Oil Prices and Recessions

If I believed forecasting wasn't largely fruitless, the predictions by James D. Hamilton would make me nervous.

LOUNGANI: How has your thesis held up over the past 20 years?
HAMILTON: Quite well.My evidence showed that six of the seven U.S. recessions since 1947 were preceded by a sharp increase in the price of petroleum; the only one that wasn’t was the 1960 recession.While I was working on the thesis, U.S. oil prices shot up because of the Iran-Iraq war in the early 1980s and the U.S. deregulation of the oil industry. This was followed by a recession. A decade later, the spike in oil prices triggered by Iraq’s invasion of Kuwait was followed by the recession of 1990–91. A decade after that, oil prices played a role in the recession of 2001. So the score is now up to 9 out of 10.

Further reading: James D. Hamilton, 2003, “What Is an Oil Shock?” Journal of Econometrics,Vol. 113
(April), pp. 363–98.

I wonder how many oil price shocks have not been followed by a recession? I guess I should get his latest article.

Thanks to Newmark via Mahalanobis for the link.

Keywords: ECO120, ECO305, ECO307, ECO712

Posting to Resume..

As soon as I'm finished with grades, I should be able to post more regularly. Oh the beauties of academia. Some of my posts will find their way to Truck and Barter. I recently introduced myself over there.

A Random Walk

Michael Stantsy at Mahalanobis has an excellent post on the statistical process from which this blog draws its name.

By far, the most interesting stochastic process used in financial economics is Brownian motion. The role of Brownian motion in stochastic processes is similar to that of Normal random variables in elementary statistics. The concept of a random walk, the discrete counterpart of the (continuous time) Brownian motion, is well known among students of economics, since most macroeconomic time series behave in a similar fashion (A random walk is a special case of what is known as unit root process or I(1) process). The plot given below shows trajectories (realizations) of a random walk process.

I agree, it is a statistical process that continues to interest me. My question is when trying to distinguish between a stationary and a non-stationary process: what is the difference between a permanent innovation and a structural break? And how can we distinguish between the two?

Commencement: A Beginning or an End to Labor?

As we approach commencement ceremonies here, and my office is increasingly flooded with anxious seniors wondering "what next?" I offer the following working paper by Jay Stewart of the Bureau of Labor Statistics "What Do Male Nonworkers Do?"

According to Alan Krueger in his review of the paper, more men in their prime working years are pursuing a Kramerian lifestyle (after Seinfeld's Kramer who appeared to never really work, yet never wanted for anything). "In 1967, 2.2 percent of noninstitutionalized men age 25 to 54 spent the entire year without working for pay or attending school. That figure climbed to 8 percent in 2002, the latest year available from the Bureau of Labor Statistics."

This is partially due to a rise in the number of people on disability and disproportionately affects men with less than a high school degree. Furthermore, "joblessness is persistent over time, so it ends up being highly concentrated among a small cadre of men who frequently spend long stretches without work." As a result, long-term joblessness among men has become a more important problem than unemployment. These men aren't actively looking for work, so they aren't counted in the unemployment figures, but they, nonetheless, represent an inefficiency in the economy: unproductive resources.

Why aren't they working? "The conventional wisdom is that joblessness has grown since the early 1980s because the demand for less-skilled workers has dropped, causing their pay to fall. The decline in unions and erosion of the real value of the minimum wage have also caused their pay to fall. Rather than toil at low pay, more and more men have withdrawn from the market."

It would be one thing if they were all becoming Mr. Mom's; performing child care, or engaging in household work. In other words, performing some productive activity that contributes to the economy albeit not formally--the sort of work for which women have historically been responsible. What Stewart finds in his study of time-use surveys, however, is that "many manage to live as if every day were Sunday" (Krueger). Nonworkers spent 8.4 hours per day on leisure and recreation, and 3.3 hours to housework. This compares to how a male worker spends his day off.

For those of you graduating soon, don't get your hopes up; financing the Kramerian lifestyle is a full-time job. Most nonworking men were funded by Social Security and disability payments. Others were financed by their wives' income or continued living with their parents. As with everything else, life's choices contain tradeoffs: You can spend your post-graduate days shooting 18 holes, just be sure you're home for dinner and walk the dog before bed.

Keywords: ECO330, ECO336

Discounting the Future

Matt Gaddis over at Undergradecon, claims that students aren't rational.

Last night I was really trying to use economics to make my decision about what I should do for the night. Let me take you through my thought process. I was in the shower it was 10:00pm I had just gotten back from playing some basketball and running when I was deciding which of the following to do:

A) Go downtown to Brothers for $5 all you drink.
B) Stay at home and watch some TV.
C) Stay at home and do homework.

So I learned a little bit about decision making in my micro class and I was told people choose their decision based what option maximizes their utility. So I considered the utility of each.

A)Probably the greatest utility because drinking at bar is good times, BUT being hungover at work all day is no fun at all. So this raised some questions. Is the utility I am trying to maximize only in the short run so it only includes that night? Is their negative utility the next day and does that offset the positive from the night before?
B)...

Matt discovered the challenges of maximizing utility over more than one period. Several econ students at other schools emailed him to suggest he was not being irrational by going to the bars, but rather he was just heavily discounting the future.

I wonder when he'll stumble across the currently vogue idea of hyperbolic discounting?

One reason hyperbolic preferences are less convenient in a model is not only that there are more parameters but that the agent's decisions are not time-consistent as they are with a constant discount rate. That is, when planning for time two (two periods ahead) the agent might prepare for what looks like the optimal consumption path as seen from time zero; but at time two his preferences would be different.

Who hasn't awoken the night after drinking only to utter the requisite "I'm never drinking again" hangover mantra? Brad Delong has another example of hyperbolic discounting from the ASSA meetings in DC, where he spied one of its biggest proponents, David Laibson.

"My feet hurt. These marble floors are hard. I want to go sit down." "But here comes David Laibson, the master of hyperblic discounting. If we stay here, we can talk to him." "But then our feet will hurt worse later on in the afternoon." "Ah, but right now we don't care: you see, we are hyperbolic discounters, and so underweight future pain relative to present pleasure. It's true that later on we'll regret the fact that we spent so much time standing around and did not sit down. However, right now the benefits of discussing hyperbolic discounting with David Laibson are irresistible!" "But if we stay here, we'll be doing the wrong thing..."

You can find a nice paper by Laibson here.

Keywords: ECO308, ECO110, Discounting

Kuznets and GDP

From Brad Delong, comes this reference to an article in The New Yorker.

This steady flow of data is easy to take for granted; few things, surely, are as dreary as a soybean-export-price index. But the economy depends on these numbers; they make business smoother and policy smarter. (Recessions after the Second World War, for instance, have lasted about half as long as recessions before it.) This is why, ever since the days of Kuznets, the government?s basic assumption, at least when it comes to economic data, has been: the more information, the better, no matter how dismal it may be.

Does it? There is some evidence that the moderation in the business cycle is an artifact of the poor quality data that is estimated for the days before Kuznets and the boys. Christina Romer has written:

But appearances are deceiving. The kind of statistics that economists use to measure the severity of business cycles, such as data on the unemployment rate, real gross national product, and industrial production, have been kept carefully and consistently only since World War II. Therefore, the conclusion that government policy has smoothed business cycles [Ed- Or that business's access to data has smoothed the cycles] is based on a comparison of fragmentary prewar evidence with sophisticated postwar statistics.

In some recent research, I have tried to avoid the problem of inconsistent data by comparing the crude prewar statistics with equally crude postwar statistics. That is, I have compared the existing prewar series with modern data that are constructed using the same assumptions and data fragments that were used to piece together the prewar series. These comparisons show essentially no decline in the severity of cycles between the prewar and postwar eras. They also show little change in the duration and frequency of cycles over time. Thus, much of our apparent success at eliminating the business cycle seems to be a figment of the data.

So much for trying to claim economists have become more like the dentists of Keynes's dreams.

Update: Russell Roberts on his new blog Cafe Hayek follows Friedman's lead arguing that the improved performance of the economy is due to a better undestanding of central banking. Read more here.

Keywords: ECO120, ECO305, ECO307, ECO301, ECO712, GDP, Data

Affluent Action?

Walter Benn Michaels' article in today's New York Time's Magazine, "Diversity's False Solace" argues that while universities have achieved some success in the area of racial diversity, they are lacking in terms of economic diversity.

He's a professor of English at the University of Illinois, Chicago, and the catalogues at U.I.C., boast about being "ranked among the Top 10 universities in the country for diversity."

"And the enthusiasm for such differences is widespread. When I asked a group of Harvard literature students about what distinguished them from a parallel group of literature students at U.I.C., they were prepared to acknowledge that the U.I.C. students might be even more diverse than they were, but they were unable to see the relevance of the fact that the U.I.C. group was also less wealthy. And this is equally true of the students at U.I.C. who identify themselves as black, white, Arab, Asian and Hispanic and not as poor or working class. After all, your ethnicity is something you can be proud of in a way that your poverty or even your wealth (since it's your parents' wealth) is not.

But the real value of diversity is not primarily in the contribution it makes to students' self-esteem. Its real value is in the contribution it makes to the collective fantasy that institutions ranging from U.I.C. to Harvard are meritocracites that reward individuals for their own efforts and abilities--as opposed to rewarding them for the advantages of their birth. For if we find that the students at an elite university like Harvard or Yale are almost as diverse as the students at U.I.C., then we know that no student is being kept from Harvard because of his or her culture. And white students can understand themselves to be there on merit because they didnt' get there at the expense of black people.

We are often reminded of how white our classrooms would look if we did away with affirmative action. But imagine what Harvard would look like if instead we replaced race-based affirmative action with a strong dose of class-based affirmative action. Ninety percent of the undergraduates come from families earning more than $42,000 a year (the median household income in the U.S.)--and some 77 percent come from families with incomes of more than $80,000, although only about 20 percent of American households have incomes that high. If the income distribution at Harvard were made to look like the income distribution of the United States, some 57 percent of the displaced students would be rich, and most of them would be white. It's no wonder that many rich white kids and their parents seem to like diversity. Race-based affirmative action, from this standpoint, is a kind of collective bribe rich people pay themselves for ignoring economic inequality.

In the end, we like policies like affirmative action not so much because they solve the problem of racism but because they tell us that racism is the problem we need to solve. And the reason we like the problem of racism is that solving it just requires us to give up our prejudices, whereas solving the problem of economic inequality might requrie something more--it might require us to give up our money."

Keywords: Affirmative Action, ECO110, ECO336