either. So check out his site.