Teaching economics at an elite institution: depressing

No, I am not distraught by spoilt/apathetic students and less time for research. Those are problems every PhD student faces, and in spite of them, I enjoy teaching at Oxford. Rather, the problem is that many of my students enter careers in the City, a manipulative square mile full of shiny-shoed assholes. This is for two reasons: money, and, more importantly, the City's devilish propaganda machine. At the end of the day, you have several Oxbridge-educated graduates wreaking havoc on the global economy, and one sad Oxford tutor (me), sighing in the corner - a net loss.

The financial industry is now the temple of crony capitalism; Wall Street and the City mostly trade assets around, instead of generating new wealth. For example, in 1994, Orange County, California filed for bankruptcy due to bad investments in inverse floaters. Real economy companies like Procter & Gamble also lost money on these volatile derivatives. Yet Wall Street firms that sold these derivatives raked up massive fees - Merrill Lynch alone made $100 million. Even modern mortgage-backed securities are merely ways of shifting risk, rather than reducing it. As one Bankers Trust employee said, "Lure people into the calm and then totally f*** them." The fact that talent is drawn to this industry is bad for economic prosperity; the finance industry's growth has instead created new robber barons.

This is where bright twenty-one year olds come in - the industry's number one pick-up line is money. A huge starting salary and luxurious lifestyle seem sexy to young people with no work experience or expertise. It is little wonder that the City can pay such ridiculous compensation, over and above other private sector jobs (i.e. rent-seeking). Indeed, 30-50 percent of excess financial sector wages cannot be explained by differences in individual ability. Clearly, City banks are lining the pockets of naive youngsters who hold dreams of grandeur.

These dreams are truly dangerous, and the City has a mighty propaganda arm that penetrates campuses, telling young people that they can be 'leaders' and really make a difference in the world. This means nothing, but to a smart Oxford student who believes that the world owes him everything - wealth, power, women - this is an appealing mantra. The City is also tempting to graduates wanting to enter public service; the revolving door between government and the City is horrifying. Thus Goldman Sachs wines and dines Oxford students at fancy restaurants, giving them a glimpse into life as a fast-talking banker. As one Prophet aptly put it, "Not that which goeth into the mouth defileth a man; but that which cometh out of the mouth."

I write these words as my economics students enter final exams, and then leap into a world of arbitrage trading, derivatives, and hedge funds. I feel disheartened, knowing that the skills they learned in university will be going to waste in some glass-and-concrete building in London. This blog post probably won't change anyone's mind, but at least it gives me some comfort. It is therapeutic. Yet while I am sad, I am not pessimistic - we can regulate and reign in the financial industry, and implement policies that allow for true innovation. Until that day comes, I remain a depressed Oxford tutor.

Libertarians and consent

I am not a political theorist, so my ideas are mere ramblings, but I dive into the abyss anyway. There is a fundamental right libertarian (henceforth 'libertarian') principle, which states, "Be free to do whatever you want, as long as you don't impede other people's freedoms." This principle is at least as old as John Stuart Mill, and has its modern form in Milton Friedman. Yet it is misguided: even if an activity is consensual, it may not be moral. This betrays libertarians' inability to properly define their terms.

I give two examples: drug company lobbying of physicians, and incest. Drug companies often lure physicians with all-expenses-paid trips to tropical islands with beautiful beaches and watermelon wine. The catch is that these physicians then listen to a flashy company presentation extolling the virtues of its new product, Drug X. "We've shown you a presentation, and now you just have to sign a statement saying you support Drug X... though it's up to you," says the beautiful blonde salesgirl. The doctors, their senses dulled by a lovely holiday, generally sign these statements. The breach of scientific ethics is immense: no scientist can make an independent assessment of a drug after being bribed by a drug company.

Yet a libertarian would suggest that this is all consensual and okay. Therefore, we do not need to worry about it. Drug companies go through rigorous testing anyway, and if a company puts out a bad drug, then the market corrects for this (i.e. people die and there is a recall). Needless to say, this is bullshit: what is at stake is scientific ethics, not market functioning.

A more extreme example concerns incest. If incest is consensual, then is it okay? A libertarian may counter that a handicapped child from an incestuous relationship imposes burdens on society - true, but what about a woman who gives birth at the age of 40? We are discussing probabilities here, and by that argument no action should be engaged in because it imposes costs on society at large, limiting society's freedom.

The point is that libertarian principles require reform and better definition. There might be libertarian philosophers who are rigorous, but I have yet to come across them. There are inconsistencies in libertarian logic that requires remedy, and I would be fine with their fundamental principle if it were supplemented with ethical instructions. But hey, a religious libertarian strikes me as a slight oxymoron.

Funniest meme ever

Attention econ geeks, take a 10 minute break from working and invest some time in this gem: Daron Acemoglu Facts. You will then truly understand why nations fail.

I dream of Gini?

If you ever visit an impoverished nation like India, the gap between rich and poor strikes you immediately: half-starved children run around without shoes, while Hummers with boom boxes blaze by. Yet looking at India's 2005 Gini coefficient of 33.4, I am shocked. For comparison, the U.S. Gini coefficient is in the high 40s! So, the United States is more unequal than India? Surely the Gini coefficient is screwed up, you conclude.

Yes and no: the Gini coefficient, like everything, must be interpreted cautiously. Scientific American published a good article on the limitations of this measure. The Gini is calculated based on the difference between 'perfect equality' and the actual distribution of income. In the process of conversion to a number, the actual income distributions are lost; it may be more useful to look at these curves on a graph. Furthermore, the Gini is aggregate, not individual: a 25 year old economics graduate student like myself, with little income but incredible future earnings (I hope), is still counted as penurious. There is also the issue that the rich may hide their wealth from the taxman through offshore accounts and undeclared transactions. The Gini is a very inexact measure, that encounters myriad problems.

There are good economists trying to improve inequality measures - this is crucial work. In addition, it is important to discuss inequality qualitatively: that is, how does it arise politically, economically, and socially? The mantra that skill-based technological growth and globalisation have caused inequality is, at best, incomplete. Globalisation does not occur in a vacuum, and its effects depend on a country's institutions and norms. Besides, the U.S. is far more unequal than Sweden, although both have experienced international trade and technological innovation. There is endogeneity. There is a ripe field for research. Go forth and experience it!

Terrorist groups, funding, and external shocks

Nobody has properly studied how terrorist groups allocate their funding. Hamas and Hezbollah both fund separate military and charity wings - one to fight enemies, and the other to gain public support. Hezbollah, for example, owns one of Beirut's finest hospitals, which provides free healthcare to Hezbollah supporters. How, then, is funding distributed between the twin purposes of terror and charity, and why is this important?

One way to examine this would be to see how external shocks affect funding. Wars, financial crises, and famines impose hardships that terrorists can exploit. During the 2006 Lebanon war, Hezbollah had to ensure funding for its Katyusha rockets and armed personnel. It also had to create sympathy. It therefore aired propaganda on its TV network Al-Manar, and reconstructed homes destroyed by the Israeli Defense Forces. Of course, Hezbollah is very wealthy and can afford to do this. Nonetheless, it would be exciting to gain access to their ledgers and see how funding is distributed between guns and 'winning hearts and minds'!

All large terrorist organisations must use charity and propaganda to survive. Even the most brutal, like the Liberation Tigers of Tamil Eelam (LTTE), had social services wings. Terrorism sucks resources from local communities, who may then demand repayment. Thus, a reciprocal relationship develops, in which a population provides a terrorist force with soldiers, food, and money, and the terrorists then fund roads, hospitals, and a police force. In effect, certain terrorist groups act as a state.

This is telling: terrorism arises when the state fails to provide public goods. In the case of Sri Lanka, the post-independence Sinhalese government encroached on Tamil land, seized Tamil property, and manipulated language rights. Amidst this misty confusion, the LTTE emerged and declared Eelam an independent state in northern Sri Lanka. The Tamil Tigers formed a development organisation, police force, law courts, and even a sports division. The Tigers, then, replaced the Sri Lankan state for Tamils.

Nothing solid can be said without further investigation, but two conclusions can be drawn from my preliminary discussion:
1. To fight terrorism, the government should better provide public goods: hospitals, schools, libraries, etc. India wisely used this strategy to deal with a Naxalite insurgency. Within a year of implementation, Karnataka ceased to be a Naxalite-affected region.
2. Terrorism occurs when people are being conquered or occupied by a malevolent state. Even an international terrorist force, like al Qaeda, detests the presence of US military bases on Muslim holy soil.

The solution is actually pretty commonsensical, except to sycophantic Washington policymakers.

Assessing Thatcher

Margaret Thatcher's union jack draped coffin made its way across London's gloomy streets yesterday, surrounded by mourners in black and protesters in bandanas. I do not wish to engage in maudlin fantasies, but to assess Thatcher for what she was: a politician. And while I respect her as a leader, I cannot help but feel that her policies were misguided. Because of Thatcherism, Britain was fashioned from a sickly workhorse into a powerful steed, capable of rapidly outpacing other European economies. In the process, it was also imbued with dangerous hubris, from which it now suffers: financial instability, rising inequality, and jingoistic foreign policy.

First, some mythology: the Iron Lady arrived at an appropriate time, when 1970s Great Britain was overrun by a labour aristocracy. Coal miner strikes and power cuts were common. Trade unions refused to negotiate. This climaxed in the 1978-79 Winter of Discontent, during which hospitals were blockaded and trash was left piling up. Thatcher fluttered onto this scene, privatised the economy, and crushed the unions.

This has some truth to it: Thatcher helped to reign in union power, but the union movement was in decline well before her term of office. In fact, her union-bashing privatisation fetish had tremendous costs. For example, she failed to protect the UK's manufacturing industry, a short-sighted negligence on her part. And while Britain now has a growing service sector, these are mostly rent-seeking financial services that require billions in bailouts when times are bad. Her deregulatory measures also meant that Britain was unprepared for the recent financial crisis. Overall, Thatcher was bad for the British economy, and a more moderate, reasonable politician would have been better.

Her foreign policy, in turn, was a nasty mix of jingoistic, reactionary ingredients. Thatcher denounced Nelson Mandela's fight against apartheid, while defending US support to Nicaraguan contras. She did some things right, of course; her biggest accomplishment was to refrain from joining the Euro currency, which is now a mess. Yet offset against Thatcher's backing of Chilean dictator Augusto Pinochet, this means little. While not as bad as later Prime Ministers (Tony Blair), she laid the groundwork for future UK foreign policy.

What would a better alternative look like? Well, policy might involve privatising the British economy while retaining welfare state provisions and protecting manufacturing. Unions were too powerful in the 1970s, but a sensible politician would have fought them sensibly, letting most of them fizzle out of existence. Lastly, a more rational foreign policy would have strengthened the UK's special relationship with the US, while eschewing the nastier aspects of American interventionism (see 'Nicaraguan contras'). In other words, the better alternative would have been a moderate.

Don't get me wrong: I respect Margaret Thatcher's leadership. She was an eloquent and witty speaker, who kept her party in line for eleven years, a rare parliamentary achievement. Yet when it comes to economic and foreign policy, perhaps the Iron Lady could have soldered more softly.

Politics and the English Language: Redux

I have just finished re-reading George Orwell's "Politics and the English Language," which I first encountered as a foolish 18 year old university student. It is a humbling read, because my own writing is a polluted pool compared to Orwell's. This passage particularly caught my attention:

In our time, political speech and writing are largely in defence of the indefensible... villages are bombarded from the air, the inhabitants driven out into the countryside, the cattle machine-gunned, the huts set on fire with incendiary bullets: this is called pacification. Millions of peasants are robbed of their farms and sent trudging along the roads with no more than they can carry: this is called transfer of population or rectification of frontiers. People are imprisoned for years without trial, or shot in the back of the neck or sent to die of scurvy in Arctic lumber camps: this is called elimination of unreliable elements. Such phraseology is needed if one wants to name things without calling up mental pictures of them.

Nowadays, a similar thing can be said about targeted killings, extraordinary rendition, War on Terror, collateral damage, bipartisanship, democracy promotion, international development, etc. They are all purposely vague words, intended to hide an actual intent. Instead of stating, very clearly, that "U.S. armoured drones are flying robots that murder hundreds of civilians, and destroy schools, roads, and residences, all in the hope that a terrorist is killed," we are left with "targeted assassinations are an important tool in the U.S. War on Terror, that minimize casualties and maximize gains." Such statements are euphemisms for diabolical deeds, dulling a sharp mind.

The Left is also guilty of this sin, defending rulers like Hugo Chavez, Muammar Gaddafi, and Bashar al-Assad. My leftist friends in Saskatoon staged a lovely memorial for Chavez, even though he once imprisoned a judge for her controversial ruling. Leftists can defend this, because Chavez is a socialist, and a man of the people - he is one of us. It does not matter that he happens to have contempt for the judiciary and an excessive grasp on power.

In sum, everyone should read "Politics and the English Language," if for no other reason than to clarify thinking in this murky, postmodern world.