Economics for the Masses

[Vlerchan]

I decided to make a blog. But it's not a blog because no-one reads those. ITT I'm going to make posts about particular economic papers and events that I find interesting - and then if I'm feeling mean pluck out and discuss other posts made on VT about economics that I find particularly awful. To make things more fun I'm going to link to something degenerate at the end of each post. Feel free to comment: argue and ask questions. It's going to be an obvious reflection of current research interests. Sounds fun? Probably not. But whatever.

So let's start.

We study the long run effects of one of the most ambitious regional development programs in U.S. history: the Tennessee Valley Authority (TVA). Using as controls authorities that were proposed but never approved by Congress, we find that the TVA led to large gains in agricultural employment that were eventually reversed when the program's subsidies ended. Gains in manufacturing employment, by contrast, continued to intensify well after federal transfers had lapsed - a pattern consistent with the presence of agglomeration economies in manufacturing. Because manufacturing paid higher wages than agriculture, this shift raised aggregate income in the TVA region for an extended period of time. Economists have long cautioned that the local gains created by place based policies may be offset by losses elsewhere. We develop a structured approach to assessing the TVA's aggregate consequences that is applicable to other place based policies. In our model, the TVA affects the national economy both directly through infrastructure improvements and indirectly through agglomeration economies. The model's estimates suggest that the TVA's direct investments yielded a significant increase in national manufacturing productivity, with benefits exceeding the program's costs. However, the program's indirect effects appear to have been limited: agglomeration gains in the TVA region were offset by losses in the rest of the country. Spillovers in manufacturing appear to be the rare example of a localized market failure that cancels out in the aggregate.

Kline, P. and Moretti, E., 2013, Local Economic Development, Agglomeration Economies, and the Big Push: 100 Years of Evidence from the Tennessee Valley Authority, NBER Working Paper No. 19293. (http://ceg.berkeley.edu/research_28_2916353443.pdf)

The TVA was big enough that people in Ireland doing leaving cert geography - not me: thank god - have to do a case study on it. If I'm quite honest I'm not exactly sure what happened other than lots of gvt. that served as a grand impetus for industrialisation. But it was big so two economists I've never heard of before decided to analyse its impact - and there's a number of quite important conclusions reached. The first is that the rate of depreciation of investment in agriculture is quite high. Once subsidies were eliminated productivity in agriculture descended back towards pre-subsidy levels quite rapidly, wealth in the sector contracted. That means government stimulus directed towards agriculture is awful and backwards from an economic perspective.

The second is in regards to [manufacturing], which unlike agriculture continued to expand at a significant rate after subsidies were removed: there didn't seem to be tendencies towards a contraction to pre-subsidy levels of productivity in manufacturing. This raises the question of whether multiple equilibria exist. That means some endogenous cause might result in the 'natural' level of productivity shifting upwards, to a new higher state. In such a case, spending would activate factors that might become self-reinforcing or something to that effect. Unfortunately, for us filthy statists this paper doesn't quite support that conclusion.

However, what it does support is that once some minimum level of industrialisation is reached, that the stimulative impact becomes quite embedded, the rate of depreciation is quite low. It can takes decades-upon-decades, it still hasn't in the researched case, for the impact to wane. In such a case it makes little practical difference as to whether or not multiple equilibria exist. It might lead to reduced growth in the income of future generations but in the lead-up household incomes for the current generation receive quite a boost. It's hard to state to relevance of this in developed countries where comparative advantage dictates de-industrialisation but the implications for developing countries are quite significant and pose an argument for aid-induced investment.

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So are people interested at all? I'm open to discussing topics that other people choose.

Soundtrack: Typical Cats - Zulu (https://www.youtube.com/watch?v=Amdj44Iy7NQ)

[Porpoise101]

Do elasticity of housing please. It is relevant for the refugee situation in Europe

[Judean Zealot]

Don't think I'll have much to contribute (yet), but reading about it is fascinating

[Capto]

I'm a mass. I have no clue how economics works.

Teach me, sensei.

[sqishy]

All I know is you know much more about these sort of things than I do

As a side note, I did LC Geography last year, ended up getting a B3 even though I thought I did great, which goes against the trial exam where I thought I did not do great at all even though I got an A1. Not that it matters anymore :]

[dxcxdzv]

As an economist (student) myself, I'd love to read you.
I've not really the time to respond to your post, especially because I'm drunk, but I'll do it.

[phuckphace]

what's up with Dutch disease? pls respond as this is relevant to my future regime's economic policy

[Vlerchan]

Do elasticity of housing please. It is relevant for the refugee situation in Europe
I'll write up a response for this when I've time at the weekend if that's fine.

In short refugees congregating in an area tend to cause housing prices in that area to slump. But for housing prices to slump it would require that demand is redirected elsewhere. Or that's what I would imagine. I'll have a look into the literature at the weekend though and have a proper, well-sourced argument for then. [It's also worth noting that this is considering the short-run. Refugees provide a shock to the market. But in the long-run housing prices can be expected to adjust and stabilise at, or at least towards, a neat and sustainable equilibrium.]

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Being honest, as a disclaimer, real estate economics is also far outside my area of expertise. I understand neoclassical microeconomics and basic behavioural economics, but the time and spatial dynamics involved in real estate economics makes it weird.

what's up with Dutch disease? pls respond as this is relevant to my future regime's economic policy
The US produces steel and the steel is denominated in USD [US dollars]. In order to purchase steel importing nations are required to purchase USDs first and then use these USDs to purchase steel. If - say - the demand for steel was to undergo a steep increase and the price went up then people would be required to purchase more USDs. This - in turn - would make USDs more expensive.

Because USDs are more expensive it's the case that - say - US coal becomes comparatively more expensive and demand slumps.

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Edit: I've decided an easier example that might help disentangle commodity and currency demand. Importing nations must purchase USDs before these nations can import a basket of goods that make up the US national product. Imagine that oil is introduced to this basket of goods - and there's a sudden resultant heightening of demand for US national produce as a whole in USD-terms. This would involve countries purchase more USDs and that would in turn make USDs more expensive.

To importers it would then seem that US basket of [non-oil] goods has become more expensive and there's an incentive to swap to alternatives.

I've not really the time to respond to your post, especially because I'm drunk, but I'll do it.
Sure. I think we disagree on most things [I'm a New Keynesian, being way too broad] so it might be fun.

I'm a mass. I have no clue how economics works.

Teach me, sensei.
On this, I was thinking of doing a number of educational lecture-style posts on macroeconomics.

Would people be interested?

[Capto]

If you have the time to and the patience to deal with some stupid questions (here, hi!), then I'd definitely be interested.

[Vlerchan]

Refugees and Housing Prices

I misremembered the scope of that earlier mentioned paper. It just dealt with immigrants and not just refugees in particular. But I had a look around and couldn't find a better paper. This one - in particular - is good because it adjusts for immigrants tending towards the most prosperous areas - and as such the areas with the highest rate of increase in the price of houses.

I wasn't able to find a good paper on increasing immigrant densities and housing price increases in either Germany or Sweden.

This article studies the effect of immigration on house prices in the UK. It finds that immigration has a negative effect on house prices and presents evidence that this negative effect is due to the mobility response of the native population. Natives respond to immigration by moving to different areas and those who leave are at the top of the wage distribution. This generates a negative income effect on housing demand and pushes down house prices. The negative effect of immigration on house prices is driven by local areas where immigrants have lower education.

Sá, F., 2014, Immigration and House Prices in the UK, The Economic Journal, 125(587), pp. 1393 - 1424. (http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12158/abstract)

In the paper Sá constructs a model that attempts to track the percentage increase in housing prices from the introduction of low income immigrants. He determines that an increase in 1% of the immigrant population reduces local housing prices by 1.7%. This he puts down to higher earners [the people that can afford to] leaving the area in-face in the increased densities of immigrants. However this does not seem to impact the wage levels or unemployment levels of the natives that remain in that local economy (e.g., Dustmann et al. 2005).

It's worth noting that the decrease in local housing prices corresponds positively to the education levels of the immigrants. "For regions where the share of immigrants with lower education is low (quartiles 1 and 2), immigration has no significant effect on house prices. The effect becomes negative and significant as the share of immigrants with lower education increases. The IV results suggest that a change in the stock of immigrants equal to 1%of the initial local population reduces house prices by 1.3% for local authorities in quartile 3 and by 1.9% for local authorities in quartile 4."

The author uses education as opposed to wages in the regression in order to avoid counting unobserved factors that might influence both wages and house prices. It was noted in the text that immigrants don't seem to have a significant impact on crime levels or the state of the housing stock.

I unfortunately couldn't find papers on demand overspills. I would imagine an increase in immigration densities would result in increases in the prices for houses in the top quartile. Though it's arguable in-line with Dustmann et al. (2013) that since high-earners tend to gain an income boost from the increase in immigration densities an increase in the price of houses for high-earners is at least somewhat justified.

It suggests that housing supply is particularly inelastic in these countries [inc. United Kingdom], translating into poor supply responses to demand shocks and strong rises in house prices (e.g. André, 2010; Barker, 2004; Vermeulen and Rouwendal, 2008). Vermeulen and Rouwendal (2008) also find that housing supply in the Netherlands hardly responds to prices in the long-run. For the United Kingdom, Swank et al. (2002) report a low elasticity of supply of 0.45 over 1976 to 1999 using the number of permits as a measurement of new housing supply.

Sancház, A. and Johansson, Å., 2011 The Price Responsiveness of Housing Supply in OECD Countries, OECD Economics Department Working Papers, No. 837, OECD Publishing, pp. 21. (http://www.oecd-ilibrary.org/docserver/download/5kgk9qhrnn33.pdf?expires=1442687980&id=id&accname=guest&checksum=943E196BC9F87818EB8076A7BF057154)

In the study the elasticity of supply is actually listed as 0.395%.

What does that mean? It means that a 1% increase in the price of a house results in a 0.395% increase in the expansion of the housing stock. That means that when immigrants cause a demand shock the impact on high-earners is semi-permanent. I should mention though that the value should be met with scepticism since it's a value for the market as a whole and not the upper-quartile. It's possible that results might differ somewhat there: not a huge amount though - I would imagine: but I don't have the data.

It's worth noting that the value for Sweden is 1.381% and for Denmark is 1.206%. Yes - that does mean that in these countries the stock expands a greater amount that an increase in demand might suggest and housing prices fall. In Germany - however - the value is just 0.428.

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Ok. So I think I'll wrap it up there. One final note on the above is that I've documented a rough estimate. That's in-large national aggregates - and in the UK's case the refugees will be shifted to the poorer north of England. I would imagine that housing prices will be much less affected because of the lower density of high levels earners. But it's a general picture.

Thanks for the question though. It was interesting to read over since it's an area I've real limited experience in.

Atmosphere - 1597 (https://www.youtube.com/watch?v=7i3wE2M1BBI)

[Porpoise101]

That is interesting as that is what is happening in the US as more white people move to the so-called "Exurbs" as more and more Asians and Hispanic people move to the suburbs.

[Vlerchan]

I haven't forgotten this. I've just started back at college and not have the same amount of time to spare. I've decided I might give writing those lectures a go though. I'm going to begin with demand. That's a microeconomic concept - but I feel that before we can begin to discuss macroeconomics these foundations are needed. I will be including mathematical explanations alongside the verbal explanations but it's simple maths that most people shouldn't struggle with.

http://www.amosweb.com/images/MkDm33.gif

That's a demand curve. It represents the various prices a consumer is willing to demand various amounts of a good at. In diagrammatic terms this can be measured through tracing a line for some price P to the curve and then downwards towards the relevant quantity Q. I'll demonstrate in a moment that means of determining this through mathematics. It's written in the form:

(1) P = C - M(Qd)

Where P refers to Price and Qd refers to Quantity Demanded. C represents what's termed the chokepoint. In our simple expression when P = C then Qd must equal zero*. M represents the slope of the line: the price reduction required in order to increase demand another unit. Simple right. Let's then use this expression to find the Qd as demanded at some price. I'll use the information from the graph I posted. So let C = 50 and M = 0.5 and then we'll set P to 30.

(2) 30 = 50 - 0.5(Qd)
(3) - 20 = - 0.5(Qd)
(4) - 20 / - 0.5 = Qd = 40

It's that simple - In the most simple form these expressions can be dealt with of course. Next we'll look at demand functions. that is - we're going to flip the graph on it's side and examine the determinants of Qd. In such a case.

(5) Qd = C - MP

(6) P = 50 - 0.5(Qd)
(7) 0.5(Qd) = 50 - P
(8) Qd = 50*2 - P*2 = 100 - 2P

Except let's introduce some new variables that might influence demand. This is a demand function.

(9) Qd = 100 - 2P + 2Ps - 2Pc - 2I

Let Ps refer to the price of substitute goods and Pc refer to the price of compliment goods and I refer to income. Substitutes are goods that a reasonable person might see as being able to replace the good in demand - take sugar and whatever that awful diet shit is called. Compliments are goods that a reasonable person might use in tandem with the good in demand - take golf clubs and golf balls. It's possible to use partial differentiation to then determine if an increase in - take - I is going to result in a increase or decrease in Qd.

Because I don't want to presume that: from here we'll just take a look at the signs. If it's a minus sign (-) then Qd will fall as the coefficient rises - and if it's a plus sigh (+) then Qd will fall as the coefficient falls.

(10) P = 50 - 0.5(Qd) + Ps - Pc - I

Back to our demand curve. This is where it gets a tad more complicated. In such a case that we begin to consider the variables listed a moment ago we must begin to reconsider the shape it takes. I claimed above that when P equals C then Qd must equal zero. That's not true outside the strictest of assumptions as is visible from here.

(11) Let Qd = 0
(12) P = C - 0.5(0) + Ps - Pc - I
(13) P = C + Ps - Pc - I

It's the case that unless Ps + Pc - I [hereafter: X] equals zero then the P at which Qd equals zero is either shifted upwards or downwards. So if X > 0 then there is an upwards shift of the demand curve - and vice-versa. This holds for the sum of its parts. For example - if we have an increase in the price of substitute goods then there will be an upwards shift in the demand curve. I hear it: Jesus Christ Vlerchan: is there going to be some non-obvious material spoken about?

Not in this post - but the material here is still worth considering as it's of fundamental importance to more or less the entire science of economics.

In the next number of posts I'm going to hold to this theme and discuss (i) supply and (ii) comparative statics - the determination of P and Qd in markets at equilibrium. If we can grasp that I can move onto the more complicated issues of (iii) elasticities and (iv) market interventions. The latter can be done through calculus so if those interest can indicate whether differential calculus - inc. partials - and definite integral calculus is known that would be helpful. I can do it through algebra - It's just a lot neater through calculus.

Until then I leave just two questions I want to see if people can work out.
Q1. Construct an expression for a simple supply curve.
Q2. There's something at first glance that might just appear odd in (9). I have continued to include this throughout the post. What is it - and for what reason might it appear?

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* I can do that out real quick if required.

[Asaf Avidan - One day / Reckoning Song (Wankelmut Remix)] (https://www.youtube.com/watch?v=KRAMNWzfjcg)

[Judean Zealot]

Give me some good PDFs. You owe me for Introduction to Phenomenology. :P

[Vlerchan]

Give me some good PDFs.
Is there a topic in mind? I can just start throwing up interesting papers if there isn't mind you.

You owe me for Introduction to Phenomenology. :P
Supply your present wants and take no doit
Of usance for my moneys, and you'll not hear me:
This is kind I offer.

(1.3)

[Judean Zealot]

Is there a topic in mind? I can just start throwing up interesting papers if there isn't mind you.

Anything interesting. :D


Supply your present wants and take no doit
Of usance for my moneys, and you'll not hear me:
This is kind I offer.


O Father Abram, what these Christians are,
Whose own hard dealings teaches them suspect
The thoughts of others!

:P

[Vlerchan]

Anything interesting.
Here's what I read yesterday; concerned savings, mostly.

Cronqvist and Siegel (2010), The Origins of Saving Behaviour. (http://www.usc.edu/schools/business/FBE/seminars/papers/F_9-3-10_CronqvistSiegel10.pdf) [@phuckphace: it's chasing genetic implications].
Madrian and Shea, (2001), The Power of Suggestion: Inertia in 401(K) Participation and Savings Behaviour (http://www.retirementmadesimpler.org/Library/The%20Power%20of%20Suggestion-%20Inertia%20in%20401(k).pdf).
Thaler and Benartzi (2001), Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving. (https://faculty.chicagobooth.edu/Richard.Thaler/research/pdf/SMarTJPE.pdf)
Choi, et al., (2003), Active Decisions: A Natural Experiment in Saving. (http://cep.lse.ac.uk/seminarpapers/14-10-03-LAI.pdf)

Eric Johnson, et al., (1993), Framing Probability Distortions and Insurance Decisions (https://www8.gsb.columbia.edu/decisionsciences/sites/decisionsciences/files/files/Framing_Probability_Distortions-3.pdf).
Tai Hsieh and Moretti, (2015), Why Do Cities Matter? Local Growth and Aggregate Growth. (http://faculty.chicagobooth.edu/chang-tai.hsieh/research/growth.pdf)

I also discovered this reading list (http://ocw.mit.edu/courses/economics/14-581-international-economics-i-spring-2013/readings/) this morning and imagine between that and attempting to learn code it'll be my Christmas break.