Archive for October 2012
Oct 18th 2012, 19:49 by G.I. | WASHINGTON
[Greg Ip] WHAT is economics concerned with? A layman taking in the raging debates over financial stability, inflation, economic growth, and budget deficits, would say it’s about money. That, of course, is not right. Money matters only insofar as it is a proxy for welfare. Money is a handy way of denominating prices and economists love prices because they are so efficient at allocating supply and demand so as to maximise welfare. Yet markets do not have to have money or prices to serve that welfare-maximising function. That distinction lies at the heart of the work that won this year’s Nobel Prize in economics, the subject of this week’s Free Exchange column.
Lloyd Shapley of UCLA and Alvin Roth of Stanford University got the prize for studying the barriers to welfare maximisation in markets without prices: examples including matching college applicants to colleges, kidney donors to recipients, and even husbands to wives. Mr Shapley and David Gale (now deceased) devised an algorithm 50 years ago that would maximise the satisfaction of such multi-sided matching games. Read the column to learn more about how the theory works and its applications. I want to focus here on a more philosophical implication of their work. Read the rest of this entry »
Alvin Roth and Lloyd Shapley have won this year’s Nobel for economics
Oct 20th 2012 | from the print edition
[Greg Ip] IN MOST countries it is illegal to buy or sell a kidney. If you need a transplant you join a waiting list until a matching organ becomes available. This drives economists nuts. Why not allow willing donors to sell spare kidneys and let patients (or the government, acting on their behalf) bid for them? The waiting list would disappear overnight.
The reason is that most societies find the concept of mixing kidneys and cash repugnant. People often exclude financial considerations from their most important decisions, from the person they marry to the foster child they adopt. Even some transactions that do involve money are not really about price. Universities in America do not admit students based on who pays the most, for example. Rather, they select students based on complex criteria that include grades, test scores and diversity. Similarly, students choose their university on more than just financial factors.
Money is not essential to a market. After all, economics is about maximising welfare, not GDP. But the absence of a price to allocate supply and demand makes it harder to know whether welfare is being maximised. This year’s Nobel prize in economics went to two scholars—Alvin Roth, who has just joined the economics department at Stanford University, and Lloyd Shapley, a retired mathematician at the University of California, Los Angeles—who have grappled with that very problem. Read the rest of this entry »
Our admittedly unscientific poll offers cheer to both candidates
Oct 6th 2012 | WASHINGTON, DC | from the print edition
[Greg Ip and a colleague] BARACK OBAMA and Mitt Romney have spent many months and hundreds of millions of dollars trying to convince the public that electing the other man would lead to economic catastrophe. They have fought to a draw: voters today are almost evenly split over which man would do a better job on the economy.
But whom would the experts pick? To find out, The Economist polled hundreds of professional academic and business economists. Our main finding should hearten Mr Obama. By a large margin they rate his overall economic plan more highly than Mr Romney’s, credit him with a better grasp of economics, and think him more likely to appoint a good economic team (see chart). They do not hold the perpetually disappointing recovery against him; half of respondents graded his record as good or very good, compared with just 5% who said that about George Bush in our poll four years ago. “It all depends on the counterfactual,” said Justin Wolfers, an economist at the University of Pennsylvania’s Wharton School, referring to how bad things might have been without the president’s emergency measures.
But Mr Romney can take heart from a deeper dive into the numbers. The Economist polled two groups: research associates of the National Bureau of Economic Research, the country’s leading organisation of academic economists; and the outlook panel of the National Association for Business Economics. The academics gave Mr Obama much higher marks than Mr Romney, which may in part reflect partisan preference: fully 45% of them identified themselves as Democrats, and just 7% as Republicans. Read the rest of this entry »
The role of government intervention in the economy is perhaps the starkest difference between the candidates
Oct 6th 2012 | from the print edition
[Greg Ip] THIS year’s election carries big implications for economic policy well beyond the budget and taxes. Barack Obama and Mitt Romney have very different ideas about regulation, monetary policy, international trade and labour markets, although their rhetoric sometimes exaggerates the distance between their positions.
In his first term Mr Obama presided over a big increase in the number of major newregulations (as measured by their economic impact), from air-cargo screening to fuel efficiency in trucks. On top of those come thousands of pages of new rules implementing his financial-regulation and health-care reforms (see article). The White House claims that the benefits of the new regulations easily exceed the costs, although some economists contest the way the benefits are measured.
With the deficit at over $1 trillion for a fourth year running, taxes and government spending are critical to the campaign
Oct 6th 2012 | from the print edition
[Greg Ip] BARACK OBAMA won in 2008 largely because of the economy. He may lose this year for the same reason. The economy now surpasses all other issues in voters’ minds. Close behind are health care, taxes and the deficit. These issues are all intertwined. The candidates’ competing proposals on taxes and spending are central to how they plan to revive economic growth.
Both have laid out ambitious markers for the next four years. Mr Obama promises to create 1m more manufacturing jobs. Mr Romney counters with predictions of 12m new jobs in total. Neither figure is out of line when the economy has as much ground to make up as it has now. Over the coming decade, Mr Obama has projected average annual growth of 3.2%; private economists think growth of just under 3% is more likely. A team of Mr Romney’s advisers think his plan will spur the economy to grow by 3.5-4% a year. Read the rest of this entry »