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You'll have noticed that there was a bit more time than typical since my last post. That's because Eric Chiang and I have been hoofing it around the city.

 

First off, it couldn't be more different than Bogota. At a population of 20 million in its metro area, it's the largest city in South America. Bigger than New York, bigger than even Mexico City as of last year. It feels big too, part of our adventure was navigating Sao Paulo's extensive subway system. Here are some shots:

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Clean and efficient subways (better than New York's), bike lanes everywhere; they even have bicycle crossing guards! The people here are extremely diverse in background in every sense of the word. The city really does epitomize a trade center.

 

Turning back to economics for a minute, you'll recall I used the military police in Bogota as a jumping off point to talk about the importance of stable institutions. Contrast that image with the MP's here in Brazil:

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First off we saw half as many as we did in Bogota and Sao Paulo is 3x its size. Second, they don't carry firearms (let alone automatic weapons), and they're generally much more low key. Brazil has historical had a much more stable government than Colombia so they simply don't need as much of a police presence as their citizens have much more confidence in its institutions.

 

More to come...

Hello, Brazil!

 

Notice how that was in English? My Spanish is pretty terrible, my Portuguese is well, nonexistent. Luckily, Eric Chiang, the eminent polyglot, knows how to say "hello" and "thank you", so yeah, we'll be negotiating book deals here in no time.

 

Bogota was the capital of Colombia and Sao Paolo is more like the "New York" of Brazil; their trade center. We're heading out in just a bit to get an impression of the state of things now that the Chinese economy has downturned (more on that later). After sleeping for about 4 hours on the plane  we just needed to shower and stash our bags in this luxury accommodation. Makes me feel like I'm back in my NYC apartment!

 

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So it's late. Eric Chiang and I are in the Avianca lounge waiting for our flight to the next stop on our adventure, Sao Paolo. There's no air conditioning...

 

I thought I'd share some scenes from today as a way of saying goodbye to Bogota.

 

"Makin' it rain!" This is like $15:

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I can't escape Starbucks!

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This city is at 8300' but still surrounded by huge mountains:

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This one's for you Thomas Acox. I was going to make a point about how cheap frozen pizza is here:

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Finally, for all you fellow comic book nerds:

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Goodnight! Brazil, here we come!

When I told my parents that I was traveling to Colombia, they immediately got concerned. "What about the drug cartels down there?" "What if you get kidnapped for ransom?"

 

I obviously can't give you the final judgement on safety issues in Bogota, or even that much of an authoritative one given we were only here for 8 hours, but I can give you an impression based on my time here with Eric Chiang. First off, we did see some rough areas in Bogota (just as any other city about its size has), but overall the really surprising thing is just how nice the areas we traveled in were. There's Audi and Maserati dealerships, even a Cartier store:

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But it's not just luxury boutiques that show just how far the city has come, it's scenes like this playground:

 

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Even just 10 years ago this country was essentially ruled by drug cartels and rated one of the most dangerous in the world for travelers. WHAT HAPPENED?? This was the other economic problem we wanted to look at.

 

This particular problem isn't quite as straightforward as the coffee one; it's complicated and political in nature as well as economic. Here's what is known: Colombia's increased stability has coincided with a 60% reduction in its coca crop (chief ingredient of cocaine), over the past 10 years. We still saw economic clues nonetheless. This guy was out in front of a bank ATM:

 

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Ok, seems obvious; post a bunch of armed soldiers throughout a city and they'll keep the peace, right? What does that have to do with economics? The key is in the organization that ordered him there.

 

One of the key principles that shows up in almost every, well, principles of economics text is that stable institutions are essential to a functioning economy. Ten years ago, the army wouldn't have ordered the soldier there due to lack of resources, corruption, or another symptom of its instability. If individuals don't feel confident in their own safety or the ability to access their resources, they don't invest these resources, purchase goods, or in sum, grow the economy.

 

So what brought increased stability to Colombian institutions like the army and government as a whole? Well, that's the complicated part. Some of it is certainly due to the US investing millions of dollars through their "Plan Colombia" as the front line of the war on drugs. Some of it could be due to internal political pressure. Finally, some of it could be due to countries like Peru and Mexico having less stable institutions that offered a more hospitable market place for the drug cartels.

 

The bottom line is you don't get Cartier and happy playgrounds if you're worried you'll get jumped when withdrawing your paycheck.

 

Side note: It's not all roses. Like any economics issue, there are externalities that arose from "Plan Colombia". For instance, a spike in numbers of the leftist FARC guerillas in many of the cocaine growing areas of the country. This American Life did a fantastic podcast on propaganda efforts to counter this recruitment surge.

Ok, let's talk economics. More specifically, let's talk coffee and drugs.

 

You may have noticed in my last post that Eric Chiang was holding a cup of "Juan Valdez Cafe" coffee and yet, leading up to this trip I mentioned that they ironically don't really have coffee shops in Colombia. Well they don't, really. At least not independent ones. Since Bogota is rather cosmopolitan compared to the rest of the country, what they have is several international coffee chains. You can get Starbucks, the aforementioned Juan Valdez, or even Dunkin Donuts here. So why aren't there cute independent coffee shops in the capital city of the country whose main export is...(drum roll) coffee?

 

One reason is that coffee is a tough crop to grow. Colombia has an excellent climate to do so, but their coffee crop is still highly effected by storms, drought, pests, etc. Consequently, that makes the price of coffee pretty volatile and puts Colombia in a tough spot with their chief export. How do they deal with this problem? They export as much of their crop as possible to wealthy countries that don't have climates suitable for coffee growing.

 

So why the chains? Most of their retail is based in the aforementioned wealthy countries that pay top dollar for coffee imports and they can afford to purchase large quantities of the Colombian coffee crop at high prices just due to their scale. Thus, the little independent shop is edged out. Some clues we've seen as to the economics behind it:

 

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Ok, the photo's hard to see but this is the menu at a Bogota Starbucks. A tall (12 oz) caramel macchiato is 8,600 Colombian pesos. That's about $2.73 versus the $4.91 gouging that I suffer in NYC. Pretty cheap, right? Well, sort of. You need to take exchange rates into account and particularly that the US dollar has recently become very strong against the peso (Y = pesos to US dollar):

 

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Whereas $1 equals 3,155 pesos now, just a little over a year ago $1 equaled 1,848 pesos. That caramel macchiato would have been $4.65! Since Starbucks is a US company, they don't alter their prices much to account for the exchange rate, and given the purchase power of the average Colombian is still lower than the average New Yorker, that makes Colombian coffee [typically] super expensive for Colombians! How's a little guy to compete?

 

Next up, a [former] major export of Colombia...

As much fun as it is to globe trot at the pace we are, you may ask yourself, "why are they doing this?"

 

Aside from being the Worth author with the most tendered McDonald's receipts, one of the most unique things about Eric Chiang is his philosophy on travel. Essentially, get in, get out, and try to gain as many impressions of world locales as you can. Why? People around the world are faced with many of the same economic problems and yet they solve them in surprisingly different ways.

 

The goal of this trip is to explore just how Colombia, Brazil, South Africa, and Dubai solve their economic problems differently. It's essential to try to comprehend these things in order to begin to understand economics in our rapidly changing world. The general experiences, videos, and photos we take on this trip are going to comprise a new and key feature, "Around the World,"  in the upcoming edition of Eric's book, Economics: Principles for a Changing World.

 

Up next, I'll get in to our exploration of Colombia's economic issues. First though, some photos of Eric indulging his McDonald's craving and sampling some of the local coffee.

 

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Not really a full blown post, but I have to remark that I managed to find a craft beer bar in Bogota within an hour of arriving. What can I say? It's a gift.image.jpeg

So here we are. Myself and Eric Chiang landed in Bogota at 11:30 this morning (EST). We arrived at the hotel at 12:30, which is only 5 miles away. Goes to show you what traffic can be like when a city doesn't have a mass transit system. It will be interesting to compare with Sao Paulo which has a subway system similar to London's.

 

Initial impressions: the country has gone a long way to rehabilitate its image. Customs was actually faster than those in Toronto after coming in from NYC. The city is fairly clean, and although we did see a half dozen military police (some with automatic carbines), it seems like any other bustling South American city. One interesting thing re: mosquitos and Zika virus, the current weather is actually similar to Massachusetts in June. Cool (mid 60's and hazy). This is because Bogota is at 8300' feet altitude: higher than Denver! It's a mountain city and it's most likely too cool and too high to have much of an insect problem.

 

We're now on a quest to learn about Colombia's famed coffee industry and its fictional spokesperson, Juan Valdez. First, here's a shot of the interior of our cab. Big South Park fans down here...image.jpeg

Zero hour. Eric Chiang and I are now on board our Jet Blue flight from Fort Lauderdale to Bogota, Colombia. Incredibly, although the rest of the flight is full, there's an entire row across from us in extra legroom. Jet Blue competes against Spirit airlines for this route (duopoly). As Spirit's business model is based on carriers in largely less developed countries, Jet Blue has to drop their prices extremely low to compete against their single rival. Base fare for this flight was less than the cost to take a shuttle from NYC to Boston. Only $47...

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Our sister organization, Springer, just published Volume 22 of the International Advances in Economic Research, hosting a number of open access articles.

 

Exciting news that a highlighted article relates to the economics of education! It just so happens we are working on the first textbook specifically for the Economics of Education course so it's motivating to see current research expanding  views on efficiency and productivity in education using various approaches to computational methods.While working with authors  Sarah Turner and Mike Lovenheim on this project, I have been inspired by their analogies and passion for the economics of education.

 

In the IAER article, Cristian Barra and Roberto Zotti use "bootstrap technique... to provide confidence intervals for efficiency scores and to obtain bias-corrected estimates" in their research on education. This is interesting to me because I've started to take online coding courses to help me understand the software technology industry publishing is diving into, and this statistical technique, bootstrap, has the same name as this free and open-source HTML/CSS tool that is used to create dynamic websites and apps. As I learn more about web development, it will be interesting to see the crossovers I've learned from economics, business, and now, technology.

 

You can download and read a free copy of Barra and Zotti's article "Measuring Efficiency in Higher Education: An Empirical Study Using a Bootstrapped Data Envelopment Analysis"on Springer's journal site here.

 

Shameless plug: Pls vote for what you think our economics of education textbook should be titled! Register and VOTE HERE.

Originally posted on September 21, 2009.

 

This is an old topic but it is in the headlines again, so I pass this along, from Jeff Friedman:

This “executive compensation” theory of the crisis is now the keystone of the conventional wisdom, having been embraced by President Obama, the leaders of France and Germany, and virtually the entire financial press. But if anyone has evidence for the executive-compensation thesis, they have yet to produce it. It’s a great theory. It “makes sense”—we all know how greedy bankers are! But is it true?

 

The evidence that has been produced suggests that it is false.

 

For one thing, bankers were often compensated in stock as well as with bonuses, and the value of this stock was wiped out because of the investments in question. Richard Fuld of Lehman Brothers lost $1 billion this way; Sanford Weill of Citigroup lost half that amount. A study by René Stulz and Rüdiger Fahlenbrach[3] showed that banks with CEOs who held a lot of stock in the bank did worse than banks with CEOs who held less stock, suggesting that the bankers were simply ignorant of the risks their institutions were taking. Journalists’ and insiders’ books about individual banks[4] bear out this hypothesis: At Bear Stearns and Lehman Brothers, for example, the decision makers did not recognize the risks until it was too late, despite their personal investments in the banks’ stock.

The Stulz and Fahlenbrach abstract reads as follows:

We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.

It's entirely fair to argue that these tests are not decisive.  But still, the evidence isn't there -- at least not yet -- that executive pay was in fact the big problem.

I thank Jeff Friedman for the pointer.

Originally posted on September 3, 2011.

 

John Bogle has a nice piece in the WSJ on Paul Samuelson and the history of the index fund, an great example of how theory has contributed to practice.

[Samuelson's] article “Challenge to Judgment” caught me at the perfect moment. Published in the inaugural edition of the Journal of Portfolio Management in the autumn of 1974, it pleaded “that some large foundation set up an in-house portfolio that tracks the S&P 500 Index—if only for the purpose of setting up a naïve model against which their in-house gunslingers can measure their prowess.”

Presented with that challenge, I couldn’t resist….

 

Bogle launched the First Index Investment Trust but the project was almost stillborn because the initial underwriting was a huge failure. Only $11.3 million was raised, a 93% shortfall from the goal, and not enough to buy [100 shares of ?] all 500 stocks in the S&P 500. The underwriters urged Bogle to cancel but Bogle persevered despite catcalls from Wall Street about “Bogle’s Folly.”

The most enthusiastic media comments about the coming underwriting of the index fund came from Samuelson himself. Writing in his Newsweek column in August 1976, he expressed delight that there had finally been a response to his earlier challenge: “Sooner than I dared expect,” he wrote, “my explicit prayer has been answered. There is coming to market, I see from a crisp new prospectus, something called the First Index Investment Trust,” an index fund available for investors of modest means, “that apes the whole market (S&P 500 Index), requires no load, and keeps commissions, turnover and management fees to the feasible minimum, and . . . best of all, gives the broadest diversification needed to maximize mean return with minimum portfolio variance and volatility.”

…Today, the assets of the Vanguard funds modeled on the S&P 500 Index total $200 billion, together constituting the largest equity fund in the world. (The second largest, at $180 billion, are the Vanguard Total Stock Market Index funds.) Investors have voted for index funds with their wallets, and they continue to do so.

Originally posted on March 8, 2010

 

Under certain conditions the pursuit of self-interest leads to the social good even when no one has the social good as their goal.  Under these conditions it is, using Adam Smith’s metaphor, almost as if an “invisible hand” were guiding self-interested individuals to work towards what is in society’s interest.  One of the goals of Modern Principles is to teach students to “See the Invisible Hand,” that is to recognize when self-interest leads to the social good and to understand that this beneficial result is not automatic but depends crucially on the operation of institutions.  Students who can recognize and understand the invisible hand gain an appreciation for what markets can do but precisely by understanding the difficulty of the task that markets sometimes accomplish they also gain a deeper appreciation of  market failure.

 

In See the Invisible Hand (powerpoint slides),  I illustrate the invisible hand and some of the institutions that channel self-interest towards the social good.  (These slides are an extended version of a talk that I also gave at the North Carolina teaching symposium).  See the notes pages for some notes on the slides.  If the embedded video doesn’t work you can find it online here.

Originally posted on June 6, 2011.

 

May 9, 2011- Tyler Cowen shows us through economics that we may not be as innovative as we think we are and urges us to change.

Originally posted on February 10, 2011.

 

Alex Tabarrok’s PowerPoints from his recent talk on the ‘Invisible Hand’ can be found here.

 

Tyler Cowen’s PowerPoints on ‘Teaching Macroeconomics in Turbulent Times’ can be found here.