I have sometimes expressed here my frustration over the disconnection between research and reality. The scientific process is about trying to explain some data. Any paper that just tries to see what could result from a model without looking at data or restrict parameter value in any way is useless. What do we learn if a model tells us anything could happen with some parameter values, but the authors are not capable of telling us in which range those parameter values lie? And what use is a model that is not, or worse cannot, be tested in any way?
Harald Uhlig opines on the relationship of Economics and reality from four different angles. The first is Economics as a science, where he has largely the same arguments as me above. Economics is also an art, as it is vain to find a great unified theory of Economics, as life is too complicated. One can only hope to explain observations in batches, and then the most elegant theory wins. But that theory still has to be tested against data, at least for the observations at hand.
Economics is also rhetoric. Indeed, convincing others is a big part of the success of a theory, and how that theory does with explaining the data is unfortunately not always central. This competition of ideas also spills over into politics, as Economics is in the end about giving policy advice. And this is where data and empirical relevance becomes the least important.
Uhlig then goes on to relate this to various aspects of macroeconomics. While there is much introspection in macroeconomics these days, I wish he would have defined Economics to be broader than that. Some areas of Economics need indeed to be much more closely related to data and trying to explain empirical observations. Game theory would be a prime example. public economic theory as well, if not much of microeconomic theory. Mainstream macroeconomic theory has always tried to relate to data, which is probably why it has changed over the decades: some crucial facts have changed.
Triple-blind refereeing
Until it became too easy to find research papers on the Internet, the norm in academic publishing was to subject any journal submission to a double-blind refereeing process. The author does not know the referee, and vice-versa. Most, but not all journals have abandoned the double-blind for single-blind, as referees can figure out anyway who the author is. Well, most of the time.
And now the new concept, triple-blind refereeing, where the editor does not know who the referee is. Indeed, I got a paper to referee under my nom de plume. And I just cannot figure out who the author is.
Why would the editor choose me? Indeed, what are the chances that the paper's topic would fall in my research competences? While I do something like refereeing on this blog, and I have written on this topic, it is not like I can claim to be an expert on every topic, or even on any topic. And the paper is certainly not that bad that the editor just expects me to trash it and help get it out of the pile.
Maybe the editor could just have waited for me to discuss it here. But wait, the paper is not available on the Internet, so I would never see it. Yes, that is the ticket: the editor lost patience waiting for my comments.
Anyway, I will referee this one, just because of the unique situation. I will do my best to write a good referee report. But I cannot promise I will write more referee reports under my pen name. What would be in it for me? Writing a report anonymously to both author and referee, and the report remains forever secret, even the fact that I wrote it? And no, I will not publish it here. I do not take suggestions on what I should write about.
And now the new concept, triple-blind refereeing, where the editor does not know who the referee is. Indeed, I got a paper to referee under my nom de plume. And I just cannot figure out who the author is.
Why would the editor choose me? Indeed, what are the chances that the paper's topic would fall in my research competences? While I do something like refereeing on this blog, and I have written on this topic, it is not like I can claim to be an expert on every topic, or even on any topic. And the paper is certainly not that bad that the editor just expects me to trash it and help get it out of the pile.
Maybe the editor could just have waited for me to discuss it here. But wait, the paper is not available on the Internet, so I would never see it. Yes, that is the ticket: the editor lost patience waiting for my comments.
Anyway, I will referee this one, just because of the unique situation. I will do my best to write a good referee report. But I cannot promise I will write more referee reports under my pen name. What would be in it for me? Writing a report anonymously to both author and referee, and the report remains forever secret, even the fact that I wrote it? And no, I will not publish it here. I do not take suggestions on what I should write about.
Differentiated carbon taxation
In the face of pollution externalities, there is no doubt that carbon taxes are the best solution. What is more tricky is to establish the level of those taxes. A particular aspect of this is whether carbon taxes need to be differentiated across countries. For example, should it be the same in developed and developing economies? For context, see the current riots and strikes in Nigeria after the removal of fuel subsidies.
Antoine d’Autumne, Katheline Schubert, Cees Withagen take on the question at an international level and argue that that optimal tax design would call for differentiated taxes with lump-sum transfers across countries. While the tax has a world-wide component, the country-specific one stems from local externalities, of course, and from the distortions from cost of public funds. If lump-sum transfers are not possible, international inequities would also have to be captured by differentiated taxes. So, yes, rich countries do need to tax carbon more, even probably even much more than poor ones.
Antoine d’Autumne, Katheline Schubert, Cees Withagen take on the question at an international level and argue that that optimal tax design would call for differentiated taxes with lump-sum transfers across countries. While the tax has a world-wide component, the country-specific one stems from local externalities, of course, and from the distortions from cost of public funds. If lump-sum transfers are not possible, international inequities would also have to be captured by differentiated taxes. So, yes, rich countries do need to tax carbon more, even probably even much more than poor ones.
On advances in econometric orthography
Economists use jargon, and the origin of that jargon is sometimes nebulous. Most of the time, we borrow existing words and twist their meaning. But also create new words, especially in econometrics where new acronyms keep popping up and are used as words. And in some cases, words change.
Alfredo Paloyo takes the case of "heteroskedasticity" or "heteroscedasticity" and its varying orthography over time. I am myself confused about which is the right way to write it and have been inconsistent in the past. My confusion appears justified: spelling this word goes through fads, as documented by parsing through the Google book library. The second spelling was most popular until 2001, and the second is mostly preferred since. What is puzzling is that "homoscedasticity" dominates by a wide and persistent margin "homoskedasticity," indicating that authors are rather inconsistent in their spelling. For adjectives, "c" dominates "k" widely as well. What is then so special about "heteroskedasticity?" Paloyo mentions the impact of a few influential papers using that spelling. But that does not explain the inconsistencies.
Alfredo Paloyo takes the case of "heteroskedasticity" or "heteroscedasticity" and its varying orthography over time. I am myself confused about which is the right way to write it and have been inconsistent in the past. My confusion appears justified: spelling this word goes through fads, as documented by parsing through the Google book library. The second spelling was most popular until 2001, and the second is mostly preferred since. What is puzzling is that "homoscedasticity" dominates by a wide and persistent margin "homoskedasticity," indicating that authors are rather inconsistent in their spelling. For adjectives, "c" dominates "k" widely as well. What is then so special about "heteroskedasticity?" Paloyo mentions the impact of a few influential papers using that spelling. But that does not explain the inconsistencies.
Why India should let engineers and doctors emigrate
One of the great frustrations of developing economies is that they spend scarce resources follow everyone's advice by educating their brightest citizens only to see them leave the country for greener pastures. And those pastures are mostly developed economies, where immigrants from the third world are often better educated than the locals. Is it still worth it to push higher education in developing economies?
Yes, would say Oded Stark and Roman Zakharenko. They base this on a simple two sector growth model. One sector, the "engineers," is productive to the point of exerting a positive externality on total factor productivity. The other, the "lawyers," does not. Workers can choose how much education to get and which career to pursue. Once you allow emigration, the general level of human capital increases, as the prospects of a foreign standard of living is a strong incentive to stay longer in school. The interesting part is that everyone is better off: engineers are better and lawyers are fewer. And such a result is not just abstract theory. I reported before on empirical examples of beneficial brain drain, for example in Fiji or Finland.
Yes, would say Oded Stark and Roman Zakharenko. They base this on a simple two sector growth model. One sector, the "engineers," is productive to the point of exerting a positive externality on total factor productivity. The other, the "lawyers," does not. Workers can choose how much education to get and which career to pursue. Once you allow emigration, the general level of human capital increases, as the prospects of a foreign standard of living is a strong incentive to stay longer in school. The interesting part is that everyone is better off: engineers are better and lawyers are fewer. And such a result is not just abstract theory. I reported before on empirical examples of beneficial brain drain, for example in Fiji or Finland.
The corporate tax Laffer curve
Given the mobility of the headquarters of financial holding firms, there is much more diversity in corporate tax rates than tax competition would call for. Looking at OECD countries, the effective tax rate peaks at 40% in Japan and the US, while it is half this, or below, in other countries. Given the high mobility, would it be government revenue maximizing to reduce the tax rate in the US or Japan? In other words, are these two countries to the right of the Laffer curve peak?
Kazuki Hiraga asks this question for Japan, but in a closed economy, thus ignoring international tax competition. Japan is still on the wrong side of the corporate tax Laffer curve. Decreasing the tax not only increases tax revenue, it leads to more growth through stronger capital accumulation. Add tax competition, and you have even better reasons to cut the corporate tax rate. Hence, the argument likely also applies to the US.
But wait a moment, let us have a look at the model. It is a standard real business cycle model with various distortionary taxes. The collected revenue is rebated in lump-sum fashion to households, which own the firms. In other words, this is a model where taxes a never optimal. Indeed, nothing useful is done with tax revenue, and there is no redistribution going on. No need for fancy solution techniques to understand the results...
Kazuki Hiraga asks this question for Japan, but in a closed economy, thus ignoring international tax competition. Japan is still on the wrong side of the corporate tax Laffer curve. Decreasing the tax not only increases tax revenue, it leads to more growth through stronger capital accumulation. Add tax competition, and you have even better reasons to cut the corporate tax rate. Hence, the argument likely also applies to the US.
But wait a moment, let us have a look at the model. It is a standard real business cycle model with various distortionary taxes. The collected revenue is rebated in lump-sum fashion to households, which own the firms. In other words, this is a model where taxes a never optimal. Indeed, nothing useful is done with tax revenue, and there is no redistribution going on. No need for fancy solution techniques to understand the results...
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