What's up with Donald Trump

It's rare that your blogger writes about politics and I assure you when I do I will try to be very fair in my assessment to all sides of the story. That being said, I've noticed that Donald Trump has been getting a lot of attention in the media, and decided that it may be interesting to analyze his economic policies, specifically immigration and the relationship with mexico.

First one that's been the most talked about is his stance on immigration. He has said that he would stop the flow illegal immigrants, make mexico build a wall and pay for it themselves, put sanctions on mexico, and fine mexico 100,000$ for each immigrant that they "knowingly" send over. 

Whether the government should limit the number of immigrants coming into the country will always be hotly debated. One side of the argument is that if we allow too many low skilled workers, it will create a surplus of their cheap labor and drive down wages for unskilled workers and blow up income inequality.Its the most popular argument for trade unions and protectionists. The other side is that the argument claims the first argument falls into what economists the "lump of labor" fallacy. The idea being that wages can only fall if  ceteris paribus holds which it never does.They claim that immigration may even cause wages to rise with the increase in wealth of that area. 

The rest of his arguments are humorous at best I'm afraid. If Mr. Trump were to storm into the Mexican parliament and demand that they pass a bill to build a wall across the entire border, and pay a fine of around 1 Trillion dollars to the U.S, it wouldn't go very well. 

First of all, our allies in other countries would start to think of America as a bully and trying to subvert another independent countries democracy. Think of how some countries and academic institutions are speaking about Germany's actions toward  Greece only the U.S. doesn't have a reasonable claim to Mexicos debt. 

Second his demands that they pay the fine and build the fence would throw the country into a sovereign debt crisis and would create an incentive for the government to just inflate away the debt, hurting savings in the process.

Third, levying sanctions on a trade partner would be a violation of NAFTA and the WTO could penalize the U.S. Not to mention it would hurt its credibility in the current TPP talks and any other future trade pacts as well. 
An economic future for america with a trump president would look very dismal, there might be some who would favor it, (Labor Unions in manufacturing would love a 25% tariff on Chinese goods), and conservatives on the far right would admire anyone who attacks immigration on Mr. Trumps level.
The economist did a great piece on Mr. Trump here that might explain why a real estate mogul would enter into politics in the first place.

The inevitable fall of the euro?

There's been a lot of attention with the Euro lately, mainly because of Greece, and its caused a lot of economists to come out and renew their claims that ANY currency union without a fiscal Union is doomed to fail. Why is that? As John Cochrane points out in his blog here, a fiscal union doesn't have to be mandatory to get an efficient currency union. When Detroit declared bankruptcy, politicians in Washington didn't rush to decide if they should kick Detroit out of the dollar.
Is he right? Are the similarities between cities in the US the same as countries in Europe?
Some obvious differences are labor mobility and the political culture. Labor mobility in the sense that if any region in the US goes into an economic slump and people lose their jobs, they can move anywhere else in the US to find the same job or a different one. With Europe their tends to be a lot of frictions that could really deter mobility. An example being that if France goes into an economic slump, its workforce can't all move to Germany. After all doing something like that requires them to learn German, and adapt to their culture all of which increases the moving costs that it deters or at the very least slows down their movement.
Does that mean its doomed to fail? I say probably not.
One reason is that the worry that labor would move less frequently can be not as big as some economists believe. The OECD published a report here that shows that mobility right now may be even stronger than the US.  In fairness the data shows greater mobility in the newly joined eastern countries, while the rest of the Eurozone shows the same little-to-no mobility it has for the past few years.
Second is that the single currency union wasn't created as an economic program to stimulate growth. It was a political and strategic project meant to put an end to Europe's countless wars with itself. No country would presumably want to go to war with another country that it shared a currency, and had strong trade ties with.
But that won't stop some economists from predicting the end of the single currency. In the end nobody knows for sure. 

What's up with these weird sounding words?

I was thinking about a way to improve the performance of economics students and decided that definitions might be a good way to help them. So if your a student wondering what the heck your professor is talking about in class. This post may help you.
First one is "utility" this is by far the most used word in economics. You'll hear it from your first intro class to your phd asset pricing program. It doesn't mean anything super fancy, or something that must be "utilized" it's merely the measurement for someone's happiness. That's it! Nothing fancy at all just think that if I'm happier I'm getting more utility.  A variation that different professors might use are "welfare" it's pretty much the same thing and has nothing to do with food stamps.
Next is one that will confuse even the brightest graduate students. Some economists might say a phrase like "stochastic dynamic general equilibrium" when referring to some sort of economic activity. To explain it I'll break it down.
Stochastic means random. Some of you that are physicists might have heard of stochastic calculus and it sort of has the same meaning here.
Dynamic just means that things change.
And general equilibrium is basically where it all ends up. 
An analogy that I heard yesterday from David Zetland (who has his own blog here) was soccer.
The stochastic part are the random things that happen in the game.
The dynamics come in when because a player did something another player is going to do something. And if the first player had done something different then the second player would have done something different too. 
General equilibrium is where it ends up being whether it's 0-0, 1-2 or whatever the score is. 
So next time someone asks you if you know what stochastic dynamic general equilibrium means just say "yeah it's like soccer".
Optimization is also something you may hear in your intro classes. It the process of achieving your maximum utility.It can also be called acting optimally. 
Marginal is one that every economist should know. It's like a physicist not knowing the definition of mass. It just basically means adding one more of something. An extra unit of output or an extra hour of studying. It can mean adding another of anything. 
There are other words that get used a lot as well. Such as interest rates, money, discounting. These are for more specific economists so I won't articulate them here. 
If there is anything else you think I should mention feel free to write a comment.

What's up with Greece?

After 6 months in power and numerous of negotiations, it seems that Tsipras has given in to the demands of the Troika. What happens next is still uncertain. Although the prime minister of Greece has given into their demands, he still has to get this deal swallowed by his communist (Syriza) party members. It's likely that this will be an uphill battle though. The whole existence of Syriza was based on ending austerity and setting the terms for future bailouts. He will have to convince his party, and the people of Greece, that the terms under the bailout agreement are far better than defaulting on their debt.
If the Greek parliament votes down the bailout terms, is where the economics comes in.
The first thing that would happen is the European Central Bank (ECB) will cut off all emergency liquidity needs to the Greek Banks. This will exacerbate the bank runs that are already happening and pretty much guarantee a financial crises.
To fight this problem the Greek government would have to rescue the banks themselves, but the Greek Central Bank cant print Euros. The only alternative would be to go back to the old Greek currency of Drachma and handle their own monetary policy.
If they're smart they won't do that. As JP Koening wrote here, switching back to the drachma suddenly would lead to hysteresis. Why would any firm company in Greece want to accept Greek drachmas, that would certainly be devalued by the hot potato money printing the government would need to do to pay their obligations, when they could have strong Euros backed by credible institutions.
What comes next is beyond anybody knowledge, but the combination of rampant inflation, two currencies circulating, and high interest rates that greece had with the drachma would be a nightmare for anyone living there.
The deal reached is far from perfect, and may even hurt the Greek economy. But it's a trade off that might be well worth it in the long run.

 

Why is Economics so hard?

Everyday in class some of my students will continuously look at me with open bugged-eyes as if what I'm articulating is coming out in Mandarin. A few semesters of this and I decided to look for the root cause as to why economics is difficult for some people. Some hypothesis that I threw out there were
1. Students are not really interested in Economics
2. Maybe its the way I teach
3. Perhaps some psychological biases make it difficult to understand economic dynamics
4. It could simply be that the vocabulary confuses them
There can be many more but I didn't really have a big budget.

Testing my first theory was relatively simple. I passed out a survey on a random day in class and simply asked students, "What do you think of economics?", "Do you think economics applies to you?", "Do you think you might consider majoring in economics, or have you already considered it?". I had some other questions in there so as to get them to think the survey was about something else, and not just tell me what they think I want to hear.
The results were as one might expect. The students who had an A in the class were either students that indicated they wanted to major in economics, or who seemed to enjoy the information. The students who had C's and below were not really interested in economics and didn't want to major in it. Its also noteworthy to point out that 91% of the students with a C or below didn't think economics applies to them. (The answer is, is that it applies to everyone)

Testing out my second hypothesis was a little tricky but I was bale to get good data. I knew I couldn't simply just ask the students in person or on a survey of their thoughts on the way I teach, as I'm sure they would censor their words to make sure I didn't curve their grade down. What I ended up doing was asking one of my friends, who happens to be a student in that class, to ask students what they thought of my teaching. The reviews were very enlightening, from what she told me, it seems that what students have a lot of difficulty at is the way I articulate the math portion of it.
There's no way around math unfortunately, you can't calculate inflation without doing some division, and you can't find the marginal cost of a good without derivatives.

My third theory couldn't be done in a survey nor do I have any data to present but here is my theory in narrative form. When I was in High School and first learning about economics I remember a lecture on price ceilings and price floors and the shortages and surpluses created. What burns that memory in my mind is that there was always this student, who kept arguing with the professor about the effects of price ceilings saying things such as, " Why wouldn't someone just sell it at that price and continue building houses" or "Why wouldn't [producers] hire the same amount of people and keep prices the same?". This logic still comes up in some of my lectures, I remember lecturing on corporate taxes and regulatory costs and how they lead to price increases, there was this one student who passionately yelled "That's so unfair!!! Why are they making us pay for their taxes and [regulatory costs]?" I stated that companies are their make as much money as possible and that transferring costs over is how the markets work. This didn't seem to work as she came back and said "But companies already make so much profits, why cant they just make less?"
The psychological bias I think this shows is that some think that the world revolves around them and that they shouldn't have to pay higher prices for safer food or cars nor should they see the quality of their housing fall because the government cut their rent in half. I'm sure if I asked them if the government put a ceiling on their wages and the most they could make was $15,000 a year they would probably lose the incentive to go to college, or work harder.
With that being said, I don't want to give the impression that I'm against all government price controls. The minimum wage certainly helps people escape poverty, and utility companies that have monopoly power certainly can't be allowed to choose their own prices.

To test whether it was the vocabulary that was hard I had a vocabulary quiz in my class. The quiz was straightforward, I had a list of words with numbers next to them and asked students to articulate in extreme detail what these words mean when economists use them. Words I included were limited to basic economics examples being, marginal, utility, dynamic, stochastic and so forth.
The results were as one might expect, almost every student regardless of their grade in the class could articulate what demand & supply meant. Words like utility received definitions like "your water and electricity" from students who had C's and below. Words that received no attempt or where even my A students got it wrong were, dynamic, stochastic, endowment, and welfare. Welfare received 0 correct responses as the students thought it government welfare, when I was just looking for the same definition of utility.

My theories certainly aren't perfect and I'm sure other professors might have their own ideas for this phenomenon. One thing for sure is some people don't realize the importance of economics on their lives or think they live above the laws of it.