Archive for the ‘Economics focus’ Category
Central banks ignore this century-old observation at their peril
Bandwagon behaviour: Why missing out on one job application is bad news for your chances in the next
Jul 20th 2013 |From the print edition
[Greg Ip] A TRULY informed diner would choose a restaurant based on the quality of the menu and the chef’s experience. The discerning investor would decide which company to back after studying the business plan and meeting the founders. In reality, people often copy the choices of others. Diners pick the crowded restaurant over the empty one. Investors go with the company that already has multiple backers.
Such bandwagon effects are not necessarily irrational. Often, the buyer knows less about a product than the seller; the collective wisdom of the crowd can correct for such “asymmetric information”. It can also be a way of coping with a surplus of choice: rather than study 100 models of music player, why not assume the market has already figured out the duds?
The existence of bandwagon behaviour can be hard to prove. A product or an asset usually becomes popular (or unpopular) in the first place because it is genuinely superior (or inferior). But some have tried to isolate the self-fulfilling effects of popularity. One 2004 study* by Alan Sorensen, now of the University of Wisconsin, examined accidental omissions from the New York Times bestseller list. By comparing the sales of books that did make the list and unlisted books that should have, the author could isolate the effect of inclusion—a modest boost to first-time authors’ sales. In a 2008 study by Matthew Salganik of Princeton University and Duncan Watts, now at Microsoft Research, participants tricked into believing a song was more popular than it actually was were more likely to download it.
Scholars are now asking whether herd behaviour also prevails in labour markets. 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 »
Central bankers wonder why success eludes them
Sep 8th 2012 | from the print edition
[Greg Ip] IMAGINE that the world’s best specialists in a particular disease have convened to study a serious and intractable case. They offer competing diagnoses and treatments. Yet preying on their minds is a discomfiting fact: nothing they have done has worked, and they don’t know why. That sums up the atmosphere at the annual economic symposium in Jackson Hole, Wyoming, convened by the Federal Reserve Bank of Kansas City and attended by central bankers and economists from around the world*. Near the end Donald Kohn, who retired in 2010 after 40 years with the Fed, asked: “What’s holding the economy back [despite] such accommodative monetary policy for so long?” There was no lack of theories. But, as Mr Kohn admitted, none is entirely satisfying. Read the rest of this entry »
America’s economy is growing at an unimpressive rate. It may not be able to go much faster
May 26th 2012 | from the print edition
[Greg Ip] WHEN the American economy emerged from recession three years ago, forecasters fell into two broad camps. Optimists reckoned brisk growth would quickly return the economy to its long-term potential level of output, the maximum sustainable GDP that could be achieved with the capital and labour on hand. That would pull down unemployment and prop up inflation. Pessimists, however, predicted sluggish growth, persistently high unemployment and inflation that would slip ever lower as a result of unused capacity in the economy.
What has actually happened since then has been a mixture of the two. Unemployment and inflation have moved in the directions that optimists expected. Since peaking at 10% in late 2009, the jobless rate has now fallen by nearly two percentage points. Core inflation, which excludes food and energy, dipped below 1% in 2010 but is now above 2%. Yet economic growth has averaged 2.5%, a rate more typical of the economy at full employment rather than when recovering from a deep bust.
Economists advance several explanations for this dichotomy. The drop in unemployment may simply be mechanical, a snapback after employers fired workers too indiscriminately during the recession. Inflation has been underpinned by the indirect effects of higher commodity prices, rising rents and the influence of stable inflation expectations on prices and wages. Optimists say that GDP may be revised up later.
America’s ability to issue debt is helped by a resemblance between Treasuries and money
Mar 10th 2012 | from the print edition
The business cycle matters when assessing the cost of new regulations
Oct 29th 2011 | from the print edition
AMERICAN policymakers are pulling every lever they can to revive the economy, from fiscal stimulus to quantitative easing. The big exception has been regulatory policy. From environmental protection to bank oversight, the rule book has steadily thickened in recent years. Republican critics of Barack Obama think this explains America’s economic malaise. Scrap the rules, they claim, and the economy will spring to life. Nonsense, responds the Treasury. In a recent article, Jan Eberly, an assistant secretary for economic policy, scrutinised the behaviour of corporate-bond yields, corporate profits and other indicators. She found no evidence that regulatory uncertainty is holding businesses back from hiring or investment; weak demand is the big culprit. Read the rest of this entry »