The Effects of Economic Inequality

A great video from Richard Wilkinson and TED discussing the effects of economic inequality on various aspects of life

Economics and Egalitarianism

Economists are known for being rather ignorant when it comes to equality. I’m regularly told in my lectures that welfare and happiness can’t be measured and as economists we’re only concerned with an efficient outcome. I have had it drilled into me that economists should leave decisions regarding welfare to politicians (think of that what you will). I don’t agree with this, but I see it creeping into my thoughts more and more. I hope that as my work load increases, I won’t become as dehumanised as some of my peers.

‘the importance of producing and analyzing plots as a standard part of statistical analysis cannot be overemphasized. Besides occasionally providing an easy to understand summary of a complex problem, they allow the simultaneous examination of the data as an aggregate while clearly displaying the behavior of the individual cases.’

Stanford Weisberg, Applied Linear Regression, 1980, p.120

‘making an empirical regularity the foundation, rather than an implication of economic theory, is always dangerous’

William Pool, “Is Inflation Too Low” the Cato Journal, vol. 18, no.3, 1999, p.456

Economics In Crisis

A really interesting 2 part series by the Financial Times discuss the current crisis in the school of Economics.

“just as a court pronounces a verdict as ‘not guilty’ rather than ‘innocent’, so the conclusion of a statistical test is ‘do not reject’ rather than ‘accept’ “

Jan Kmenta, Elements of Econometrics, 1971, p.114

Modelling The Cobb-Douglas Production Function

I’m currently doing some regression analysis on the US aggregate production function. I’m using time-series data for the period 1954-2005. I’ve modeled the US aggregate production function using a log-transformed Cobb-Douglas production function. Using the Ramsey RESET test, I’ve found my model to be misspecified at the 1% level. I found this surprising. Whilst I understand that a simple Cobb-Douglass production function can’t model reality in its entirety, I didn’t expect such strong evidence in favour of misspecification. Obviously, I’ll be carrying out further tests to find the cause of the problem.    

“theory must be the guide to model building”

Gujarati and Porter, 2010, Essentials of Econometrics, p.233

“Politicians in a democratic society tend to be shortsighted because they are driven by the need to win their next election.”

Francesco Giavazzi and Frederic S. Mishkin, An Evaluation of Swedish Monetary Policy between 1995 and 2005, p.12

Corruption

Corruption is seen as a major constraint on growth for developing countries. It creates uncertainty. It creates inefficient and unnecessary levies on useful productive activity. It diverts public spending to the kind of projects in which bribery and over-charging are easy and profitable. It increases the profitability of rent-seeking. Subsequently, it is observed to have a negative relationship with both public and private investment, productivity, and equality.

The causal relationship between corruption and development is of course ambiguous. Does corruption cause a lack of development? Or does a lack of development cause corruption?