Archive for October 8th, 2018

The economics prize 2018 to William Nordhaus and Paul Romer

October 8, 2018

Interesting choices.

  • William Nordhaus for integrating climate change into long run economic analysis
  • Paul Romer for integrating technological innovations into long run macroeconomic analysis

Both were on the wait list for a long time.

More links to follow. Nobel guys will put up a lot of basic info.




Confessions of an equity analyst

October 8, 2018

Vikas Vardhan of Valueresearch in this piece gives investment advice why confessions:

  • Confession: The investible universe is very small as compared to the total listed stocks
  • Confession: There are dozens of investment rationales but the most compelling ideas are built on just a few.
  • Confession: We are no expert at running businesses. Analysts are often given the status of ‘demigods’. In reality, they are simply numbers experts. Managements, on the other hand, take years to master their businesses. An analyst covering multiple sectors and companies can never know the business the way an entrepreneur does.
  • Confession: We like it when markets behave irrationally as that creates opportunities.
  • Confession: We do not know where the market is headed in the short term.


How elite universities shape upward mobility into top jobs and top incomes

October 8, 2018
Seth Zimmerman of University of Chicago Booth School of Business in this research shows why elitism matters in education:
Graduates of top universities hold a large share of leadership positions in big firms. At the same time, elite universities are aiming to expand access to middle- and low-income students. Yet, it is unclear whether the benefits of attending top universities accrue to students from poor backgrounds. This column examines new evidence from Chile and finds that admission to highly selective, business-focused degree programmes has very large effects on the rates at which male students from wealthy backgrounds attain top jobs and incomes, but little or no effect for female students and non-wealthy male students.

Why do men from wealthy backgrounds gain so much more than other students from attending top business-focused programmes? One possibility is that women and low-socioeconomic status men also benefit from top programmes, but start from too low a rung to reach the top of the income ladder. This does not seem to be the case: on average, admission does not raise income for these groups at all, while gains for high-SES men are large. A second possibility is that women and low-SES men are less interested in careers in business. But these students go on to work in similar sectors to high-SES men. A third possibility is that high-SES men are better prepared to succeed academically. But students from the best public schools in Chile—where college entrance exam scores are similar to those in best private schools—do not benefit from admission, and graduation rates for women are higher than those for men, even though labour market effects are smaller. 

A comparison with medical degree programmes is informative. Medical degrees are similar to elite business degree programmes in that they admit only top-scoring students and in that earnings for those students are very high on average. They differ in that medical students are very unlikely to lead large companies or have incomes in the top 0.1% of the income distribution. As first shown in Hastings et al. (2013), admission to selective medical programmes leads to large earnings gains for low-SES students. In particular, admission to top medical programmes closes gaps by SES and gender in rates of attainment of incomes on average and near, but not at, the top of the distribution—the top 10%, for example, but not the top 0.1%. This holds even though patterns of achievement by group are similar to those in business programmes. That elite education expands gaps by gender and SES appears to be a feature of business careers, not of academic content nor the Chilean economy as a whole. The returns to elite education for women and lower-SES men are not zero on all career paths, but are zero on the paths most likely to lead high-SES men to the very top of the income distribution. 

One way that business careers may stand out from careers in other fields is in the importance of peer networks. Research on managerial behaviour at big firms shows that social ties between top executives play a role in determining firm behaviour (Fracassi and Tate 2012, Shue 2013, Fracassi 2016). If high-SES male students are better able to form valuable peer ties while at school, this could explain why they gain from admission while other students do not. Studies of friendship formation among college students (Marmaros and Sacerdote 2006, Mayer and Puller 2008) show that ties are more likely to form between demographically similar students. Relationships with high-SES men may be especially valuable from the perspective of professional advancement, and may be most accessible for students already in that group.  

The peer ties channel does appear to be important: high-SES men who gain admission to top business programmes become more likely to lead the same firms as other high-SES men who are their school peers, but not with non-peers or with peers from other backgrounds. Several studies have shown that peer ties affect early-career job-finding (Marmaros and Sacerdote 2002, Arcidiacono and Nicholson 2005). They also seem to affect who makes it to top jobs over the long run. 


Reading Hayek on the Economics Prize day…

October 8, 2018

Just in one and a half hours, we are going to learn of the recipient of ‘The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’ for the year 2018.

I had read Hayek’s Prize lecture (received the prize in 1974) but saw this Banquet speech recently (HT: Conversable Economist Blog)

Your Majesty, Your Royal Highnesses, Ladies and Gentlemen,

Now that the Nobel Memorial Prize for economic science has been created, one can only be profoundly grateful for having been selected as one of its joint recipients, and the economists certainly have every reason for being grateful to the Swedish Riksbank for regarding their subject as worthy of this high honour.

Yet I must confess that if I had been consulted whether to establish a Nobel Prize in economics, I should have decidedly advised against it.

One reason was that I feared that such a prize, as I believe is true of the activities of some of the great scientific foundations, would tend to accentuate the swings of scientific fashion.

This apprehension the selection committee has brilliantly refuted by awarding the prize to one whose views are as unfashionable as mine are.

I do not yet feel equally reassured concerning my second cause of apprehension. It is that the Nobel Prize confers on an individual an authority which in economics no man ought to possess. 

This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence.

But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally. There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society – as the press tends to treat him till in the end he may himself be persuaded to believe.

One is even made to feel it a public duty to pronounce on problems to which one may not have devoted special attention.

I am not sure that it is desirable to strengthen the influence of a few individual economists by such a ceremonial and eye-catching recognition of achievements, perhaps of the distant past. I am therefore almost inclined to suggest that you require from your laureates an oath of humility, a sort of hippocratic oath, never to exceed in public pronouncements the limits of their competence.

Or you ought at least, on confering the prize, remind the recipient of the sage counsel of one of the great men in our subject, Alfred Marshall, who wrote: “Students of social science, must fear popular approval: Evil is with them when all men speak well of them”.

Wish Hayek had declined the economics prize with these words! That would have set a benchmark of sorts..


The transformation of economic analysis at the Federal Reserve during the 1960s

October 8, 2018

This is a superb paper by Beatrice Cherrier and Juan Acosta. In history of central banking, we barely look at role and evolution of economic research at the central bank. Did it influence policies and if yes in what way and if no why? Who were the key people in this economic research team and so on. Most of these people are also unsung but do quite a lot of work in the central bank.

This paper looks at eco research at Federal Reserve:

In this paper, we build on data on Fed officials, oral history repositories and hitherto under-researched archival sources to unpack the torturous path toward crafting an institutional and intellectual space for postwar economic analysis within the Fed. We show that growing attention to new macroeconomic research was a reaction to both mounting external criticisms against the Fed’s decision-making process and a process internal to the discipline whereby institutionalism was displaced by neoclassical theory and econometrics.

We argue that the rise of the number of PhD economists working at the Fed is a symptom rather than a cause of this transformation.

Key to our story are a handful of economists from the Board of Governor’s Division of Research and Statistics (DRS) who paradoxically did not always held a PhD, but envisioned their role as going beyond mere data accumulation and got involved into large-scale macroeconometric model building.

We conclude that the divide between PhD and non-PhD economists may not be fully relevant to understand both the shift in the type of economics practiced at the Fed and the uses of this knowledge in the decision making-process. Equally important was the rift between different styles of economic analysis. 

It is an interesting new approach to figuring history of central banking.

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