“adopt a code of ethics that requires disclosure of potential conflicts of interest that can arise between economists’ roles as economic experts and as paid consultants, principals or agents for private firms”.

More than 300 economists signed the letter, among them Nobel laureate George Akerlof and Christina Romer, a former advisor to US president Barack Obama.

Almost exactly one year later, the American Economic Association in fact agreed on a new disclosure codex. (Luigi Zingales also presented an interesting paper on the “Capture of Economists”.)

What do the authors of the open letter make of the new guidelines? I did an interview with Gerald Epstein, who wasn’t involved in the discussions about the new rules.

Olaf Storbeck: Gerald, what do you think about the new AEA disclosure guidelines? Are you satisfied?

Gerald Epstein:  I think the AEA guidelines are a very big step forward. They make very clear the importance of disclosure of potential conflicts of interest by economists and set out in detail the types of conflicts that should be disclosed. In some ways these guidelines are stronger than i had expected.

For example?

They require disclosure with respect to publication in AEA journals, rather than just recommend it. And they require such disclosure with respect to a broad range of possible conflicts including those connected to groups that might have an ideological interest in the outcome of the article and not just material or financial. While this cuts a broad area, I think it is healthy.

The guidelines also suggest that these same criteria for disclosure apply to all other publications, including non academic publications, media appearances and testimonies. By suggesting their application to these areas, as well as by requiring such disclosures for AEA publications, these guidelines will help to set norms of behavior that colleagues, the press, students and citizens can help hold economists accountable to.

Is there anything missing?

One could quibble about the $10,000 limit. For an economist who makes a low salary, smaller amounts would have a significant impact. Still, I think that as a bench mark, the $10,000 figure is fine since it will catch most of the economists for whom such kinds of activities are an important part of their work.

What should happen next?

These guidelines should be widely promoted and reported on in the press and it would be important for journalists, students and others to try to see if such guidelines can be broadly implemented for other publications, TV and radio appearances, etc. The point would be to make such guidelines a broad norm that are widely implemented .

Will these guidelines have any impact?

I do think they will have an impact in terms of providing information to the public. it is very difficult to predict whether it will have an impact on the professional activities of economists. It will take five  years or so to see that.

Would you recommend economic associations abroad to adapt similar guidelines?

Yes. Absolutely. I think this would be a good starting point for other associations. If they do not have publications, then they could still recommend the broad guidelines as indicated in point 7 of the guidelines. In fact it would be good to start with point 7 and then if they have publications, then require that they apply to the organizations’ publications.

In a striking paper, Gerald Epstein and Jessica Carrick-Hagenbarth showed that from 2005 to 2009, a lot of economists who made proposals for financial reform did not reveal significant links to private financial institutions.

In their paper entitled “Financial Economists, Financial Interests and Dark Corners of the Meltdown: It’s Time to set Ethical Standards for the Economics” Epstein and Carrick-Hagenbarth urged the profession to develop a “code of ethics which would require academic economists to identify these connections in appropriate contexts”.

On its current annual meeting, the American Economic Association responded  to this criticism. As the AEA announced in a press release, “the Executive Committee of the American Economic Association adopted extensions to its principles for authors’ disclosures of potential conflicts of interest in the AEA’s publications”.

These are the new guidelines:

(1) Every submitted article should state the sources of financial support for the particular research it describes. If none, that fact should be stated.

(2) Each author of a submitted article should identify each interested party from whom he or she has received significant financial support, summing to at least $10,000 in the past three years, in the form of consultant fees, retainers, grants and the like. The disclosure requirement also includes in-kind support, such as providing access to data. If the support in question comes with a non-disclosure obligation, that fact should be stated, along with as much information as the obligation permits. If there are no such sources of funds, that fact should be stated explicitly.  An “interested” party is any individual, group, or organization that has a financial, ideological, or political stake related to the article.

(3) Each author should disclose any paid or unpaid positions as officer, director, or board member of relevant non-profit advocacy organizations or profit-making entities. A “relevant” organization is one whose policy positions, goals, or financial interests relate to the article.

(4) The disclosures required above apply to any close relative or partner of any author.

(5) Each author must disclose if another party had the right to review the paper prior to its circulation.

(6) For published articles, information on relevant potential conflicts of interest will be made available to the public.

(7) The AEA urges its members and other economists to apply the above principles in other publications: scholarly journals, op-ed pieces, newspaper and magazine columns, radio and television commentaries, as well as in testimony before federal and state legislative committees and other agencies.

At a first glance, this makes a good impression to me. Let’s hope that these guidelines will usher in a new age of transparency in the economics profession.

Update: Here’s an interview with Gerald Epstein about the new rules. Gerald is full of praise.

Update: Last year, Tim Harford discussed potential conflicts of interest in an interesting piece. 

IZA Logo

It was one of the briefest letters David Jaeger has ever received. And few others made him so upset: “Dear David, we have decided to terminate your IZA affiliation. Thank you for your cooperation in the past and all my best wishes, Klaus”, Klaus Zimmermann wrote to Jaeger several weeks ago.

For David Jaeger, who used to teach economics at the University of Cologne and recently moved back to the City University of New York, this was a slap in the face.

He was one of the first research fellows when the Bonn based “Institute for the Study of Labor” (IZA) was founded in 1998 and has supported it ever since. In 2003 and 2004, when David Jaeger was a recipient of the renowned Humboldt Stipendium, he spend one year as a visiting fellow in Bonn. Jaeger taught at the IZA summer school and visited the economic research institute almost every summer.

“It was really a good place”, Jaeger told me. “I do find it upsetting to be summarily dismissed after all these years of being affiliated and after having spent so much time contributing to – and, in fairness, benefitting from – IZA.” He asked Klaus Zimmermann to give an explanation for the decision to throw him out but has not received any answer yet. “I have no idea why I was tossed out”, says Jaeger, who uploaded Zimmermann’s letter to his website.

David Jaeger is not the only prolific economist who recently was thrown out of IZA without any further explanation. The same thing happened to Christian Dustmann, a professor at the University College London and one of the leading empirical labour economists in Europe. “I was very surprised and I don’t know the background of this decision”, says Dustmann, who joined the IZA as a research fellow in January 1999.

The decision to sack him looks particularly weird given the fact that Dustmann worked very closely with Klaus Zimmermann until recently. From 2003 to 2010 Dustmann, was an editor of the “Journal of Population Economics”, a journal founded by Zimmermann and published by IZA.

The IZA is one of the most important global academic networks and is mainly focused on labour market research. About 1100 economists from 40 countries are affiliated to the IZA. It cooperates closely with the University of Bonn, one of the leading economics departments in Europe. The institute was founded in 1998 by the German economist Klaus Zimmermann who has been its director ever since. The institute is funded by the Deutsche Post foundation.

IZA fellows enjoy no monetary benefits from their affiliation to the research network. However, they receive important reputational benefits and can disseminate their academic research through IZA’s discussion paper series. “The IZA is really an amazing place”, says David Jaeger, “it has, done a lot for empirical labour economics in Europe.”

"An amazing place": The IZA in Bonn.

Other leading labour market researchers are highly irritated by the decision to sack Jaeger and Dustmann without any explanation. “I am very concerned about what has happened”, says Jennifer Hunt, Professor of Labour Economics at Rutgers  University and an IZA fellow herself. “The expulsions seem very arbitrary.” As Jennifer pointed out to me:

“Both Christian and David rank very highly both in terms of the quality of their research and their contributions to the IZA. Christian was an editor of the Journal of Population Economics, associated with IZA, and David has spent long periods in residence at the IZA, and is valued as a mentor by younger researchers on the IZA staff in Bonn. Both continue to publish in top journals. If they have been excluded from IZA, it is certainly not because of their research and service, and the migration group, in particular, will be much weaker.“

Justin Wolfers, a professor with the Wharton School (University of Pennsylvania) and also an IZA fellow, makes a similar point.

“I do know that he [David Jaeger] is not only a fine economist, but has been an enthusiastic supporter of IZA. He’s been involved with their conferences and summer schools, published useful working papers — pretty much exactly what you might hope a research fellow would do. Given how many fellows IZA has, and how few of them have been as involved as Jaeger, it does seem like an odd decision to terminate him.”

According to Klaus Zimmermann, the whole discussion is a storm in a teacup. As he points out, each fellowship is being reviewed internally every three years. The decision to renew or cancel a fellowship was based on the “performance in academics as well as in policy advise” as well as the intensity of the cooperation with the IZA and the future direction of research of the academic. Another aspect taken into consideration was the “mutual willingness to cooperate”.

As Zimmermann asserts:

“This is a well established procedure that has been used since the foundation of the institute. Discontent about the decisions exists since the research network has been set up. Nevertheless, these procedures unfortunately are necessary to enforce the academic standards and the working capacity of IZA”.

Other research networks like the CEPR and CESifo only very rarely get rid of fellows. As Stephen Yeo, the CEO of CEPR, points out:

“We occasionally find that fellows are no longer active in CEPR – either because they have moved into university administration, or their interests and the Programme’s interests have diverged. In this case we write to them suggesting that their association with CEPR no longer makes sense, etc etc. Some write back and disagree, and we usually give them another chance.”

According to Julio Saavedra, the Munich based CESifo network follows similar procedures than CEPR and usually only gets rid of fellows who cease to work as an academic.

It is not only the excellent academic track record of Christian Dustmann and David Jaeger that raises an eyebrow.

Additionally, it is striking that two leading figures of the DIW Berlin research institute were expelled from IZA: Gert G. Wagner, a professor at the Berlin University of Technology, and Georg Weizsäcker, professor at the University College London. Wagner and Weizsäcker have been chairing the executive board of the DIW since Klaus Zimmermann stepped down prematurely as DIW president in February 2011 after more than ten years at the helm of the research institute.

Klaus Zimmermann rejects the notion that the decisions to terminate some IZA fellowships were related to any personal issues. To think that there is a causal link to an institution like the DIW is “erroneous”, Zimmermann explaina. As Zimmermann points out, the number of fellows grew by more than ten percent in 2011 but only about one percent of fellowships were terminated. As Zimmermann points out: ”The separations were in line with the numbers that were common in the earlier years and the decision to cancel a fellowship were purely taken on individual and objective reasons.”

David Jaeger feels deeply hurt by IZA’s decision. “Klaus Zimmermann deserves a lot of credit for building IZA into the important institution it is today. I care a lot about IZA – that’s what makes this so painful.”

Some economists are concerned that the way IZA deals with it’s fellows has the potential to damage the institution. As Justin Wolfers puts it:

“If the decision to terminate fellows is based on anything other than a considered evaluation of their scholarship and their contribution to IZA’s broader mission, then it most definitely would tarnish IZA’s reputation. If fellows start to be terminated for non-scholarly reasons, then it would naturally lead the readers of IZA research to wonder whether there are other ways in which political or personal vendetta’s are influencing the scholarship, which would reduce the prestige of the institution.”

]]> http://economicsintelligence.com/2012/01/03/not-so-fellow-any-more/feed/ 2 51.553745 -0.097731 51.553745 -0.097731 Olaf http://www.iza.org/de/webcontent/press/files/logo_large.jpg IZA http://economicsintelligence.com/2011/12/20/behind-the-scenes-of-ejmr-an-interview-with-kirk/ http://economicsintelligence.com/2011/12/20/behind-the-scenes-of-ejmr-an-interview-with-kirk/#comments Tue, 20 Dec 2011 09:50:20 +0000 Olaf Storbeck http://economicsintelligence.com/?p=1489 Continue reading →]]> The Economic Jobs Market Rumor Forum is a controversial web forum for economists.  Christine Mattauch, a German freelance journalist based in New York City, recently wrote a story about EJMR for Handelsblatt (“Die Gerüchteküche der Volkswirte”) . She got in touch with “Kirk”,  the anonymous moderator of the forum and did the following interview with him by email.

Christine Mattauch: When was the website founded, and why?

Kirk: An economist who went by the alias of Tatonnement founded Economics Job Market Rumors (EJMR) several years ago. The aim was to provide a forum to help economists share information and tips about the complex economics job market. About a year ago Tatonnement no longer wanted to moderate the site and offered it to the person who made the best proposal to be the next moderator.

How many users does it have, and could you say how they are scattered by countries/regions? Any idea where the site ranks in comparison with competitors?

In a typical month EJMR receives between 50,000-60,000 unique visitors, over 200,000 visits and 2 million pageviews. The average length of a visit is over 8 minutes. The top 5 countries by visitors are US, Canada, UK, Germany, Australia. I don’t really think of other sites as competitors as EJMR operates in a fairly unique space.

In you own view, what makes the site attractive to the econ community? What would you consider being unique?

EJMR provides students with insider information of the economics job market and profession that they can’t find anywhere else. It also gives economists a unique opportunity to unwind and discuss various topics with fellow economists without having to worry about their reputation being tarnished.

Why do you want to stay anonymous?

For two primary reasons. Given that EJMR often breaks the news of controversies in the economics profession, it could be damaging to my career to be named as the moderator of the site. Secondly, since EJMR discusses a lot of political and economic issues I feel it is important to remain as non-partisan as possible, and show no preference to any topic. Users of the site have various theories on my identity, but they’re not very close!

Would you reveal if you are the administrator or founder of the website, or maybe both? Any personal/background information you would allow us to share, like male/female, living in London (or not), being a student/an economist, whatever?

The name Kirk gives it away. Where I come from the scarcity problem has been solved by replicators and the Federation no longer has a need for economists. I stand alone in a society dominated by political scientists.

Is the site being operated out of passion (as a hobby, we would say in German) or is it a commercial project?

A combination of the two, but primarily as a hobby. Web design is a hobby of mine and I and find it much more interesting to be working on a site that has so many users and serves a useful purpose rather than tinkering with projects that nobody looks at. Since taking over EJMR I’ve added several new features including a optimized site for smartphones, a quote button, a voting system, and identifier tags so that within a thread users are able to anonymously identify each other using 4 character tags.

A main feature is that anyone can post easily and that entries are hardly censored. Why is that?

This brings several benefits to EJMR. Firstly, by having minimal entry barriers it raises the number of active contributors to the site and minimises the number of ‘lurkers’. Secondly, the anonymity and ease of use allows users to express their opinions or reveal information that they would not be comfortable to do otherwise. Thirdly, a lot of moderation does take place, but it is done discreetly.

John Cawley with Cornell University writes in a guide for young economists about the site: “I had high hopes for it, thinking it might be a clearinghouse for important information. Sadly, it’s virtually useless as the message boards are overwhelmed with unrelated and offensive posts. Job candidates are better off ignoring it.” – Your comment?

I wholeheartedly disagree. Out of every 50 posts, about 4 or 5 may be unrelated or offensive. These are either deleted quickly or sink to the bottom of the site when no one responds. In addition, users of EJMR also have a mechanism to report each post to be deleted; adding an element of crowd sourced moderating to the site. The site is popular with some of the most distinguished economics professors, but I’ll admit that it can help to have a sense of humor when visiting EJMR.

Yesterday,  Aaron Tornell with UCLA and  Frank Westermann (University of Osnabrück) exumed the debate with a weird post on Voxeu.org. Both academics got completely lost in the arcane details of central bank accounting and make claims that are not backed by facts. Unfortunately, this piece got a lot of publicity because FT Alphaville and  Felix Salmon picked it up.

Karl Whelan debunks the  arguments by Tornell and Westermann convincingly in a piece entitled “Worse than Sinn”. His conclusion is straightforward:

“this piece has even less to add (and more to subtract, if believed) to the stock of useful knowledge than Sinn’s various pieces”

There’s nothing to add to Karl’s points.

I really wounder how some academics work. If Tornell and Westermann would have bothered to take a look either a brief chapter in March edition of the Bundesbank monthly bulletin (pp 34ff) or the October edition of the ECB monthly report (pp 35ff) , they should have realised how flawed their description of the Target2 operations is.

Logo of the ECB (Image via Wikipedia)

The nationality of the ECB’s managerial staff matters for the monetary policy of the central bank, two German and Austrian economists show in a new paper. The findings are so politically charged that the detailed results of the study are kept secret.

Today is the first working day of Mario Draghi as the new president of the European Central Bank. Apart from Draghi, two more Italians have a seat in the ECB council: Lorenzo Bini Smaghi and Ignazio Visco, Draghis successor at the helm of the Bank of Italy.

Currently, no other Euro zone country has as much influence in the ECB council as Italy has. Ironically, the country is also at the centre of the Euro crisis.

Does the nationality of the ECB’s policy maker matter?

„Not at all“, would be the official answer of the central bank to this question. Formally, members of the governing council do not represent their home country. According to the rules of the ECB, they have to base their decisions on the needs of the whole currency area. In a metaphorical sence, they hand in their passports when they join the central bank.

Is this a realistic description of what’s going on in the central bank?

Harald Badinger (Vienna University of Economics and Business) and Volker Nitsch (University of Darmstadt) addressed this question a remarkable paper. According to their results, the official view is a delusion. In reality, the nationality of the policy makers does influence the monetary policy of the ECB.

The results of the paper entitled “National Representation in Multinational Institutions: The Case of the European Central Bank” are so explosive that Badinger and Nitsch refrain from publishing the most juicy parts of their work.

Badinger and Nitsch meticulously – and apparently to the consternation of the ECB – collected data about the nationality of all top-level employees of the central bank. They were able to get this information for 190 of the 210 senior managers who have been hired by the central bank since 1999.

The economists reveal that high-ranking ECB officials have a tendency to hire their fellow countrymen. Additionally, the nationalities of the policy makers do influence the monetary policy decisions in a meaningful way.

As Badinger and Nitsch assert:

“Looking at the European Central Bank, we show that nationality is indeed relevant for both hiring and decision-making.  (…) There is evidence for the existence of national networks between adjacent management layers.

Finally, monetary policy decisions seem to be linked to national representation in the core business areas of the ECB.”

The analysis is based on a common rule of thumb for monetary policy – the so-called Taylor rule. As the economists explain in their paper, “Taylor rules specify the nominal interest rate as function of inflation and the output gap”.

Badinger and Nitsch compare two different specifications of the Taylor rule. The first one is based on the actual economic weights of the different Euro zone countries. The second version uses the national representation weights in the management of the ECB instead. According to the paper, the latter specification explains the actual interest rate decisions of the central bank better than the first one.

As the economists conclude:

“there is convincing evidence that the empirical fit of the Taylor rule based on national representation weights in the management of the ECB clearly exceeds the fit of the rule that is observed for euro area aggregates based on economic weights.”

This is where the paper really gets interesting. Which member states are too heavily represented in the ECB and which are marginalised? Which countries benefited from the biased monetary decisions and which were?

Unfortunately, the answers to those questions are not given in the paper. The economists do not publish any country specific results at all. In a lengthy telephone call with Volker Nitsch, I tried to convince him to reveal country specific details. However, I wasn’t able to make him change his mind.

Both researcher are afraid that the media could take the results the wrong way and might initiate a nationalist campaign against the ECB.

Between the lines I also gleaned that the authors do not want to offend the ECB. Apparently, from the central bank’s perspective, even the current version of the paper is very hard to digest. Allegedly, a senior ECB representative was completely startled when he listened to a presentation of the paper at a conference.

However, shooting the messenger seldom turns out to be a successful strategy.

Update: Bernd Hayo (University of Marburg) and Pierre-Guillaume Méon have recently published a  related paper entitled “Behind closed doors: Revealing the ECB’s Decision Rule”. Here’s the abstract:

“This paper aims at discovering the decision rule the Governing Council of the ECB uses to set interest rates. We construct a Taylor rule for each member of the council and for the euro area as a whole, and aggregate the interest rates they produce using several classes of decision-making mechanisms: chairman dominance, bargaining, consensus, voting, and voting with a chairman. We test alternative scenarios in which individual members of the council pursue either a national or a federal objective. We then compare the interest-rate path predicted by each scenario with the observed euro area’s interest rate. We find that scenarios in which all members of the Governing Council are assumed to pursue Euro-area-wide objectives are dominated by scenarios in which decisions are made collectively by a council consisting of members pursuing national objectives. The best-performing scenario is the one in which individual members of the Governing Council follow national objectives, bargain over the interest rate, and their weights are based on their country’s share of the zone’s GDP.”

Under the auspices of Backhaus, the ELJE in 2006 published two articles by Frey that had already been published earlier in other journals with different titles, as I reported in September. (A detailed comparison of the content of the papers is available here and here.)

The invitation, which was distributed via the newsletter of the  “Societies for the History of Economics”, refers to my articles about Bruno Frey (the full story is here and here) and his tendency to publish similar papers in a number of journals without any cross-references:

“It is only by varied repetition that new ideas can be impressed upon reluctant minds.”

This often repeated admonition by the Nobel-prize winning economist James M. Buchanan is obviously unknown to the journalist of the German daily “Handelsblatt” Olaf Storbeck, who has initiated a vendetta against the well-respected economist Bruno S. Frey accusing him of self-plagiarism.

Many people agree that such a delinquency does not even exist. For this reason, a meeting will be convened at the University of Erfurt to discuss the issue, the merits and demerits of repeating oneself.

Essays read and defended at this meeting will be published in the journal “Homo Oeconomicus” in a conference issue. The meeting will take place at the University of Erfurt on December 9.”

I really wonder who is going to attend this conference and will give lectures.

Has David Autor, the editor of the “Journal of Economic Perspectives” who publicly rebuked Frey  been invited?

What about William Neilson, the editor of the “Journal of Economic Behavior and Organisation” who - according to Barkley Rosser - informed Frey and his co-authors that he will not be accepting any papers from them for consideration at JEBO as long as he is editor?

Will there be anybody representing the “Committee on Publication Ethics” (COPE) which states  in its “Retraction Guidelines”:

“If redundant publication has occurred (i.e. authors have published the same data or article in more than one journal without appropriate justification, permission or crossreferencing) the journal that first published the article may issue a notice of redundant publication but should not retract the article unless the findings are unreliable.

Any journals that subsequently publish a redundant article should retract it and state the reason for the retraction.”

I could not find any further information about the conference on the website of the faculty. At the moment, it has not yet been listed in the conference section. (I dropped Professor Backhaus a mail and am awaiting his answer.)

I also wonder what Bruno Frey himself thinks about this meeting. Backhaus is quite close to him and I cannot imagine that he will host the conference without Frey’s consent.

On the other hand, Frey profusely apologised in a letter to David Autor for repeating himself without any cross-references to his other papers on the same topic. The letter, also written in the name of Frey’s co-author Benno Torgler and  published by the JEP, states:

“we well understand your very serious complaint and we both agree that you are right. It was a grave mistake on our part for which we deeply apologize. It should never have happened. This is deplorable. (…)

Please be assured that we take all precautions and measures that this unfortunate event does not happen again, with any journal.”

Be that as it may. I’m really feeling honoured that my work has such an impact (although I’m not quite sure about the vendetta part of invitation…) I really look forward to reading the papers that are going to be presented in Erfurt.

If you happen to like this blog, why don’t you like me on Facebook as well?

Image via Wikipedia

Each year, motorists in Germany collectively spend 234 million hours in traffic jams. According to estimates by the German highway authority, this congestion causes an economic loss of about 3.5 billion Euro per year.

At first sight, there’s an easy solution to this problem: just build more roads, and the congestion will vanish, won’t it? Automobile lobbyists are pushing this view very strongly, and they are at least partially successful.

Even in cash-strappedBritain, which is currently enduring the most severe austerity programme since the second world war, the government spends 897 million pounds on new roads, reports George Monbiot.

However, more roads will not bring an end to congestion. Instead, they will bring more traffic. The American economist Anthony Downs put forward this hypothesis more than four decades ago.  He called this idea the “fundamental law of highway congestion”.

According to an amazing paper by two Canadian economists, Downs really had a point.

Gilles Duranton and Matthew Turner, both affiliated to the UniversityofToronto, empirically analysed the relationship between road building and traffic volumes and came to a very sobering conclusion:

“increased provision of interstate highways and major urban roads is unlikely to relieve congestion of these roads.”

The paper is entitled “The Fundamental Law of Road Congestion: Evidence from US Cities” and has been published in the latest issue of the “American Economic Review”, one of the globally most renowned and demanding economic journals.  (Here’s a free working paper version of the paper.)

The meticulous study rests on highly detailed regional data about public expenditures for roads and the development of traffic volumes between 1983 and 2003. Duranton and Turner looked at these  numbers from different perspectives. On the one hand, they analysed how the road network and the traffic volumes in a particular region have evolved over the years. On the other hand, they investigated differences in infrastructure expenditures and traffic flows across regions in a given  year.

Both approaches produce very similar results: A one percent increase in roads leads to a one percent increase in traffic within less than ten years. In other words, if you double the road infrastructure, car traffic also doubles very quickly.

Duranton’s and Turner’s study is highly relevant for transport policy and for urban planning. They came to the conclusion that the “fundamental law of highway congestion” does not only hold on Highways. Apparently, it is also valid within cities. For a “a broad class of major roads” within urbanised parts of America, a 1 percent increase in road kilometres triggers a 0.67 to 0.89 percent increase in vehicle-kilometres travelled.

Amazingly, the quality of the local public transport network does not affect this pattern. According to the paper, increased “provision of roads or public transit is unlikely to relieve congestion.”

However, do the economists really observe a causal relationship? A mere correlation does not explain anything about cause and effect. In general, it is possible that more streets are built in regions where traffic volumes are on the rise because of other reasons. However, the economists make sure that their results are not driven by regional economic activity, population growth or other socio-economic factors.

Additionally, they use a method that is common in econometrics for disentangling cause and effect: They employ an instrumental variable approach. As they explain in their paper:

“To identify the causal effect of roads on traffic, we examine both time series and cross-sectional variation in our data and exploit three instrumental variables to predict the incidence of roads in metropolitan statistical areas (MSAs). These instruments are based on the routes of major expeditions of exploration between 1835 and 1850, major rail routes in 1898, and the proposed routes of interstate highways in a preliminary plan of the network. Our results strongly support the hypothesis that roads cause traffic.”

What exactly causes the additional traffic? Duranton and Turner addressed this question, too. The most important factor is that people change their driving behaviour. A better road network induces people to drive more. That areas with a better roads attract new residents turns out to be less important.

Hence, when it comes to traffic, Say’s law really seems to hold: new supply creates its own demand.

Now, finally, the ECB itself gets involved. In its latest monthly bulletin, published yesterday, the central bank addresses the arguments of Hans-Werner Sinn. From my point of view, this analysis is at odds with Sinn’s view.

Here’s a table that compares of statements by Sinn and the ECB on the matter.

At the core of the debate is the electronic payment system that private banks use to settle cross border payments in the Euro area. This system is called Target2. (A detailed description of the system and the debate is available here and here.)

Here’s a brief summary of the key points from the ECB monthly bulletin:

- Sinn suggests that the Target2 operations come “at the expense of German banks”. The ECB, however, points out:

“It would be wrong to believe that TARGET2 liabilities that result from the provision of relatively large amounts of liquidity to banks in some countries have a negative impact on bank lending in other countries.”

- Sinn’s asserts that current design of the cross border payment system is flawed and detrimental to the stability of the Eurozone. He writes: ” It (…)  leads to hefty foreign debts and undermines the ability of the ECB to influence with its interest-rate policy the economies of the countries where the surplus money is flowing to.” This is the view of the ECB:

“The distribution of liquidity within the Eurosystem provides stability, as it allows financially sound banks – even those in countries under financial stress – to cover their liquidity needs, thereby contributing to the effective transmission of the ECB’s interest rate decisions to the wider euro area economy, with a view to maintaining price stability in the euro area over the medium term. “

- Sinn suggests that there should be an upper limit on  Target2 balances. The ECB asserts:

“As there can be no upper limit on the value of payment flows within a single currency area, there can be no upper limit on the TARGET2 balances of NCBs. Limiting the size of TARGET2 balances would be inconsistent with the concept of a currency union. “

- Sinn claims that similar imbalances cannot occur in the United States because the electronic payment system is designed differently.  The ECB, however, writes:

“[I]n the United States, there are no limits on payment flows within the currency area formed by the 12 Federal Reserve districts. Interdistrict balances emerge from such payment flows, which are not more constraining than the TARGET2 balances are in the Eurosystem. The mechanism used in the United States to readjust interdistrict balances once a year has no influence on cross-border payment flows and essentially leads to the adjustment of the key used for the allocation of profits and losses of the US Federal Reserve System to the 12 district Reserve Banks”

Interestingly, however, the Ifo institute published a German  press release earlier today asserting that there are “no factual differences” between Sinn’s view and the points made in the ECB’s monthly bulletin.

I’m in a similar situation right now with regard to my rant against this years decision on the Nobel prize.

A number of comments on my blog and in private emails as well as a discussion on Kantoos Economics (in German) have convinced me that I mixed my general skepticism about contemporary macro with the specific work of Sargent and Sims.  In my blog post I made some claims about the work of the new laureates that  are not  justified.

My view on Sargent was heavily influenced by two things:

- The  paper “After Keynesian Macroeconomics” that he published with Robert Lucas in 1979. In that paper, they boldly claim that Keynesian models are completely useless and discuss an equilibrium model with rational agents as an alternative. In this model, agents are “assumed to make the best possible use of the limited information they have and to know the pertinent objective probability distribution” and  all markets clear. I personally don’t think that this approach is significantly more useful than the old Keynesian models that  indisputably failed.

- A panel discussion entitled “Why Did Economists Not Predict the Crisis?” at the annual meeting of the American Economic Association in Atlanta in 2010 where Sargent’s performance wasn’t fantastic from my point of view. He claimed that the established economic theories were indeed very useful with regard to the financial crisis and pointed to the Diamond/Dybvig (1983) paper (He makes similar points in this interview.) I did not find Sargent’s general way of reasoning overly convincing because bank runs were only one (rather minor) aspect of the current financial and economic crisis. The housing bubble, the insufficient regulation of the financial sector and the blind confidence in financial innovation as well as the stability of the financial system were much more important, from my point of view.

However, I did not know that Sargent worked on models with multiple equilibria and I wasn’t aware of his work about model uncertainty. In his research on learning, he analysed the underpinnings of the rational expectations theory. Thankfully, several people have pointed this out to me.

It should also be stressed that they received the prize primarily for their methodological contributions to macroeconomics, not for theoretical models I scold in my blog post.

As Morten Ravn wrote me:

“These methods have no views about how the economy works and there’s no way you can ascribe them to an old regime.”

Well, that’s right.

Apologies.

Further reading:

On the Work of Sargent and Sims:

Stockholms description about their work.

An interview with Tom Sargent in “Macroeconomic Dynamics” (2005). An interview with Chris Sims (2002).

Tyler Cowen’s discussion of their contributions (Sargent, Sims)

Other critical voices  on the decision to give the prize to Sargent and Sims: 

Ira Basen:  “Economics has met the enemy, and it is economics” 

John Cassidy: “A Nobel for freshwater economics”

Peter Boettke: “The 2011 Nobel Prize in Economics”

Arnold Kling: “The Legacy of Sargent and Sims”

On the problems of contemporary macro

George Akerlof (2007): “The Missing Motivation in Macroeconomics”, American Economic Review, 97(1): 5–36

Willem Buiter (2009): “The unfortunate uselessness of most ’state of the art’ academic monetary economics”, Voxeu.org.

Paul Krugman (2009): “How Did Economists Get It So Wrong?”, New York Times Magazine.

David Colander u.a. (2009): “The Financial Crisis and the Systemic Failure of Academic Economics”, Kiel Working Paper

John Kay (2011): “Economics: Rituals of rigour”, Financial Times.

John Quiggins (2010): “Zombie Economics: How Dead Ideas Still Walk among us”, Princeton University Press.

On the Lindau Meeting of Economic Laureates, Joseph Stiglitz also gave a very good talk about the problems of the discipline.

There’s also an interesting defence of contemporary macro by Narayana Kocherlakota entitled “Some Thoughts on the State of Macro” (Many thanks to Monika Piazzesi for pointing me to this paper.)