Daniel Davies (permalinks bloggered) has an excellent post on data mining, using everybody’s favorite example of dodgy research, John Lott. I discussed the same issue here and “with specific reference to Lott, here.

In practical terms, Davies suggests that economists should keep log books recording their estimation strategies. I’ve urged this kind of requirement in the past. The scandalous fact is, however, that in the great majority of cases, economists don’t even keep their datasets, at least not in a publicly accessible form. To be fair, Lott did at least make his data available, though he didn’t record the data mining that must have been necessary to derive results that were so uniformly favorable to his case.

It looks as though the US dollar bubble has finally burst. The rapid depreciation of the dollar in recent weeks has brought exchange rates closer to their long-term equilibrium level and is therefore a good thing, though of course there are both costs and benefits. My main interest for the moment is in pointing out that the bubble representations yet another refutation of the efficient markets hypothesis, this time for bond markets (which might be expected to be immune from some of the sources of inefficiency that affect stock markets, such as the influence of amateur ‘noise traders’.

As I pointed out last October,

If you accept that the $US has to depreciate at some time, then holding bonds denominated in $US, and paying interest rates lower than those obtainable in other currencies, is a dumb idea. Unless you think either that European governments are likely to default on their debt or that euroland is poised for inflation, eurobonds are a better bet, and similarly for Australian government bonds denominated in $A. But I’ve given up even the residual belief in the efficient markets hypothesis that would lead me to try and work out a coherent explanation of perverse asset prices.

The failure of the efficient markets hypothesis is not complete. As this NYT report says, the proportion of new issues of debt denominated in euros has risen sharply in the last few years (relative to the predecessor currencies, most notably the deutschmark), and is now about equal to that in dollars. Given that most debt issues involve rolling over existing debt, it’s likely that the majority of new debt is being denominated in euros, and that, as the report indicates, some holders of debt are shifting part of their portfolio into euros. But this kind of gradual adjustment is not what the efficient markets hypothesis would predict.

Update 21/5 Dean Baker at In These Times also considers bursting bubbles. He correctly traces the problems back to the Clinton boom. In addition to the stock market and the dollar, Baker is concerned about a bubble in housing prices. My instinct is to agree. But it’s worth noting that if there’s a bubble in the US, where real prices have risen 30 per cent, the situation here in Australia, where prices have nearly doubled in a lot of markets, is far more dangerous.

Kieran Healy fresh from defending sociology against attacks from ignorant economists, returns fire with this sly dig in a post about the underrepresentation of women

Even the lower-status fields in Economics (e.g., those that involve looking at data of any sort, hem hem) require a very high degree of competence in formal methods.

Actually, Kieran is out of date here. The availability of large cross-section data sets and the development of new techniques for analysing them has led to a resurgence in the prestige of empirical methods accompanied by a decline in the status of abstract theory. Steve Levitt’s Clark Prize is the most recent example (of winners in the last decade, I’d say only Matt Rabin is primarily a theorist).

What remains striking is the ambiguous status of policy. Although quite a lot of high-profile economists are engaged in the policy debate, there’s still quite a strong undercurrent of academic disdain for such a grubby activity, especially when it involves being embroiled in controversy (Stiglitz, Krugman etc). The situation in Australia was quite different in the generation preceding mine, when the top economists were almost automatically those actively involved in making or criticising public policy (Gruen, Gregory and Pitchford, just to name a few of the ANU contingent), but we now conform to the global norm. For the general public, an economist is someone who shills for a bank, and within the academic profession, involvement in policy is at best an optional extra . As in many things, I prefer the attitudes and institutions of the past, to those of the present in this matter.

Kieran Healy and Brian Weatherson, among others, have been discussing the absence of women at the top levels of economics and analytic philosophy. For example, all the winners of the JB Clark Medal and the Nobel Prize in Economic Sciences have been men.

Kieran is mainly concerned to dismiss the idea that this reflects some fundamental difference between men and women. He takes the hypothesis of discrimination within the occupational groups as the alternative, more or less by default.

I’d argue that the bulk of the explanation can be found in high school or earlier.
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In today’s [Thursday} Fin (subscription required) Gary Johns continues the Institute of Public Affairs campaign against the idea of corporate social responsibility. The piece spends 750 words complaining about a Greenpeace exercise solely on the grounds that non-responses to a question were coded as zero.

The more substantive claim is that corporations should focus on making profits for their shareholders, and leave the shareholders to decide whether to keep the money themselves or to allocate it to worthy causes. One obvious implication of this argument is that corporations should stop funding organisations like the IPA. However much or little good the IPA does for Australian capitalism in general, its impact on the profitability of any individual corporation is clearly trivial. Hence, giving shareholders’ money to such organisations is a breach of the directors’ fiduciary responsibilities.

Update As Scott Wickstein points out in the comments, if shareholders want to support the IPA, they should do so as individuals.

Today is Labour Day in Queensland, held to mark May Day. In most other Australian states, though, Labour Day commemorates the passage of legislation in the mid-19th century limiting the working day to eight hours. This was the first step in a series of legislative measures and agreements negotiated by unions that steadily reduced the number of hours standardly worked per year from about 2400 in 1950 to around 1750 in the mid-1980s.

As we all know, that trend came to an abrupt halt and went into reverse through the 1990s. Strictly speaking, standard hours have not changed, but the majority of full-time workers now work longer-than-standard hours, typically without paid overtime. Similar trends have been evident in other English-speaking countries, most notably the US.

Meanwhile working hours have continued to decline in Europe. The imposition of a maximum 35 hour week in France has attracted most attention, but few Europeans work more than 1600 hours a year.

Is the return of longer hours a desirable market outcome or an aberration. In my view, it’s the latter. the intensification of work in the 1990s seems to be the product of a period of economic expansion combined with employer dominance. Working hours have already begun to decline in the United States.
The experience of Japan, famous for long working hours in the 1980s is instructive. The low growth of the last decade has not been accompanied, as one might expect, by strong growth in unemployment, even though productivity has continued to improve. This is because working hours have declined. As this ILO data shows, average working hours in Japan are now slightly below those in Australia and well below those of the US.

Intuition suggests that leisure is a normal good. Economic progress should entail shorter hours and less stress. Instead, for the last decade or so, we have had the opposite. Productivity gains derived from such sources are built on sand (in fact, correctly measured, they are nonexistent).

All wars generate conspiracy theories. The most interesting theory doing the rounds in relation to the war in/on Iraq is based on the struggle between the US dollar and the euro for pre-eminence as an international reserve currency, and, in particular, a basis for trade in oil. Until recently, this theory has been widely circulated among opponents of the war, but a version recently appeared in Newsweek with the implication that the shift to trade in dollars was justified as ‘spoils of war’.

Although the factual details and the supporting analysis vary from version to version, the common factual core is the fact that both Iraq and North Korea have recently switched their reserves from dollars to euros and that Iran is considering following suit. This, rather than weapons of mass destruction, is seen as the real cause of the war. In some accounts, this is tied to the attempt coup, generally welcomed in the US, against Venezuelan President Hugo Chavez who had also undertaken some diversification of foreign exchange holdings. One report, widely circulated on the Internet, includes an anonymous insider who is quoted as saying ‘Saddam sealed his fate when he decided to switch to the Euro in late 2000’.

The North Korean angle can be dismissed fairly quickly. North Korea’s annual trade is roughly comparable with Tasmania’s and its foreign exchange reserves are negligible. Then again, by many accounts, North Korean was something of an afterthought in the Axis of Evil, brought in to replace Syria when it was realised that an all-Muslim Axis would not play well with the world public.
More generally, the focus on Middle Eastern petrodollars is redolent of the 1970s thinking that still dominates much policy debate on both sides of the politicla divide. The characteristic feature of this thinking is an overemphasis on the economic importance of oil. The vast majority of US-dollar denominated assets are held in Europe and (East) Asia, and it is the sentiments of investors in these regions that will determine whether the US remains dominant as a reserve currency. In economic terms, a decision by OPEC to quote in euros rather than dollars would make very little difference.

Before going on to look at the implications of the war for the dollar, it is worth asking ‘does it matter if the dollar is the world’s reserve currency?’ After all, the pound sterling was an important reserve currency until the late 60s, and this did not seem to do much for the British economy.

The US directly benefits from the ‘reserve currency’ status of the dollar through international seignorage, that is, the fact that the US government can print dollar notes for which foreigners, notably in Eastern Europe, are willing to exchange real goods and services. A shift towards the euro would reduce or eliminate this benefit. However, as Lawrence H. Meyer of the US Federal Reserve Board of Governors, has observed, the total benefit of international seignorage is about $US15 billion per year – not much of a motive for a war that has already cost about $US50 billion and is likely to cost much more.

The real issues are subtler and relate to the complex relationship between military power, economic power and the ‘soft power’ of cultural and diplomatic influence. A successful outcome in Iraq may be seen as reinforcing US hegemony and therefore increasing the willingness of market participants, including central banks, to take actions that reduce their own returns but bolster the status of the dollar as a reserve currency.

Taken as a whole, I would argue the Iraqi war has done the opposite. The effect has been to make the US appear dangerous and unpredictable and to increase the desire of most people and governments to constrain its hegemonic power. Moreover, Bush’s willingness to spend vast amounts on war while making yet more dramatic cuts in taxes has strengthened the perception that US debts will sooner or later be repudiated either directly or through inflation.

However, this is not the view in Washington, where military and economic power are still seen as going hand in hand. It’s clear that, in the minds of those formulating US policy, military victories achieved in the face of European opposition will pave the way for continued US economic dominance.

Thus far, the foreign exchange markets don’t seem to agree. Although the $US is still well above its fundamental value, it has declined steadily during the Iraq war, with little regard for whether the war news is good or bad.

Update This piece from the UK Centre for Economic Policy Research considers a wider range of effects including benefits for ‘home’ financial institutions, relaxation of the ‘external constraint’ on macroeconomic policy, the role of the region in international institutions, effects on macroeconomic policy coordination, and the wider consequences of exercising ‘currency hegemony’. They conclude that the impact of the euro replacing the dollar for most international transactions would be

The consequence could be a welfare gain of 0.5% of GDP (annually) for Europe, with a similar loss for the US – as well as the other economic and geopolitical attributes of the ‘hegemonic’ world currency.

On this estimate the cost to the US would be around $50 billion per year, still well below the cost of maintaining military hegemony, which will certainly raise annual US defence expenditure by at least $100 billion per year, while having only a marginal impact on currency hegemony.