Starbucks connect the poorest countries to the wealthiest countries. (linked from Urbanomics)

See a bigger and clearer picture here

Last weekend, I attended a classmate’s post-wedding celebration party. Usually in these occasions I chatted with classmates about useless, non-economic things, school gossips, or had dead-end conversations that began with the question, “How’s research?” Nothing stimulating.

But this time, I had a conversation with a finance PhD classmate which touched on two topics: Detroit and investment. This conversation long occupied my mind after the weekend. We started with talking about Detroit’s situation and my research on quality ladders within a country. Since he knows much about firm financial data, he gave me an extremely useful suggestion to look at the financial annual report filed by Intel to SEC for some clear evidence that strongly motivates my research. All the while I was unsure what I am doing is a real thing, the Intel statement gave me a kick in the arse. (I read it on Sunday; it was wonderful)

The second thing we talked about, and it still makes me think now, is investment. So I asked him if he invests, and whether he makes practical use of our knowledge from class. He said yes. I asked him, what works? He said, diversification. He said he tries to invest in every asset class which has low covariance against one another. I asked, even derivatives? he said yes. He does futures. I asked, somewhat dumbly, do you know what you are doing? He said, as a matter of factly, and quite confidently, “OF COURSE! I study finance!”

WAIT A MINUTE. Suddenly, I remember that I took asset pricing with him. In fact, we started our PhD program together. And except for the financial economics sequence, which he took and I didn’t (which is way easier than the PhD sequence of asset pricing), I wouldn’t think my education in that area and the tools we learned is any much different. I had taken the IO sequence, I had taken the empirical macro sequence. I had done the math with all that stochastic calculus shit.

And suddenly, it hit me — SHOULDN’T I be actively using my knowledge to make something useful out of it? Something useful….such as …..money?

I look at all these economics blogs written by MBAs and non-economists…and I listened to advices given by these personal finance planners whose economics education is probably half of mine, and I realized this:

I have this buried, taken-for-granted assumption that my knowledge of economics could not help me make money!

So now I ask myself: why is my evaluation of the worth of my knowledge so low? (and why some people in the society price it so highly)

When I was in Berkeley, I had some friends who had taken Intermediate Microeconomics with David Card, and they had often talked about how this professor kindled their passion for economics. Curious about how this professor could inspire people around me so, I went to his talk on how to do research in economics.

At the end of his talk, I went up to him to ask a question that has been bothering me. My current research approach. This is timely because I have been struggling with my thesis proposal these weeks. My adviser has been tough on my proposal, and said, “You need to go through that struggling period.” And struggled I did.

Anyway, so I asked David Card, given a circumstance like mine (I will not bore you with details here), how would he go on. He asked the following question: “Is the observation unit an agent who maximizes?” (You see, a maestro will ask questions of such specificity). He gave the answer.

I exited the room, sort of moping.

But it was very nice to have heard him speak today. He, the guy who inspired such passion for economics for Jessica and Anderson!

Basically, recently every where I look links international trade with climate. I didn’t follow the debate and now I am trying to get back onto the boat.

Meanwhile, this NYT article makes me look twice:

Trade and Climate

When leaders of the world’s richest nations and the big developing countries agreed at the Group of 8 summit this month to restart global trade negotiations, they sent a powerful signal about the need for concerted action to deal with the world’s economic emergency.

It was disturbing, however, that they could not agree on a common strategy for reducing the greenhouse emissions causing global warming. Trade and climate policy have become increasingly entangled. A failure to agree on how to address global warming could undermine half a century of opening world trade.

The House of Representatives proved the point last month when it passed a climate bill that would impose trade penalties on countries that do not accept limits on carbon emissions. Last year, the European Commission approved the idea of an “equalization” levy on imports from countries that have not agreed to cut emissions.

President Obama rightly opposed the penalties in the House bill. Unilateral sanctions are unlikely to work and more than likely to provoke a dangerous protectionist tit-for-tat trade war. Yet if the world’s biggest emitters of CO2 — including the United States, China and India — fail to reach an agreement at a meeting in Copenhagen in December, the temptation for countries that accept limits on emissions to impose unilateral sanctions on countries that do not could well become irresistible.

The main reason trade and climate change are linked is that the damage inflicted by carbon dioxide and other greenhouse gases is not mainly local or regional. If big emitters do not cut back, atmospheric concentrations of greenhouse gases will continue to rise dangerously no matter what the rest of the world does.

Moreover, without a worldwide agreement on emissions, strict limits in signatory countries would very likely lead to a fall in energy prices in countries that did not agree to cuts — encouraging even more energy consumption in those places and undermining the goal of stopping climate change.

Congress is concerned that domestic limits on carbon emissions would put American companies at a competitive disadvantage with rivals in countries with no such caps. But that is not the only problem. In the absence of a system of import duties related to carbon, industries with high emissions might relocate to nonsignatory countries to save money. Or they might fail, unable to compete with dirtier and cheaper foreign rivals.

There are precedents for using trade measures for environmental goals. The Montreal Agreement to curb the use of ozone-depleting gases included trade controls on such substances. And the World Trade Organization has suggested that levying taxes at the border on the carbon content of imports would be acceptable if they are devised properly — in the same sort of way as some consumption taxes are levied on imports, ensuring equal treatment with domestic products.

Such tariffs must be part of an international agreement on climate change. Unilateral penalties against fast-growing polluters like China and India would be seen as illegitimate and could easily backfire, scuttling chances of an agreement on climate issues. Congress must refrain from putting sanctions in its climate bill.

An international accord that includes trade-related enforcement measures must also include commitments on emission reductions all around, as well as financial aid for poorer countries, like India and China, to meet the caps without sacrificing economic growth.

Further, any deal must set clear guidelines on how to identify and quantify transgressions and establish appropriate countermeasures. It also must not open a backdoor for protectionism. Without such a deal, trade is going to have problems. Failing to conclude the current negotiations will be the least of them.

Motown is a GIGANTIC part of the history of American music. So, so, sooooo many great songs (i.e. Ain’t No Mountain High Enough, Sugar Pie, Honey Bunch, You Can’t Hurry Love, For Once in my Life, Tracks of my Tears), and so many great performers (i.e. Temptations, the Miracles, the Supremes, Stevie Wonder, Jackson 5, just to name a few) — came from motown. It’s my favorite period of music, next to 1920s-1950s big band. Not only did motown make big contributions to music, it also was one of the few things that transcended racial barriers during a period in America when black and white didn’t dine in the same restaurant.

American Idol tonight mentioned a little bit of how motown came to be — the name motown (which is a reference to a certain era of music, as well as the record label) is named after Detroit, motown’s birth place. In the 1960s, Detroit was the place for auto manufacture, and hence its nickname “Motor City.” So how come this auto town became the birth place of one of the biggest brand of music (and never moved to LA Hollywood)?

Smokey Robinson said, “All cities have the same amount of talent. But in motor town, we have Berry Gordy.”

Berry Gordy is the founder of the motown label. It all started in a garage. And from then on, the talent started coming, and the motown label just grew and grew. Gordy was the “organizer”, the inducer, of the massive talent. Perhaps it was he who paved the logistics that allowed the talent to be realized.

Is it really purely by chance that Berry Gordy happened to be in Detroit?

On a somewhat related note, is it really purely by chance that a great leader such as Lee Kuan Yew became the president in Singapore, and who became the key instrument to Singapore’s subsequent growth?

Anyway, here is a tribute to Diana Ross, queen of motown:

I have not read “The World is Flat” despite the hype around it. It has become something of a must-read for MBA-type class, or for someone picking up a book in the airport bookstore right before a flight. However, I did skim through the book in the airport. I read the content page: flattener #1, flattener #2…okay, that’s it, book closed.

So I did not read the book. Big deal. (I believe my skim gave me enough of an idea about the book) But I read the amazing 58 pages review of the book by Professor Edward Leamer. Three words to describe the review: witty, piercing, and insightful. His review managed to be very critical without sounding arrogant (most economists can do the first part, but not the second) (By the way, this reminds me again how difficult it is to write a good critique….that’s why there exists high paying and respected job with the NY Times Book Review, with the job title “critic”) Let me just say that Leamer is one of a kind of economist. A little detour here: First, he HAS to be great teacher. How do I know? From his former student. Second, from the clarity of his writing. Our profession needs someone who can write as well as him, and who can write clearly (as clear as a journalist, the scarcity of economist like Leamer is the reason why people like Friedman can get away writing books like this).

So the idea of The World is Flat is to push to the extreme the message that locations don’t matter anymore (that’s why the world is flat). Of course Friedman’s message is exaggerated, and the world is still spiky.

My favorite passage from the review:

There are countless real “globalization” questions for economic geography to answer. For example: What if Europe were to form an economic union that allowed the four freedoms among countries: free movement of goods, people, services and capital, all supported by a common currency? Which kinds of activities would concentrate and which would disperse? Do the peripheral countries, like Sweden, benefit or lose out? What happens to a central country, like Switzerland, that doesn’t join? On another continent: Can the economic liberalizations in Sout h America create an export-led prosperity, or are Argentina and Chile and other Latin American countries too far from the large and wealthy European and North American marketplaces for that strategy to work? If closeness matters, how can one account for the historically high per capita GDPs of New Zealand and Australia, and what accounts for the economic successes of far-way countries like Taiwan and Singapore, and now China?

Leamer gave a wonderful exposition of economic geography and how to relate Friedman’s idea to Von Thunen and Krugman. But the thing is, Krugman’s basic model on geography would tell you that the opening to international trade would lead to a dispersion of economic activities inside a nation (and also across countries) — lessening of the core-periphery pattern within a country; in other words, Friedman’s The World is Flat should be on the boat with Krugman’s basic model. In fact, cities in Europe had been moving according to this trend (in Friedman’s liguo — “flattening”) in 1970s and 1980s, and somehow in the 1990s, the core becoming bigger again at the expense of the peripheries. And this increase in the “spikes” of the world have not gone un-noticed. Why? One of the IMF annual report suggested that international trade actually reduces international inequality — but it is the financial globalization that is sharpening international and intra-national inequality. That actually makes sense, since finance and service as an industry operate on a much more scale economy that the good old manufacture industry.

But this is all very unsettling, when we cannot even make unanimous statement on how international trade affect inequality.

8:00am. Began the morning with a session titled “Completing an Economics Ph.D in Five Year: Let the Data (Literally) Speak for Themselves.” First a paper that ran regressions to predict the completion of the PhD in 5 years. We have seen these regressions a lot of times…on GRE scores, on whether the program give students shared office spaces in the first year, on the undergrad majors…you know. As these studies go, the one variable that is consistently significant is students going to liberal arts school — those who attend liberal arts schools tend to do best and have the best placement rates. This finding I also personally found true. The few friends I have who went to a liberal arts school seemed to be extremely articulate and educated. There is something about an education that pays loads of education to the needs to every students that overwhelms whatever benefit that large research universities can produce.

Of course the regression results are rather discouraging. Because according to it, I for sure cannot graduate in 5 years (which is indeed true since only 3 out of 23 5th year students in my department is on the job market this year). Fortunately, I do not believe in these regressions — not at all.

The “datapoints” then spoke. They are 4 former PhD students who filled out the surveys for that study (which asked the cohort of PhD Economics students in 2002 to fill them out at the time). One of them is former University of Chicago student. In any case, these students credited relations with advisors, camaraderie with fellow students, luck, creativity and motivation, as the crucial factors.

10:15am This session is titled “Explaining International Trade Patterns.” By far the dominating model underlying each of the 4 paper presented is the Eaton and Kortum paper, EKK (and it’s only 2008!). Melitz to a less extent. My attention was most tuned during the Costas Arkokolis and Muendler paper on extensive margin of exporting good. Their paper’s style is exactly like Kortum (most likely because Arkokolis is Kortum’s former studnet) — facts, model, simulations. A lot of things in it seems to be similar idea as EKK. The discussant is Ruhl, whose paper I also vaguely seemed to remember we have to read in Kortum’s class. If I am not mistaken, he is also his former student. Made some really good points about the big picture: When we study welfare gain, is relocation effect across firms larger than single good per firm case? Some interest questions: do a firm sell 3 products domestically and 10 products abroad? Or does a firm sell 3 products to every destinations? How many HS 4 out of each HS 6 product level does the firm trade? Measure of source of diversity….What kind of goods does the firm trade: are they complements or substitutes?

Another paper presented in this session uses a DSGE model to model the volatility of exports. It takes into account the large fraction of durable goods in the exports to produce that volatility. I seem to remember that there is a paper in asset pricing that heavily relies on that durable component to produce some risk premia? If yes, it is not surprising that this trade paper uses similar argument since the authors are asset pricing people.

Overall, it is a very good session.

(but a person gave out a really loud snore in the middle of the session, so loud that everyone looked)

noon Walked to Chinatown. As I walked, I could barely remember the person I was about 7 years ago, when I was the tourguide in Chinatown. I could not remember any of these streets! At the same time, I remember more and more why I love San Francisco. The wind is so soothing to the skin. In Chinatown, which is on the hill, you can get a glimpse of the pacific ocean, the bay bridge. And the way that Chinatown is built, it has this traditional Chinese feel to it that even Hong Kong or cities in China does not have. It is an immutable feeling. As I walked, I just thought about how influential Amy Tan is. Amy Tan’s San Francisco has somehow imprinted so deep in my impression of the city that I cannot take it away from my head. Whenever I walked on the street of San Francisco, I think about Amy Tan’s stories.

2:15 Amazing. Two large panel session are held at the same time, and both are very important (both have at least 300 audience +). One is on the recent financial crises, with speakers including Ken Rogoff, Robert Shiller, Olivier Blanchard, Alan Blinder. The other is China’s growth experience from the past 30 years, and speakers include Joe Stigliz, Michael Spence, Justin Lin, Marty Fieldstein. Guess which session won? Of course the financial crisis. By winning, I mean garnering the most audience. Since they are such big sessions with such big speakers, they took place in the biggest ballroom in Hilton. 20 minutes before the Financial Crisis panel began, crowds were already pouring into the ballroom. I walked by, and bumped into several PRESS people. But for certain reasons, I had to attend the China panel session (otherwise I would have gone to the financial crisis one too). While in the end, the China session had a full room, it was nowhere as full as the crisis session. In the middle of the China session, I left to go to the crisis session, where I was only able to stand about 10 feet from the door huddled with people, couldn’t even hear the speakers; alas, I had to return to the China session, where I doze off. (until I suddenly saw my name on the screen and heard my name mentioned)

I find this revealed preference of attendants quite paradoxical. Crises is a short term thing, whereas utimately, growth is the most important thing. As I sat in the China session, I couldn’t help but marvel at my choice as well. A couple years ago, I would have gone to the crisis session; but somehow now I have chosen growth.

In the morning during breakfast at hostel, went into an annoying conversation with a Harvard student who knows an annoying former classmate in program.

In the afternoon bumped into 2 classmates in a random cafe that isn’t even close to the conference location.

At around 6pm, started seeing a lot of economists walking on the street close to my abode.

Went to pick up registration material at about 6pm. Seeing a lot of economists but don’t know who they are.

A Thai kid found out from me what conference it is, then started asking question about where to get a master in economics.

Spotted the wife of Prof. Mick Jagger.

Spotted Prof Snoozy Santa.

Went to the Reception in Grand Ball Room; rather crowded. Amazingly, while I expect that I should know at least 10 people, I could not spot a single familiar face despite walking around three times.

Talked to a PHD student from U of Drexel, U of Delaware, a Professor in Trade and Development from Russia who knows one of my classmate, a job market candidate from Berkeley, and bumped into 3 classmates.

Had dinner with econ phd friend from another university, who went around the restaurant asking if they are economist — viola, they are.

San Francisco downtown is rampant with economist at this moment.

One thing about coding data manually in international economics research is that you are forced to confront a bunch of wierd “countries”, from those peanuts on the world map, to those that changed names several times over the past decades. This is a great opportunity to learn about all these exotic islands in the pacific ocean which I will buy when I grow up and become rich.

For example, there exist a “country” named Northern Marina Islands which is composed of 15 islands, located between Hawaii and Phillippines. According to Wikipedia, “The Northern Mariana Islands have the lowest male to female sex ratio in the world: an average of 76 men to every 100 women. That is due to the overwhelming female majority of foreign workers, especially in the garment industry.”

To be a man trapped in an exotic island outnumbered by females who would weave clothes for them, what is better?

Some academics wrote something earlier in their life, something which they probably didn’t know at the time that will be the precise thing that guide their action many many years later.

A certain academic now is facing such a historical coincidence, placed at the historical moment to apply his own research on the most powerful economy in the world.

I am of course talking about Bernanke, who wrote many papers on monetary policy in times of deflation.  Several years ago, he wrote a paper on the monetary policy of Japan during an extended episode of deflation after the burst of a credit boom.  His main conclusion is that at times of deflation, the monetary authority should aggressively keep the interest rate at low level for an extended time.  He emphasized the aggression part of keep the interest rates low.

Today, he is the chairman of the Fed at a time when the economy is at the end of an extended cycle of credit boom and finds itself teetering at the edge of deflation.  Today the CPI reported a 1 percent drop in CPI, the largest for 61 years (excluding energy and food, still 0.1, which is the largest in more than 2 decades.)

But the interest rate is already at very low level.  Is the Fed running out of ammunitions?

What will Bernanke do?  The next few years would be interesting.

P.S.  I did not mention fiscal policy because the US already has an extremely large deficit (even during good times!) and it takes a long time to kick in.