The visible hand in economics

Archive for the ‘Econometrics’ Category

According to a recent book by Christian Broda and David E. Weinstein (Prices, Poverty, and Inequality: Why Americans are Better Off Than You Think) (ht Marginal Revolution) growth in income inequality was less pronounced in the US because of changes to the quality and cost of goods that “poor” people purchased.

This indicates to me that a tiered consumer price index could be a useful thing.  Currently the household economic survey (HES) provides an annual tiered income measure (where we see the average income of different income deciles).  However, this nominal measure is not particularly useful if the change in prices experienced by different groups are very diverse.

As a result, a similarly tiered CPI measure (so a CPI for each income decile) would actually give us a much better way to figure out change in “real income” and thereby a fairer measure of the distribution of real income – which is something we care about.

Surely the HES has a measure of purchases by different income groups.  As the CPI is broken down into different products it should be possible to take these weights and come up with a loose set of indicies that represent the price inflation faced by different income declines shouldn’t it?

Vox report a recent study on adaptation to life-changing events. I don’t want to venture into a discussison of happiness research — a topic fraught with controversy — but the results are always fun to read!

Apparently marriage really isn’t all that exciting and most people get progressively less happy as it drags on. Unsurprisingly, ending an unhappy marriage by divorcing one’s partner is a fantastic thing for most people; however, I’m surprised to see a strong increase in happiness in the lead up to the divorce with no drop immediately around it. Providing more evidence that marriage is a happiness wrecker is the plot for widowhood: while the death of a spouse is devastating, people are happier 3-4 years later than they were during the marriage!

Economists like to claim that their discipline is about providing tools for analysis, not answers to ready-made problems. OK, so they’re hardly alone in that but Dani Rodrik links an interesting paper by Michael Greenstone that walks the walk. Greenstone

…shows how data from world financial markets can be used to shed light on the central question of whether the Surge has increased or diminished the prospect of today’s Iraq surviving into the future. In particular, I examine the price of Iraqi state bonds, which the Iraqi government is currently servicing, on world financial markets. After the Surge, there was a sharp decline in the price of those bonds, relative to alternative bonds. This decline signals a 40% increase in the market’s expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it.

I really like how he uses modern economic and econometric techniques to tackle important public policy issues. However, we shouldn’t rely too heavily on the wisdom of the market in evaluating the effectiveness of the surge. While the aggregation of information that occurs in market pricing might be a better indicator than anecdotal evidence, ‘The Market’ doesn’t have superpowers that grant it access to information nobody else has. Many of the decision makers in that market likely have little more access to information about the surge than you or I. Aggregation tends to dampen the influence of extreme views but it doesn’t guarantee accuracy.

It’s commonly believed in many countries domestic violence spikes following a loss in a major sports event. It’s easy to see why “facts” like this spread easily: they seem to stand to reason (we tend to be upset when our favourite team loses, and most people are more prone to violence when they’re upset), as well as being an implicit criticism of our obsession with sports. The problem is, these “facts” are often false.

In the US a few years ago a story did the news circuit about domestic violence increasing following Superbowl Sunday. While it’s a good story, on examination the facts seem to have been largely manufactured, and the contention is not supported by academic evidence.

In 2003 a similar story did the rounds here, originating from a study commissioned by the National Collective of Independent Women’s Refuges, and already the idea is being dragged out again as pundits of all colours weigh in on the effect of the All Blacks’ loss on the national psyche.

I haven’t been able to track down a copy of the NCIWR report, so I can’t comment on its relevance, but anecdotal evidence alone that domestic violence goes up after an All Blacks game isn’t enough. This is because All Blacks games tend to happen on the weekend, and it’s possible that domestic violence always goes up on weekends anyway. Moreover, domestic violence will fluctuate randomly from week to week, so to suggest that the All Blacks are having an effect on domestic violence, we need to be able to prove that the any increase in incidents (after adjusting day of the week, and any other known factors) is more than can be explained by random variation.

The fact is that most of the data that we see is influenced by many factors, so show that a one-off occurrence has an effect, we need to make the necessary adjustments for other known influences.

In the same way, the most recent Molesworth and Featherston newsletter goes out on a limb when it claims: “New Zealand has been dumped out of the world cup four times now. Each time, our economy has accelerated in the following quarter. We have won the world cup once – in 1987, immediately before the stockmarket crashed.”

While they’re being flippant, we can’t automatically conclude that the All Blacks are helping the New Zealand economy because the World Cup tends to be held right before Christmas, when the economy peaks anyway.

It’s often said that “there are lies, damned lies, and statistics”. Statistics aren’t bad in and of themselves, but they can be bad when they’re used wrongly. I’d prefer it if we acknowledged that there are “lies, damned lies, and bad statistics”.


Update: The Dom doesn’t fail to deliver:

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