L'Information est d'Or

Barbara Petrongolo 15 October 2010 The 2010 Nobel Prize in Economics has been awarded to Peter Diamond, Dale Mortensen, and Christopher Pissarides "for their analysis of markets with search frictions". This column explains how their research relates to fundamental economic issues that are both at the core of the wellbeing of society at large and now near the top of many policymakers’ agendas. Various forms of imperfections or “frictions” characterise most real-world transactions. The coexistence of buyers and sellers in a given market, who can in principle agree on a price, may not be sufficient for immediate trade, as both buyers and sellers may need to invest in a costly search process in order to locate matching partners, and eventually need to agree to enter a transaction rather than wait for better trading opportunities. These frictions derive from several sources, including imperfect information about trading partners, heterogeneous demand and supply, slow m

By Douglas Irwin A large body of research has linked the gold standard to the severity of the Great Depression. This column argues that while economic historians have focused on the role of tightened US monetary policy, not enough attention has been given to the role of France, whose share of world gold reserves soared from 7% in 1926 to 27% in 1932. It suggests that France’s policies directly account for about half of the 30% deflation experienced in 1930 and 1931. A large body of economic research has linked the gold standard to the length and severity of the Great Depression of the 1930s, primarily because fixed exchange rates precluded the use of monetary policy to address the crisis (see for example Temin 1989, Eichengreen 1992, and Bernanke 1995) But it has never been entirely clear why the gold standard produced the massive worldwide price deflation experienced between 1929 and 1933 and the enormous economic difficulties that followed. In particular, worldwide gold reserves ex

Are the USA heading for a new recession? One of my favorite economic mentors, John Mauldin, who is the author of a weekly newsletter read by more than a million people in the World - Thoughts from the Frontline - thinks we are likely to get one because the fiscal tightening in the USA and in Europe is happening too soon as the economy is still weak. Paul Krugman also believes in such a scenario. I advise you to be very careful if you buy and hold stocks!!

“The Company of Strangers” (2004, Princeton University Press) In a very rich and lively book, Paul Seabright, an economist from the University of Toulouse, explains how human beings have evolved from an ordinary animal species to a highly organised society through what he calls “The Great Experiment”. This experiment consists in the building of social and economic institutions and Seabright shows that our subsequent evolution has little to do with genetical or biological evolution. These institutions – mostly embedded in the modern state via some core principles: army, law enforcement, property rights,… - have made it possible the development of markets by nurturing trust and allowing specialisation. Trust and specialisation are linked to each other because one cannot specialize in what she does best if she doesn’t trust that others will provide her with everything else she needs to live. Specialisation has grown to such a high level that the manufacturing and delivery of a new shi

A joke about economists and mathematicians There are three men on a train. One of them is an economist and one of them is a logician and one of them is a mathematician. And they have just crossed the border into Scotland (we don't know why they are going to Scotland) and they see a brown cow standing in a field from the window of the train (and the cow is standing parallel to the train). And the economist says, "Look, the cows in Scotland are brown." And the logician says, "No. There are cows in Scotland of which one at least is brown." And the mathematician says, "No. There is at least one cow in Scotland, of which one side appears to be brown." And it is funny because economists are not real scientists and because logicians think more clearly but mathematicians are best.

Bad news for one of the high profile industry in France, which contains for instance wine. According to a research by three economists from the Toulouse School of Economics , the food processing industry in France has lost 0.44%pa of productivity over the decade from 1996 to 2006. Of course, this loss of competitivity is at the expense of foreign competitors. At the same time, agricultural sector has made small competitivity gains (2%pa) which the food processing industry benefitted. The authors suggest that increased regulation may be (partly) responsible for this loss of productivity. However, since most of the regulation is now EU-wide, I doubt that this could explain the difference with our European competitors.

As economics has a lot to answer following the crisis, I feel it is useful to go back to basics. Here is a rap song of Hayek vs. Keynes presenting the opposition between the Austrian and Keynesian schools of economics.

Ever since the defeat of the right-wing in the local elections  in France, some MPs of the ruling UMP party feel like they have to "do something" quickly, however stupid this thing might be. Their first demand was to cancel the project of a Carbon Tax. Their argument in a nutshell was that such a tax would only work if it was applied to most countries, that it was not a good time to introduce a new tax during a recession and anyways, taxing was a left-wing thing. I find it a shame that for once we had the opportunity to move from taxing labour (a good thing) to taxing pollution (a bad thing), but I understand that there is disagreement among economists as to what the appropriate carbon tax level should be, so... A few days later, having succeeded on their first demand, the same MPs demanded to remove the 50% cap on personal tax, arguing that this limit was preventing any new tax and that new taxes were necessary to reduce the budget deficit. What? Just a few days after havi

More on banking reform: Jon Steward from the Daily Show pretends to be a corporation and shows all the crazy things banks have done. Thumbs Up! The Daily Show With Jon Stewart Mon - Thurs 11p / 10c In Dodd We Trust www.thedailyshow.com Daily Show Full Episodes Political Humor Health Care Reform

As part of a research assignment, I analyzed with my fellow Toulouse School of Economics colleagues Maria Garcia , Saniya Tapalova and Rodolfo Tupayachi the drivers of oil prices. Here is a link to the Analysis  and the presentation .

What have we learned from the credit crisis? A lecture by Paul Krugman, my hero. Here are the main extracts: This crisis is any many ways similar to the 30s one Crisis tend to occur when we forget about previous crisis We forgot that banks were unstable (and therefore needed to be regulated). This is mainly targeted at the Americans In the Great Depression, the Fed did not even try to expand the monetary base. In this respect, Bernanke did much better. Big government with all its flows has the advantage of being an "automatic stabilizer" in periods of crisis. Financial crisis have long lasted consequences (cf. "This time is different" by Carmen Reinhart and Kenneth Rogoff). There is a risk that we remove economic stimulus too early and the economy to plunge back into recession.

Yesterday was the Super Bowl, a sort of final for American Football, watched by millions of people. It is therefore a fantastic platform for advertisers. According to a survey, 51% of the Super Bowl watchers liked the ads better than the game! Have TV ads become a platform for advertising football? :) PS: The Google ad was "Parisian Love". It reminds me that the presentation of Apple's iPad was based around Paris as well. Have the Americans fell in love with France?

Canada's banks weathered the financial storm remarkably because they hadn't indulged in reckless lending. We could learn from this example when considering banking reform. http://www.nytimes.com/2010/02/01/opinion/01krugman.html?partner=rssnyt&emc=rss

Eliot Spitzer, former governor of New York, illustrates the dramatic failure of bank regulators by giving an extension to the Peter Principle that he calls "Peter principle on steroids": "People are promoted to their point of incompetence. The incompetence creates a crisis. They use the crisis to ask for even more power. So they get a promotion even beyond their point of incompetence!"