Notes on the AEA meetings in Chicago

The main point of my US visit was to attend the American Economic Association (AEA) meetings. They have been pretty good although many of the sessions were (predictably) mainly oriented to the US. In all I attended 12 sessions over 2.5 days with 4 speakers per session. I saw several Aussies at social events during the meetings but most were recuiting new staff not attending the actual meetings. I took the following notes as the conference proceeded to force myself to begin to think about what I had learned.

Day 1

I went to a ‘social economics’ session on climate change where the speaker sought to apply behavioral economics ideas to global warming issues – I approve of the idea of attempting to encourage a change in US mass consumption ethics as a way of reducing greenhouse gas emissions but still wonder how you do it. Conventional carbon taxes coupled with tradable quotas seem to me to be the necessary proximate policy instruments although I am as happy as the next guy if ‘moral suasion’ to cut energy waste can work. Generally, I think we can sensibly cut our desires Buddhist-fashion to augment our welfare – substituting leisure for material consumption – but I would be very reluctant to cut out conventional policy approaches. I have long thought of writing a new version of the basic consumption model of economics where you allow the consumer to invest money and time in contracting desires!

A session on the economics of obesity was focused on things that interest me. Getting fat involves external health costs because (unlike smoking or drinking) the activity is untaxed and there are health costs generated that are paid for by risk-pooling insurance arrangements. But, for certain, the private costs you incur from being a fatty are much bigger than the public costs so perhaps obesity is not so much of a public health issue. Two of the three papers presented focused on this issue. In the US health insurance is generally provided by your employer and fatties are paid less than people of normal weight. Indeed the lower wage probably more than compensates for the extra health costs imposed by being fat. So I am unsure if this analysis applies much to Australia. If health care funds in Australia could charge higher premia to fatties effects would differ.

I then went to a session chaired by James Galbraith (son of John Kenneth) on the economics of exiting from Iraq. It was chilling from the perspective of the US. Nobel Laureate Thomas Schelling argued that the war had ended and the issue was how does the US get out of an occupation? He generally thought that an exit would not occur until the Presidency changed – then an ‘if you break it you must pay for it policy’ should be used. Lynda Bilmes (co-author last year of a celebrated study with Joe Stiglitz on the cost of the war in Iraq) estimated the huge costs the US would continue to experience from disability payouts even if it withdrew now. For each of the 3,040 US troops killed there are 16 with injuries that need treatment (50,508 injured disability claimants) creating ongoing health costs of a $700 billion dollars. Lynda ideas are summarized here. By the way she has increased her estimated total cost of US involvement in Iraq at $18,000 per US household!

The most astonishing paper in this session for me was by ex-1991 Iraq veteran Col. Douglas MacGregor who argued that the US had lost the war in Iraq and was an irrelevant force in the region. He argued that the US politicians who had organized the war as well as their generals were simply militarily incompetent. His classic line with respect to the idea of sticking around and ‘building institutions’ was ‘Iraqi Muslims would not accept a cancer cure from an invading white Christian military force’. He rejected ‘break it you must pay for it policy’ and argued for withdrawal now without any attempt to transfer military prowess to the local US-backed administration which he described as ‘doomed’. He believed the US had mistaken impressions of its invincibility because of flawed perceptions of its role in World War 2. There was an urgent need to think about how to stage moderate interventions that did not involve ‘shock and awe’ attempts to annihilate a country.

A luncheon address on the case for the US Federal Reserve to continue combine monetary policy with supervision of the banks – on the basis of economies of scope- was provided by Governor Ben Bernanke. It was boring – better suited for a straight banking audience though I was curious to see Bernanke. It was well argued using agency theory and ideas of economies of scope.

I finished my day with a session on the economic contributions of Milton Friedman by Thomas Sargent, Gary Becker and Robert Lucas. There were no eulogies but a lot of emotion. All three economists identified Friedman’s skills as a teacher along with his superb economic insight. Becker is not a young man but said that Friedman had been his friend - and teacher - for 50 years. Lucas was an ex-student of Friedman. All three say Friedman’s strength as his love of argument and his respect for opposing views even as he sought to demolish them as among his strongest assets.

I have long lost my copy of Friedman’s Capitalism and Freedom so bought a new copy after this talk. I have been flipping through it during dull presentations - it is still a good read!

Day 2

The opening session I made it to was on economics and biology chaired by Gary Becker. Economic motivations for biological phenomena such as the demographic transition, other-regarding utilities and perhaps most interestingly of all piece by Arthur Robson on ‘why we die?’ and (with Larry Samuelson) ‘why nature might want us to hyperbolically discount/’. Generally I found the discussion a bit space-cadet-ish and abstract. The paper by Robson is good but requires careful reading.

The luncheon involved a speech by David Kreps on the contributions to game theory of Thomas Schelling and Robert Aumann with a response by Schelling who told some nice intuitive stories about focal points in game theory. He discussed his delightful story about two separated friends in a city might find each other by thinking where the other person might focus.

Then excellent presentations on the US productivity acceleration after 1995 – they have finally agreed there was an acceleration! Standard stories dominated about the role of IT. An interesting piece by Barry Triplett argued that the main source of productivity growth was growth in the services sector backed by IT. It was a neat argument. Since the 1960s and a famous paper by William Baumol economists have regarded services as a sector that will not benefit greatly from technological advance – it was Baumol’s ‘unbalanced growth’ thesis. But in the US this is no longer true – services are the sector where most productivity gains are occurring. Indeed as I noticed on this trip there are now not only automatic check-in facilities for air travelers in the US but also automated check-in facilities in hotels. (The Hyatt Regency Chicago also has a device that checks on whether the bottles in your room bar fridge move – if they do you are charged for the drinks even if you don’t consume them – the idea is to stop you stacking your fridge with outside supplies – if you do the supplies are confiscated and you are charged $25). A final paper on Europe finds that it didn’t enjoy productivity acceleration after 1995 because its use of IT, particularly in the services sector, was so low. I found this interesting.

Finally I went to what I thought was the best paper at the meetings so far, an AEA Presidential address by George Akerloff on the use of norms in macroeconomics – ‘The Missing Motivation in Macroeconomics’. All the big consequences of neoclassical macroeconomics (Ricardian equivalence, independence of consumption from current income, the Modigliani-Miller theory, irrelevance of monetary policy etc) are a consequence of ignoring norms about how people believe they should behave. Incorporating these norms restores the commonsense conclusion that none of these neutralities need hold and, indeed, restores the valuable insights of Keynes. Highly recommended reading - the full paper is here. This might be a new topic I pursue. Many of the behavioral economics I understand through my work on economics and psychology for the study of illicit drugs.

Day 3

The first session was on urban economics and sprawl. We had what I think was a trite paper on the game-theoretic economics of building skyscrapers which modified conventional building models by defining a benefit from being biggest. It suggested developers wouldn’t earn big profits since they would overdevelop. But often they do earn very big profits. Very large buildings often reflect the lumpy nature of planned expansions in office and residential space rather than skyscraper wars. Another paper looked at persistence in urban structures by examining Los Angeles. The pattern of urban concentrations could be better explained by patterns of highway networks many decades ago than current networks. Interesting – you cannot ignore history. I also liked a paper by Jan Breuckner on urban sprawl externalities that focused on the issue of population densities and externalities from being social – the intriguing result was that sociable people choose to live in denser environments but that density itself is associated with low social capital. Thus sprawl delivers positive externalities in terms of allowing people to be sociable – on this grounds it should be subsidized not taxed! Of course agglomeration an d congestion externalities interact in complex ways so this is not a particularly robust finding.

A subsequent session looked at mega-stores such as WalMart. Although Mum & Pop single stores remain about constant in numbers in the US – they remain an important force - many of them are exiting just as many are entering. It is the big chains however which are growing much more rapidly and which don’t exit (close individual stores) so frequently – there are 500 US retailers which operate in more than 14 US states. Some of the papers used standard economies of scope arguments (demands for ‘one stop shopping’) to account for such trends possibly fostered by an increased role of women in the workforce. On the supply side WalMart now uses satellite technology, new barcode and GPS technologies and benefits from lower trade barriers. One stop shopping might be part of the explanation for the success of the chain but my guess is that cheaper prices are as important. Many of these efficiencies won’t be realized in smaller markets such as Australia – at least to the same extent. But still it is the large Australian chains such as Coles and Woolworths that should do best given the US experience. This seesion feed into ideas about the next session - the greater stability of US mega-stoire chains may have contributed to the greater macroeconomic stability of the US economy over the past decades.

The final session I attended was mainly on the great moderation (the perceived reduction in macroeconomic volatility) and financial markets. The main idea is that financial innovation and the removal of credit constraints better enables households to consumption smooth and thereby reduces the volatility of aggregate demand. This is a hypothesis not a claimed regularity since better access to debt might conceivably destabilize things. But household and cross-country OECD studies confirm that greater stability has been associated with financial market liberalization.

Recreation

Chicago is architecturally a beautiful city with both attractive older and more modern buildings. Its centre has broad footpaths that give it spaciousness. The Magnificent Mile portion of Michigan Avenue is a buzz for tourists, like me, with elegant buildings and shops. I have been here early January before and it was freezing cold but this year it is mild – cool, sunny spring weather in the middle of winter – the result of warmer air masses flowing in from the west and southwest and the effects of an El Nino year.

Is this weather trivia? Perhaps but it has caused a downturn in US oil demands and the largest drop in spot oil prices in 20 months. At $55-59US per barrel it’s the lowest priced oil since June 2005. It shows the market power of US energy consumers! And in turn a big collapse in gold prices and, surely not, base metal prices as well. I was interested to note that the warm winter in Chicago seemed to be having effects on the resource sector of the Australian economy which has dropped dramatically while I was here!

I was jetlagged throughout my visit and spent a lot of non-conference time reading and watching US TV. If anyone has good ways of dealing ewith jetlag I'd be interested to hear. I have tried melatonin and tryied adjusting immediately to the new time zone but after 6 days I was still very jet-lagged.

TV in the US describes a different world. Apart from the medical ads, the endless get-rich-quick schemes (Donald Trump was performing in Chicago while I was here), the body-beautiful schemes, the boring god-talk-shows and the expanded range of commercial trash shows available here, there was TV of great interest. I watched a PBS show on the withdrawn book Hit Man which describes how to kill people. It was defended by the press here on the grounds on freedom of speech. On the same theme while here I read the chilling (though poorly written) Phillip Carlo account of The Ice Man – a ghoulish account of a Mafia contract killer’s trade that has won high acclaim – he claims to have helped kill Jimmy Hoffa – gripping as it is it lacks credibility – save your money.

I did very much enjoyed a Frontline show on PBS that examined how the weapons of mass destruction lies in Iraq were concocted with the involvement of VP Dick Cheney. Astounding documentary television and well worth watching. By the way Cheney is still making money out of Halliburton!

Meanwhile I’ve had a carnivorous time in Chicago in the evenings eating my way through some great NY-cuts, prime rib and two excellent lobster tails over the past few days. While I may have made a bit of a pig of myself I have remained alcohol-free now for 6 days – the world looks different! I am a bit steaked-out so on my last evening here tonight I’ll try some Asian food.