Economists and manifestos

I’ve had a few conversations over the past few weeks about how extremely long the academic publishing cycle is, particularly for economists. Combined with the lack of cohesive response to the financial crisis and 2010’s crisis of conscience at the AEA meetings regarding disclosure of funding sources, economists aren’t looking so good at the moment.

To address at least one of these concerns, a group of economists has put together a Manifesto for Economic Sense, which essentially calls on the fiscal and monetary policy-making bodies of the United States and Europe to kick things into high gear in order to end  “massive suffering” being inflicted. A rather impressive list of economists has signed it and though I wouldn’t call it beautiful prose (we’re economists after all), I’m a fan.

In short: The economy is suffering from lack of demand–companies aren’t borrowing or hiring, people don’t have jobs and thus aren’t buying things, which becomes more and more problematic (one person’s spending is another person’s income). Monetary policy is exhausted and fiscal policy is politically motivated and crappy, so let’s agree to focus on facts and push for credible, reasonable economic policy that will promote job growth, confidence and resilience. Sounds good to me.

h/t @JustinWolfers (Again, I don’t do everything he tells me to do!)

The measure of a market (a really old one)

A year ago, about this time, I was on my way to Ottawa for the Canadian Economic Association and Canadian Network of Economic History Meetings. They coincided, so I presented papers at both and took the opportunity to adamantly assert that I was not an economic historian.

A year later, I have a book chapter, a working paper, a paper (almost–I’m just waiting for confirmation it was sent out) under review, and a paper idea percolating that all belong under the label Economic History. I’m trying to get the paper idea in shape to submit to the CNEH meetings again this year, with the deadline fast approaching.

While my coauthors and I were hard at work on the paper on financial portfolios in the early 18th century, the one that is (almost) under review, a seminar participant at Stanford asked my coauthor what an optimal portfolio would look like. We didn’t know. None of us is really a finance person. I got involved with the project because it had a gender component and the others on the papers are economic historians.

I took it upon myself to pick the brain of my colleague who teaches finance at Gettysburg and found myself quickly immersed in the heady world of portfolio optimization, betas, alphas, indices, Markov matrices, and so much more. From my understanding of the literature, the S&P500 represents the closest thing we have to an optimal portfolio, and so creating a similar index for the time period we’re interested in should provide the answer to the seminar participant’s question.

What I find particularly interesting about the index method of portfolio construction is that the S&P500 in particular is thought to provide an accurate picture (returns and growth-wise) of a balanced portfolio of all assets–not just financial instruments. If you were to put a big chunk of your money in a fund that purchased stocks along with the S&P market capitalization strategy, you would actually be bringing your portfolio out of balance by buying things like real estate or durable investment goods.

The idea, I believe, is that the stock market has “evolved” such that it captures the risk and reward of all those types of instruments–not just the stocks themselves. I find this assumption, particularly given the dramatic dips and peaks in the stock market we’ve seen over the past four or five years to be heroic, at best, but it becomes more problematic when we turn to 1700s finance.

The financial instruments available in the period for which I have data are incredibly few in number and even more limited in scope. Besides a bank or two, they are joint-stock, charted trading companies, whose fortunes lie entirely in the wind and the water and the ability of colonists to extract resources from the colonies. There’s no ability to invest in steel or textiles or the machines that make them. I don’t have information about real estate or other investments for most of the people in the sample, and I certainly don’t have their prices. So, our optimal portfolio can really only be for the available stocks, not for the entire gamut of instruments.

I doubt that I’ll be the one to rewrite modern portfolio theory, and I do think this is the best place to start, but it’s not ideal. Story of an economics paper, I guess.

The British were here first

I’m only beginning to get into this economic history literature. In much of the work I’ve done so far, my comparative advantage came in the form of data work. So while having skimmed, but not read in depth, most of the literature cited was formerly compelling and advantageous, I’m going to have a little catching up to do if I’m going to branch out on my own in this field. Hence, my tweet from yesterday afternoon with three fat volumes of The Constitution and Finance of Early English, Scottish, and Irish Joint-Stock Companies by Scott. It’s okay to say you’re jealous.

The decline of industry and manufacturing in America over the past few decades has been decried as one of the primary culprits behind the decline of the middle class and of blue-collar jobs. It seems as though, we aren’t the first ones to be in this situation.

At the same time that British capital was leaving the island at unprecedented levels, British industry began a decline that signalled the beginning of Britain’s transformation from world’s workshop to banker. While it was no surprise that a nation would eventually surpass Britain in industrial might, the speed of the reversal caused much consternation among the British elite. The city of London, with its perceived propensity to funnel capital overseas rather than into domestic industry, was widely suspected of hastening the decline of British industry.

The growing pains of developing from a manufacturing economy to a service-based economy aren’t new. I think that’s why I like history, because it reminds me that even though nothing is a replica of the past, it’s not like no one has ever been in a similar situation before.

1. Benjamin R. Chabot and Christopher J. Kurz. 2010. “That’s where the money was: Foreign bias and English investment abroad, 1866–1907”. Economic Journal 120 (September), 1056–1079.

The value of financial history

Last week, when Eric Hanushek was at Gettysburg College for the Finance Symposium, we got into a post-symposium debate over a couple of glasses of wine concerning the usefulness of historians. In a place like Gettysburg, where most everyone is a historian of some stripe, this is a relevant argument. Gettysburg hosts the Civil War Institute and several scholars who study just that. Civil War buffs travel from all over the country–and perhaps even the world (are there non-American Civil War buffs?) to visit the battlefield and the town. They walk over Cemetery Ridge and Seminary Ridge and talk about Pickett’s Charge* and strategy and the people who died and go on ghost tours. Students and scholars read books and reimagine history, too. Hanushek argued that history is unlikely to change much because we already know all the facts and thus studying it, or at least writing several new books and papers on topics that had been exhausted, was perhaps not the best use of intelligent peoples’ time.

Last summer, I attended the Canadian Network of Economic Historians conference. It’s a great group of scholars who I’m sure would profoundly disagree with Eric’s argument, and they were particularly excited when I told them about my plans. “Gettysburg is going to have three economic historians!?” someone asked me. Actually, no. One retired, one is on leave–the one whom I’m replacing–and me, well, I don’t really consider myself an economic historian.

Despite that lack of self-identified association, I was ready to tell Eric he was wrong. I do have a few papers in economic history, using financial transaction and shareholding data from 18th century England. It’s really cool. Which is exactly what I told Eric. Perhaps I’m not going to entirely rewrite the History (with a capital H) of the establishment of the English stock market and modern portfolio theory, but I probably can make little changes to our understanding of how financial markets worked, how investors made decisions, and what effect that might have on commerce, trading, and the like.

In one of these papers, a coauthor and I show that despite relatively established secondary markets for trading shares of companies, individuals did not tend to buy in more than one company. Wealth constraints and the value of being able to vote likely trumped the relative ease with which one could stroll down to Garroway’s in Exchange Alley and pick up a few extra shares. In another, we show how women (who likely couldn’t stroll down to Exchange Alley for propriety reason) used the market.

Like I said, I’m not changing the history of the world, but it’s kind of cool to know that investors weren’t diversifying over these kinds of assets as we might expect modern investors to do. (Which, incidentally, they don’t always do, either).

I’ve been discussing some of these ideas with a few colleagues and all of a sudden, the ideas are flowing. Over lunch today, we mapped out at least half a dozen papers that could come out of these data. So now, my problem is this: how do I go on the market as a labor economist with a slew of papers that fall better under financial macro and economic history? I usually say that being a labor economist means I can do whatever I want, so there it is, I guess.


  1. The Battle of Gettysburg was July 1-3, 1863.
  2. You now know pretty much everything that I do about the Battle of Gettysburg.

Public Education Finance

Last week, my department hosted two prominent economists who do research on public education finance to speak to students, faculty, and local teachers regarding how we’re going to finance public schools and improves US student outcomes in the coming decades. By international standards, school performance in the US lags behind other countries in math and science, in particular, which is largely heralded as expected to bring about the eventual demise of out economic and geopolitical advantage.

This is certainly not my area of expertise, so I’m speaking a bit off the cuff here, but I thought I’d summarize a bit.

Andrew Reschovsky, who is a professor in the policy school at the University of Wisconsin-Madison, asserts that we’re not paying teachers enough. His argument wasn’t entirely clear to students, it seemed, but his ultimate prescription is to bring more money to the problem.

Eric Hanushek, of the Hoover Institute at Stanford, presented an argument that many of my students found much more compelling. Firing the bottom 5-6% of teachers from each school and replacing them with an average teacher, he says, would raise math and reading scores dramatically. And, if we could only get to Canada’s level, it would add trillions to our GDP.

One teacher rightly asked, where do you expect to get these teachers, particularly when you’re cutting their salaries left and right? Hanushek replied that there are a lot of unemployed teachers, but mostly ignored the distributional problem. There are a lot of unemployed teachers in Michigan, where salaries are high and applicants far outnumber openings. There are lots of openings in places like Arizona, where salaries are low. It’s as much a problem of getting people to move to Arizona as it is replacing those teachers that get fired.

Neither side got too much into the question of how we measure student outcomes (for more on this, see Dana Goldstein, who is also moderating an event on the same at the New America Foundation tomorrow evening at NYC). Though Hanushek was fairly convinced that some measure of value-added by teacher seemed to be in order through rigorous testing, by his own admission, principals and colleagues all seem to know who the bad teachers are. In that sense, amending the system to allow teachers to evaluate each other might lead to more efficient outcomes than administering tests that hamper the ability of teachers to teach, and could be racist or biased in different cultural situations. We know testing is problematic, and yet, right now, it seems to be all we have.

As a teaching moment, I wanted to highlight how two people, coming from rather different sides of the aisle, could use the exact same information to come up with very different policy prescriptions. I’ve heard some students remark lately that econometrics seems like a science without answers. But I think the better description is that there are many answers, and we’re tasked with finding the best ones. I also had a long discussion with a colleague and my students about how teacher quality over the past fifty years has likely changed dramatically as more opportunities for women opened up in different fields.

I find it all really fascinating.

I was really hoping to outsource this post by linking to my students’ blogs, but none of them wrote about it (though many  have some interesting thoughts about Moneyball). Even for extra credit. Guess it’s going to be a required assignment next year. I will update here if I notice any posts about it in the next week.

How Markets Work

A conversation with a coauthor on the financial knowledge of Americans recently incited some deep thinking about market efficiency, one of the holy grails of economics. While discussing our results on investors in English stocks from 1690-1720 or so, she brought up a recent paper in which the authors gave a random sample of (contemporary) Americans a financial literacy test. The test consisted of only three simple questions on interest returns, inflation and volatility of stocks versus mutual funds. The vast majority of respondents failed the test, unable to answer any of the multiple choice questions correctly. It is disturbing in and of itself, but also begs the question of how models incorporate investors’ knowledge. The information may be out there, but if investors aren’t using it, or aware of it, how can we conclude that individuals are savvy enough to choose the right investments? To create optimal portfolios for their individual situations? To save adequately for retirement? To choose an affordable mortgage? All this without even adding in the risk of shocks like a financial crisis or a recession or a bubble.

It’s a good reminder, my coauthor noted, that markets may do what they are supposed to, but people in markets rarely do. Without the information we assume they have, without the forward-thinking savvy we assume they have, our models are profoundly lacking.