Worthwhile Canadian Initiative

Revealed preferences for longevity

Smoking takes 10 years off your life - but is this a sufficient reason to give up smoking? Why is a long life a better life?

The United Nations Human Development Index uses life expectancy as a measure of life quality because:

a long life is valuable in itself and... various indirect benefits (such as adequate nutrition and good health) are closely associated with higher life expectancy 

That longevity is a proxy for the things that make life enjoyable is a reasonable argument, especially in the context that the UNDP is making it. The elimination of polio, for example, not only increased life expectancy, but also improved life quality, by preventing people from experiencing years of disability. But smoking shortens life by taking low quality years off at the end - is that such a bad thing?

And the statement that "a long life is valuable in itself" takes us back to the original question: why?

Of dogs and data

Over the past year or so, cities across Canada have been creating open data portals (see, for example, Vancouver, Calgary, Ottawa, Montreal, and Halifax). But Toronto's is special - it has data on cat and dog licences.

The data reveal the most popular dog breeds in Toronto in 2011:

The Interest Rate Time Bomb

The recent policy debate over whether its time for interest rates to start to rise after being at the lowest levels since the Great Depression for nearly five years shows just how much of a policy box governments are in when it comes to fiscal and monetary policy.  Never mind the debate over whether there is a trade-off between monetary stimulus and financial stability. Raising rates to reduce the perverse incentives on long-run economic behavior and activity comes with the risk of destabilizing public finances by raising debt service costs.

Marianne Ferber: A little giant

photo from "Engendering Economics" by Zohreh Emami and Paulette Olson

Marianne Ferber was proud to have been a Canadian economist, if only for a little while.

The "Canadian" part was due to astute planning by her father, Karl Abeles. Marianne was born in Sudetenland, Czechoslovakia, in 1923. Canada was exceptionally hostile to Jewish immigration in the 1930s and 40s - we accepted by some estimates just 4,000 refugees, far fewer than Australia, Argentina, or any other remotely comparable country. But the Abeles were dairy farmers, and Canadian immigration policy was as pro-agriculture as it was anti-Semitic. The Canadian Pacific Railway representative who visited the Abeles farm liked what he saw, and fast-tracked the approval of their immigration. The 39-member Abeles-Popper clan escaped Sudetenland in the nick of time, and made their way to Hamilton, Ontario.

If you don't like low interest rates, you want the Bank of Canada to loosen monetary policy now

Two weeks ago I wrote a post "Monetary stimulus vs financial stability is a false trade-off".

My opening lines in that post were: "There's an idea floating around out there that I fear may be influential. And that idea is horribly wrong. Which makes it dangerous. And I want to try to kill it."

Today, the C.D. Howe Institute publishes a Commentary by Paul Masson "The dangers of an extended period of low interest rates: why the Bank of Canada should start raising them now".

That's the idea I was talking about.

If you are worried about the dangers of an extended period of low interest rates, the worst possible thing the Bank of Canada could do would be to start raising them now. Because if the Bank of Canada tightens monetary policy now, and this causes the economy to slip back into recession and disinflation, that would require an extended period of even lower interest rates in the future.

Now go read my old post. Update: and posts by Mike Konczal and Brad DeLong. Update2: and see how the Bank of Japan's looser monetary policy is raising interest rates on 10 year bonds (finally, now the bond market has woken up to the fact that monetary policy really has loosened).

Update 3: To see pictures of recent Canadian data, which illustrate my point here, see Marcus Nunes' post.

Update4: if you want a mechanical metaphor to help you understand the paradox here: the Bank of Canada is like a man balancing a pole upright in the palm of his hand. If he wants the pole to move north, he must first move his hand south, so the pole begins to lean north, so he can then move his hand north to prevent the pole falling over. Except the pole has expectations.

Do New Keynesians need to assume (much) labour hoarding?

We know that measured productivity falls in a recession (relative to trend).

Real Business Cycle theorists say that this is because a negative productivity shock is what caused the recession.

Keynesians say that a negative aggregate demand shock is what caused the recession, and labour hoarding (firms don't like to lay off workers even if they don't need all of them to produce the goods they can sell) is what causes measured productivity to fall.

But New Keynesians assume firms are monopolistically competitive. As every first year economics student knows, monopolistically competitive firms in zero-profit long run equilibrium produce where their Average Total Cost curve slopes down. If the ATC curve slopes down, total factor productivity will fall if output falls (and rise if output rises).

So New Keynesians don't need to assume labour hoarding to explain why productivity is procyclical.

But do the numbers add up right? Is this effect big enough to explain all the cyclical variation in productivity? Maybe not. Maybe they need to assume some labour hoarding too.

I don't know if any of this is new.

Which is the most bike friendly city in Canada?

The 2006 Canadian census asked people about their usual mode of transport to work or school. Only a small fraction of those answering the question reported that they cycle to work or school, and city with the highest percentage of cycle-commuters is....

Why bikes are cooler than cars

The car is in decline. The Economist says so, and so does the New York Times. 

Cars are boring; bikes are cooler. Here are the top 10 reasons why.

10. Cars are for stuff

People from the pre-computer era have books, DVDs, TVs, stereos, big photo albums, board games, and playing cards. They need cars to transport their stuff.

Cool people have digital stuff. They can fit their entire music collection in a bicycle pannier.

Three Short Observations on the Economics of Waterways

The Rhine River is the heart of significant economic activity as a European transport and commercial corridor.  Running 1,233 km from the Alps to the North Sea, its rich economic hinterland generates commercial traffic, which made it attractive as a source of revenue for regional lords and masters for centuries.  Hence, the numerous castles, which were built at key points to defend the trade route and help extract tolls.  By way of comparison, our much longer Great-Lakes St. Lawrence Seaway (3700 km) never developed the fractured payment system – as well as the numerous political entities - that characterized the Rhine.  The upper middle route from Strasbourg to Koblenz is lined with picturesque castles and towns – and industrial activity – such as the massive BASF complex in Mannheim.

Pictures of Selma-Montgomery

James Dean knows how to tell a story. These days he'll share his thoughts on Burning Man ["But Ed, you and I know you can't run an economy this way"] or on advising the South Sudan government how to set up its central bank.

But his best stories are from his days as a graduate student at Harvard in the 1960s, when he marched in Selma-Montgomery. James Dean wasn't just at the civil rights marches, he was in the thick of things; picking people up from the airport, and being harassed by police. He had a camera, and did the best thing he could possibly do to preserve his pictures for posterity: he dumped the negatives at his father's house, and forgot about them.

Can Chinese Tourism Save Europe?

In its long history, France and Paris have been invaded numerous times but the latest invasion from the East is not from Les Allesmands but from China.  Its only May but Paris is already inundated with tourists and many of them are from China and Japan.  A recent story by Arnaud de la Grange in Le Figaro  “Tourisme, la déferlante chinoise” provides a summary of the economic impact of Chinese tourists on France.  The European economic crisis may be partly remedied by this new Chinese spending. 

Is the abandonment of religion greatly exaggerated?

The headlines around the release of the National Household Survey have proclaimed "Many Canadians are losing their religion". Yet it is not obvious this claim stands up to serious scrutiny.

Canada's religious profile evolves in two fundamentally different ways. First, people immigrate or emigrate, are born or die. Every new Canadian has their own religious beliefs, and contributes these Canada's religious profile. 

Second, a person's religious beliefs can change over time - they find God or lose their faith, or convert from one religion to another. 

In aggregate, Canada-level data, these two effects are compounded. According to the results of the National Household Survey, "About 7,850,600 people, nearly one-quarter of the population (23.9%), had no religious affiliation. This was up from 16.5% a decade earlier, as recorded in the 2001 Census. But does this mean that people are losing their religion? Or that older, more religious individuals are dying, and being replaced by young Canadians and new immigrants who are less likely to have faith? Or - given that the NHS is a voluntary survey - does it reflect sampling bias?

Yup, the NHS did produce some weird data

While writing a short comment for today's Globe, I put together a table comparing the 2011 National Household Survey data on ethnicity with the 2006 data. As the raw numbers didn't make it the Globe article, I'm reproducing them here:

Macroeconomics when all goods are non-rival

Sometimes it's good to build really weird models. Because bits of the real world are a bit weird, even if the whole world isn't as totally weird as the model, and taking an extreme case can help us understand the effect of those weird bits. Plus it's fun.

I'm going to assume that all produced goods are strictly "non-rival".

Testing productivity shocks vs labour hoarding in a traditional industry?

This is just an idea that's been floating uselessly in my mind for some time. I have never been able to apply it. But maybe someone out there could.

This isn't an earth-shattering post. Maybe someone else has already thought of the same idea. Or even applied it, and I just haven't heard about it. But I might as well throw it out there, just in case they haven't, and someone reading this might figure out how to pick up the ball and run with it.

There are two main theories of business cycle fluctuations:

1. Productivity shocks cause fluctuations in output and employment. (Real Business Cycle theory.)

2. Aggregate Demand shocks cause fluctuations in output and employment. (Keynesians and Monetarists etc.)

We've know for a long time that in a recession, output generally falls by a greater percentage than does employment (both relative to trend). We call this empirical regularity "Okun's Law".

Real Business Cycle theorists say that this is because there has been a negative productivity shock, because productivity is output per unit of input, and that same negative productivity shock is what caused the recession.

Aggregate Demand theorists say that a fall in Aggregate Demand is what caused the recession, but firms don't like to lay off workers, so they hoard some workers even if they don't really need them to produce goods right now, which is why measured productivity falls.

How can we test between the two theories? Was there really a productivity shock? Or did measured productivity appear to fall because of labour hoarding?

Monetary stimulus vs financial stability is a false trade-off

There's an idea floating around out there that I fear may be influential. And that idea is horribly wrong. Which makes it dangerous. And I want to try to kill it. But macro is hard. And it's not easy to explain clearly and simply.

I can only try. And I can only hope that others who are more influential than me, or can explain things better than me, will do the same.

"Sure, there's a risk that inflation is falling below target, and a risk that recovery will be delayed, and it would be nice if the Bank of Canada (or Sweden or wherever) could loosen monetary policy to prevent this happening. But monetary policy works by lowering interest rates and encouraging people to borrow more and spend more. And that creates a problem for financial stability, because some people are already borrowing too much. So there's a trade-off between monetary stimulus and financial stability, and monetary policy needs to take both objectives into account."

I made up that quote. But I don't think I made up the influential idea it expresses. And it's horribly wrong. It's almost the reverse of the truth.

Financial literacy in the popcorn aisle

A short financial literacy quiz:

Take a look at the picture on the right. How much does one box of popcorn cost?

The correct answer, for this particular box, is $1.50. However it is not obvious that "two for $3" implies "one for $1.50".  In other contexts, customers must make a minimum purchase to obtain a lower per-unit price. For example, if a shoe store has a "buy one pair, get a second pair free" sale, the customer who buys just one pair of shoes pays full price.

The actual per unit price of popcorn is not stated anywhere on the sign. Regular readers may recall a question from a financial literacy test used in a recent Statistics Canada Survey: True or false: By using unit pricing at the grocery store, you can easily compare the cost of any brand and any package size. In this case, the answer is false. The only unit price listed on the sign, 70.6 cents per 100 grams, corresponds to a price of $1.99 per 282 gram box, not the actual price of $1.50 per box.

How should economists respond to the National Household Survey release?

On May 8th, the results of the 2011 National Household Survey  (NHS) will be released.

The voluntary nature of the NHS will compromise the quality of the data collected. For example, the National Household Survey asks people about their religious beliefs. Yet religion has a strong influence on volunteering and civic engagement. The National Survey of Giving Volunteering and Participating found that people who are religious volunteer more. Other studies argue that some religions discourage participation in civic life - but reinforce the message that religion matters. 

There is, therefore, likely to be a correlation between a person's willingness to fill out the National Household Survey and the strength of their religious beliefs. How, then, can we possibly know whether the NHS information on the religious beliefs of the Canadian population is accurate? 

Taxation and Economic Growth

I had a bit of an intellectual crisis this evening as I pondered the conventional wisdom in economics regarding the choice between reducing consumption taxes or income taxes.  Briefly put, the simple conventional wisdom is that taxes on consumption are preferred to income taxes because they encourage saving and long-term capital formation and economic growth.  Income taxes, on the other hand, distort the labour-leisure choice and can reduce labour supply and therefore reduce economic growth.

How quickly does hotness fade?

Ratemyprofessors.com allows students to grade a professor's clarity, helpfulness, ease and - just for fun - rate their appearance as "hot" or "not". A professor with more hot than not votes is awarded a chili pepper on the ratemyprofessors.com web site.

Hotness declines with age, but how quickly? To find out, I combined ratemyprofessors hotness scores with information on when professors acquired their PhD - the best available measure of a professor's age (this information was gathered jointly with my co-author, Anindya Sen, and his co-authors).