More by training than for any sense of conviction, I belong to the rat choice and quant camp. My training as an economist gave me a set of analytical tools, which I use as often as I can to make sense of the world. A lot of things remain beyond the grasp of those tools–but they are helpful tools on any case.

Every now and then I face four kinds of charges–actually, so often that I almost have instant replies. Let’s see:

1. They (we) are irrational! Your ratchoice models are useless because people are not/not always/not very rational.

Granted, for every definition of rationality you have one can find 100 people behaving irrationally. My preferred definition of rationality implies either cost-minimizing or consistent (ie, transitive) behavior or both. But the strength of the rationality assumption and that of ratchoice theories is a matter of a) degree and b) consistency.

Degree: As long as people behave relatively more in cost-minimizing ways than in haphazard ways, rat choice models will be useful to explain such behavior. Consistency: even if we admit/assume that people are irrational, any decent explanation of such behavior has to be consistent/logic/rational. If not, how could you distinguish between an “irrational theory” of any behavior and a “bogus/just-so” story about that same behavior?

Actually, a favorite hobby of mine is to read or listen supposedly anti-rat choice people offer their theories and evidence, and then try to find the devilish little ratchoice model implicit in their argumentation… and guess what, it is always there more often than you (or they) think.

The typical shape of the anti-rat choice argument goes like this: “well, ratchoice theory A predicts outcome Y1… but as it turns out outcome Y2 ocurred, why? Because silly-theory A neglected the role of key missing/unobservable variable X. Once you consider my theory, which includes a subjective/qualitative valuation of variable X, it is obvious that outcome Y2 had to occur…” What this line of argument forgets to mention is that “ratchoice theory A + mysterious variable X” (call it theory A’) still is (or can be construed as) a ratchoice theory.

I am NOT saying that any theory is a ratchoice theory, just that a lot of supposedly non-ratchoice theories are actually pretty close to ratchoice theories–with different keywords and no equations. The fear of using mathematical or even functional language to make theoretical arguments is dumbfounded: math is just another language, a strict and picky one indeed. Some arguments are easier to make with math and some others with prose… but they are not mutually excludable. Ok, there is an exception: it is easier to spot logical inconsistencies in a simple math model than in a 100 page narrative.

An extreme version is harder to tackle: “See, people are irrational, hence the world is unpredictable. Want evidence? Just look how Y1 happens sometimes while Y2 also happens other times! I am telling you those ratchoice empiricists know nothing!” The most extreme case: “Why are you so deterministic? Why do you want to explain anything at all to begin with?” I have not figured out a reply to any of these…

These are the other three typical charges:

1) It’s a qualitative-world! Your quantitative methods are useless because not everything is measurable nor observable.
Quick reply: Granted, everything is up for grabs in the quali-land. But why should I give more credit to your subjective interpretation of the world than the one you give to my subjective choice of variables to measure it?

3) Nothing new! Ok, you measured something but you are only proving something that “everybody knew already”.
Quick reply: I am pleased that my findings corroborate your priors, and I hope you update them accordingly. By the way, did you have an estimate of the magnitude of this impact in this particular context too? Did you know the particular cases where this correlation does/does not hold? I didn’t before, but I do now.

4) No causality! Ok, you found a significant correlation but you have not demonstrated causality.
Quick reply: Stats will never prove causality–that is not its job. Sensible theory + evidence based on decent research design = closer to causality. What is your rival theory? What kind of evidence would you like to see to convince you? Is that evidence feasible at reasonable cost? Do you apply those same standards to your own work?

More later.

…Apparently, this legislator was so good at policymaking that he knew about the economic efficiency of non-linear pricing:

The rate dropped to $25,000 per additional million once the contract went above $20 million.”

Does Culture Affect Economic Outcomes?
by Paola Sapienza, Luigi Zingales – #11999 (CF EFG)

Abstract: This paper establishes that a low dimensional vector of cognitive and
noncognitive skills explains a variety of labor market and behavioral
outcomes. For many dimensions of social performance cognitive and
noncognitive skills are equally important. Our analysis addresses the
problems of measurement error, imperfect proxies, and reverse
causality that plague conventional studies of cognitive and
noncognitive skills that regress earnings (and other outcomes) on
proxies for skills. Noncognitive skills strongly influence schooling
decisions, and also affect wages given schooling decisions.
Schooling, employment, work experience and choice of occupation are
affected by latent noncognitive and cognitive skills. We study a
variety of correlated risky behaviors such as teenage pregnancy and
marriage, smoking, marijuana use, and participation in illegal
activities. The same low dimensional vector of abilities that
explains schooling choices, wages, employment, work experience and
choice of occupation explains these behavioral outcomes.
http://papers.nber.org/papers/W12006

Democracy and Development: The Devil in the Details
by Torsten Persson, Guido Tabellini  –  #11993 (EFG)

Abstract: Does democracy promote economic development? We review recent
attempts to address this question, which exploit the within-country
variation associated with historical transitions in and out of
democracy.  The answer is positive, but depends — in a subtle way —
on the details of democratic reforms.  First, democratizations and
economic liberalizations in isolation each induce growth
accelerations, but countries liberalizing their economy before
extending political rights do better than those carrying out the
opposite sequence.  Second, different forms of democratic government
and different electoral systems lead to different fiscal trade
policies: this might explain why new presidential democracies grow
faster than new parliamentary democracies.  Third, it is important to
distinguish between expected and actual political reforms:
expectations of regime change have an independent effect on growth,
and taking expectations into account helps identify a stronger growth
effect of democracy.
http://papers.nber.org/papers/W11993

How’s Your Government? International Evidence Linking Good
Government and Well-Being
by John F. Helliwell, Haifang Huang  –  #11988 (EFG)

Bush has just nominated Ed Lazear to replace Bernanke–who is about to take office at the Fed in lieu of Greenspan–at the Council of Economic Advisors.  You can say anything about dubya’s wisdom on other issues but as far as his CEA nominations go, his record is remarkable: Mankiw, Bernanke, and now Lazear–are all truly heavy-weights of our profession.  It is also interesting that Lazear, a microeconomist, takes the place of Mankiw and Bernanke, both macroeconomists. 

One favorite Lazear piece–which surely pisses off many of my non-economist colleagues–is “Economic Imperialism” (QJE, 2000).  Yes, it is a bit (a lot?) pedantic but that does not make it any less true.

“The power of economics lies in its rigor. Economics is scientific; it follows the scientific method of stating a formal refutable theory, testing the theory, and revising the theory based on the evidence. Economics succeeds where other social sciences fail because economists are willing to abstract. The old joke about a stranded, starving economist assuming a can opener to open a can of food pokes fun at our willingness to assume away what we believe to be unimportant or difficult details. Economists are used to posing the counterfactual question to do analysis. What would one expect in the absence of the hypothesized effect? What would be observed? Do the data allow us to choose between various hypotheses? Economists are not alone among social scientists in following this method, but this form of inquiry has become the standard for economic research.

It is the ability to abstract that allows us to answer questions about a complicated world. As economists, however, we believe in comparative advantage. I have argued elsewhere that the strength of economic theory is that it is rigorous and analytic. But the weakness of economics is that to be rigorous, simplifying assumptions must be made that constrain the analysis and narrow the focus of the researcher. It is for this reason that the broader thinking sociologists, anthropologist and perhaps psychologists may be better at identifying issues, but worse at providing answers. Our narrowness allows us to provide concrete solutions, but sometimes prevents us from thinking about the larger features of the problem. This specialization is not a flaw; much can be learned from other social scientists who observe phenomena that we often overlook. But the parsimony of our method and ability to provide specific, well-reasoned answers gives us a major advantage in analysis.”

Modeling Inefficient Institutions
by Daron Acemoglu – #11940 (EFG)

Abstract: Why do inefficient — non-growth enhancing — institutions emerge and persist? This paper develops a simple framework to provide some answers to this question. Political institutions determine the allocation of political power, and economic institutions determine the framework for policy-making and place constraints on various policies.
Groups with political power, the elite, choose policies to increase their income and to directly or indirectly transfer resources from the rest of society to themselves. The baseline model encompasses various distinct sources of inefficient policies, including revenue extraction, factor price manipulation and political consolidation. Namely, the elite may pursue inefficient policies to extract revenue from other groups, to reduce their demand for factors, thus indirectly benefiting from changes in factor prices, and to impoverish other groups competing for political power.
The elite’s preference over inefficient policies translates into inefficient economic institutions. Institutions that can restrict inefficient policies will in general not emerge, and the elite may manipulate economic institutions in order to further increase their income or facilitate rent extraction.
The exception is when there are commitment (holdup) problems, so that equilibrium taxes and regulations are worse than the elite would like them to be from an ex ante point of view. In this case, economic institutions that provide additional security of property rights to other groups can be useful. The paper concludes by providing a framework for the analysis of institutional change and institutional persistence.
http://papers.nber.org/papers/W11940

Some other interesting NBER papers:

The Quiet Revolution that Transformed Women’s Employment, Education, and Family
by Claudia Goldin #11953
http://papers.nber.org/papers/W11953

The Long Run Impact of Bombing Vietnam
by Edward Miguel, Gerard Roland #11954 (EFG)
http://papers.nber.org/papers/W11954

The Evolution of Top Incomes: A Historical and International Perspective
by Thomas Piketty, Emmanuel Saez #11955 (PE)
http://papers.nber.org/papers/W11955

The U.S. Health Care System and Labor Markets
by Brigitte Madrian #11980 (AG HE LS PE)
http://papers.nber.org/papers/W11980

The Median Voter and the Median Consumer: Local Private Goods and Residential Sorting
by Joel Waldfogel #11972 (IO)
http://papers.nber.org/papers/W11972

I lived for about four years in the U.S. and it took me a while to understand their left-right dimension. In Mexico it would take an exceptionally apt candidate to make me vote for the lefty PRD (or similar)–oddly enough, if I was an US citizen I can see myself voting for their slightly lefty Democratic party. How come? You have to understand where the status quo and the policies preferred by the median-voter stand in each country. Comparing Europe vs. U.S. is very illustrative also:

The Other American Exceptionalism
By Gerard Alexander

Not so long ago, American conservatives seemed to be converting the world to their ideas. After the fall of the Berlin Wall, country after country abandoned socialism for free markets, embracing such Reaganite themes as incentives, individualism, and responsibility. It looked as though the sun would never set on the friends of American conservatism. Yet today, American conservatives have never felt so alone.

This is not a matter of how many people around the world like American conservatives, but of how many are like them. To be sure, many political movements don’t have counterparts in other countries. But Europe and America are politically kin, and when in the 1980s Ronald Reagan took his stands for markets and against the Soviets he found ready and stalwart allies in Margaret Thatcher, Helmut Kohl, and other indigenous conservatives. Yet all we hear of these days is the “exceptionalism of modern American conservatism.” What happened to Europe?

Finding an answer begins with a comparison of contemporary American and European conservatives, especially concerning their basic assumptions—or operating principles—about economics, foreign policy, crime, and morality.

Market vs. State

American conservatives believe that a healthy modern economy is so complex and innovative that most economic decisions have to take place in the private sector, where scattered information is located, and risk may be rewarded or punished. Government is best at enforcing rules of the game and engaging in limited redistribution. When it does much more than that, it creates inefficient regulations and bureaucracies prone to expanding rather than learning.

This basic assumption runs deep in American life, not merely because we’ve spent too much time in post office lines—everyone on earth has done that—but because we’re in a position to compare the post office to responsive, dynamic private businesses of all kinds. Many Europeans think similarly, especially business leaders, free-market activists, policy wonks, center-right politicians (including, apparently, the German Christian Democrats’ Angela Merkel), and the occasional center-left leader such as Tony Blair or Gerhard Schroeder.

But most Western Europeans fear that markets will fail to meet their needs and satisfy their interests. They maintain a faute de mieux faith that government is the indispensable actor in economic life. Even when compelled by economic crisis to trim taxes, privatize, and curb spending—that is, even while recognizing implicitly that these measures attract investment and encourage growth—European leaders rarely offer principled criticism of government intervention, much less positive rhetoric about the marketplace. (Jacques Chirac’s center-right cabinet is now privatizing state entities, not because private ownership is more efficient but primarily to cut the deficit and pay down the debt.) The European Union’s proclaimed drive to become internationally competitive is top-down and government-centered. Not surprisingly, “Thatcherite” and “neo-liberal” continue to be labels insultingly applied and hotly denied. All this is true even for several right-wing “populist” parties, such as France’s National Front, which calls occasionally for tax limitation but more often emphasizes protectionism and a welfare state generous to native-born Frenchmen.

These views have not been dislodged, even by serious economic problems. And Europe’s economic problems are serious. The unemployment rate is stuck at around 10% in Germany and France, and if anything this underestimates the true figure–even more unemployment is concealed through extensive job-training and early-retirement schemes. The fact that many continental European economies have such mechanisms for sidelining less-skilled workers makes it all the more striking that labor productivity still generally grows faster in the United States. For decades, France and Germany had narrowed the gap in labor productivity with the U.S., but in the past 15 years their progress slowed and then reversed.

The result is that average U.S. per capita income is now about 55% higher than the average of the European Union’s core 15 countries (it expanded to 25 in 2004). In fact, the biggest E.U. countries have per capita incomes comparable to America’s poorest states.


If you like this much, you should read the whole thing.

Political business cycle, where are you?

How Do Budget Deficits and Economic Growth Affect Reelection Prospects? Evidence from a Large Cross-Section of Countries
by Adi Brender, Allan Drazen #11862 (EFG) http://papers.nber.org/papers/W11862
Abstract:
Conventional wisdom is that good economic conditions or expansionary fiscal policy help incumbents get re-elected, but this has not been tested in a large cross-section of countries. We test these arguments in a sample of 74 countries over the period 1960-2003. We find no evidence that deficits help reelection in any group of countries  — developed and less developed, new and old democracies, countries with different government or electoral systems, and countries with different levels of democracy. In developed countries, especially old democracies, election-year deficits actually reduce the probability that a leader is reelected, with similar negative electoral effects of deficits in the earlier years of an incumbent’s term in office. Higher growth rates of real GDP per-capita raise the probability of reelection only in the less developed countries and in new democracies, but voters are affected by growth over the leader’s term in office rather than in the election year itself. Low inflation is rewarded by voters only in the developed countries. The effects we find are not only statistically significant, but also quite substantial quantitatively. We also suggest how the absence of a positive electoral effect of deficits can be consistent with the political deficit cycle found in new democracies.

___________________________________________________________
The bizarre world of the free trade vs. free migration asymmetry in historical perspective

A Dual Policy Paradox: Why Have Trade and Immigration Policies Always Differed in Labor-Scarce Economies
by Timothy J. Hatton, Jeffrey G. Williamson #11866 (DAE ITI LS) http://papers.nber.org/papers/W11866
Abstract:
Today’s labor-scarce economies have open trade and closed immigration policies, while a century ago they had just the opposite, open immigration and closed trade policies. Why the inverse policy correlation, and why has it persisted for almost two centuries? This paper seeks answers to this dual policy paradox by exploring the fundamentals which have influenced the evolution of policy: the decline in the costs of migration and its impact on immigrant selectivity, a secular switch in the net fiscal impact of trade relative to immigration, and changes in the median voter. The paper also offers explanations for the between-country variance in voter anti-trade and anti-migration attitude, and links this to the fundamentals pushing policy.

___________________________________________________________
Let the kids monitor their teachers… with disposable cameras!

Monitoring Works: Getting Teachers to Come to School
by Esther Duflo, Rema Hanna #11880 (CH ED) http://papers.nber.org/papers/W11880
Abstract:
In the rural areas of developing countries, teacher absence is a widespread problem. This paper tests whether a simple incentive program based on teacher presence can reduce teacher absence, and whether it has the potential to lead to more teaching activities and better learning. In 60 informal one-teacher schools in rural India, randomly chosen out of 120 (the treatment schools), a financial incentive program was initiated to reduce absenteeism. Teachers were given a camera with a tamper-proof date and time function, along with instructions to have one of the children photograph the teacher and other students at the beginning and end of the school day. The time and date stamps on the photographs were used to track teacher attendance. A teacher’s salary was a direct function of his attendance. The remaining 60 schools served as comparison schools. The introduction of the program resulted in an immediate decline in teacher absence. The absence rate (measured using unannounced visits both in treatment and comparison schools) changed from an average of 42 percent in the comparison schools to 22 percent in the treatment schools. When the schools were open, teachers were as likely to be teaching in both types of schools, and the number of students present was roughly the same. The program positively affected child achievement levels: a year after the start of the program, test scores in program schools were 0.17 standard deviations higher than in the comparison schools and children were 40 percent more likely to be admitted into regular schools.

___________________________________________________________
Social interactions and social capital are NOT declining

The Demand for Social Interaction
by Henry Saffer #11881 (HE) http://papers.nber.org/papers/W11881
Abstract:
In this paper social interaction is modeled as a consumer good. Social interaction may provide an externality in the form of social capital, but the primary reason that individuals engage in social interaction is that these activities directly yield utility. It is important to note that some measures of social interaction show declines while many do not. A model of household production is employed to derive the demand for social interaction. The model shows that the demand for social interaction is a function of its price, the price of other goods and income. The role of children and marriage in social interaction can also be explained in the model. The theory is tested with data from the General Social Survey (GSS) and the results show that social interaction can be explained as the consequence of utility maximizing behavior by individuals. Increases in education generally increase memberships but reduce visiting with relatives and friends. Increases in income generally increase memberships and some forms of visiting. The model predicts 70 percent, or more, of the time trends in social interaction. These results are in contrast to social capital theorists who have focused on the declines in social interaction and who have attributed these changes to factors such as increased community heterogeneity and increased television viewing.

The first generation of CIDE students that I met is about to graduate in a few months. Some are considering grad school. I dont have particular advice for PolSci but there is good info available on Economics programs–IMO, the generic rules should not vary a lot among disciplines in top schools anyway. Here are some pointers:

1. Stanford Prof. Susan Athey’s advice on applying to economics grad school.
2. Guide to applying at www.econphd.net (with lots and lots of additional info)
3. And a nice Q&A from Davidson College:

Why go to graduate school in economics?
How long does it take to get a Ph.D. in economics?
What is a typical course of study?
What can you do with a Ph.D. in economics?
Should I get a Master’s degree in economics?
What is the Diploma in economics?
What about a Ph.D. in public policy?
Should I go directly to graduate school?
How much does graduate school cost?
What is the average salary?
How hard is it to get into a top program?
What are the admissions committees looking for?
Where should I apply? And to how many places?
What are my chances of graduating with the Ph.D.?
Where have recent economics Ph.D.’s found jobs?
What you need to be doing now?