• Displaying a regression to the world mean, China's real economic growth rate might be less than most people expect.

    How Chinese Economic Growth Relates to Restaurants and Pilots

    Oct 29 • Behavioral Economics, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Macroeconomic Measurement • 66 Views

    On Friday evening, at our favorite restaurant, my husband and I had an excellent meal—so good that we returned the next evening only to be disappointed. The food was fine but just not as good.

    Through a story from Thinking Fast and Slow, Nobel laureate Daniel Kahneman explained why.

    Teaching Israeli flight instructors about effective training, Kahneman was surprised that they preferred punishment rather than rewards. The instructors explained that screaming at pilots for their mistakes resulted in better results the next day. Compliments for good performance, on the other hand, had the opposite impact.

    Kahneman soon realized that the instructors were right and wrong. Yes, quality did indeed go up after a bad day and down when all went well. However, the reason was not the instructor. It was a regression to the mean.

    And that takes us to China.

    A Multi-Trillion Dollar Question

    According to economists Larry Summers and Lant Pritchett, tracing Asia’s economic rise, we would see an unfinished story. It starts with Japan, continues onward to South Korea and the “Asian Tigers,” and now focuses on India and China. Describing that fourth chapter, the consensus expects China to maintain a seven percent real growth rate because of their past record.

    However, in “Asiaphoria Meets Regression to the Mean,” Summers and Pritchett predict that the fourth chapter of the story will not necessarily involve China’s super-charged growth. Their reason is that same regression to the mean that Dr. Kahneman used for his Israeli pilot instructors. Over time, looking “less like themselves,” most countries revert to the world’s average growth rate. Consequently, predicting China’s growth rate, we should ignore the following graph.

    China's real GDP growth rate might not be sustainable because of a regression to the mean.

    From: Congressional Research Service


    Indeed, to predict China’s GDP growth rate, we need no opinion of China’s leadership nor knowledge of their resources or population. We just need to know that the world’s mean real GDP growth rate is close to 3.9 percent. (The Summers/Pritchett paper has more detail.) If China reverts to the mean, she will contribute as much as $20 trillion less to the world’s GDP in 2033 than most of us expect.

    Our Bottom Line and GDP Forecasts

    Discovered and named by Sir Francis Galton (Charles Darwin’s half cousin) during the late 19th century, the regression to the mean explains my restaurant experience, the Israeli pilots’ performance and the most feasible growth rate prediction for China.

    If Drs. Summers and Pritchett are right, China will not become the world’s economic growth engine.

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  • Replacing tradition with government central planning for garbage removal created problems in Cairo, Egypt.

    Why Government Cannot Trash Waste Management

    Oct 28 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Environment, Government, Labor, Lifestyle, Regulation, Thinking Economically • 52 Views

    More about economics than trash, Cairo’s garbage removal problems take us to tradition and central planning.

    Our story starts with the kitchen door of a New Yorker Magazine journalist’s first floor apartment. At the fire escape near the door, bagged or loose, his refuse awaited Sayyid Ahmed’s daily early morning collection. There was no pick-up schedule and no formal payment. But the journalist soon saw that Sayyid came everyday and expected a tip.

    Cairo’s Zabaleen

    The lowest level of the garbage hierarchy, Sayyid Ahmed is a zabal who sorts, recycles and reuses trash from 400 residents in 27 buildings. Sayyid then pays the seven people who have the trash rights for those buildings with re-sellable items or cash. On the other end, Sayyid makes his money from customers’ tips and recyclables’ revenue. Close to $500 a month, his income is double the Cairo average.

    The zabaleen system began during the early 1930s and 1940s when a group of entrepreneurial Christian immigrants said they would pay apartment building owners for the right to pick up their garbage. Remarkably efficient from an environmental perspective, the system reuses 80 percent of its trash. In “garbage villages,” the goods they gathered were made into items like clothes hangars, new garbage bags and mattress stuffing while food scraps were eaten by pigs that were sold to non-Muslims and hotels.

    Now all is changing. A decade or so ago, instead of zabaleen sorting, reusing and recycling, the Egyptian government had contracted trash removal to multinational waste management firms who expected residents to put garbage in bins or at the roadside. A new approach mandated by government, it ignored the reasons a traditional system had functioned consistently. Today, because residents enjoy the dependability and familiarity of zabaleen like Sayyid, the old system refuses to disappear.

    Here is a documentary on Cairo’s garbage. Although only part of the script is in English, you can still get a firsthand idea of Cairo’s garbage problems.

    Our Bottom Line: The Transition From Tradition to Central Planning

    Although tradition, command and the market are the three basic economic systems, most economies are combinations of all three. For Egypt, with zabaleen garbage removal, we have an example of the resilience of tradition in a centrally planned economy.

    I suspect even in the United States, sometimes a government mandate has difficulty changing what we traditionally expect. Here, when we combine the market with government, we have a mixed economy.

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  • Return on investment is a problem for World Cup and Olympics host nations.

    The Reason Norway Said No to the Olympics

    Oct 27 • Developing Economies, Economic History, Entertainment, Government, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 54 Views

    While Norway ostensibly withdrew its bid for the 2022 Winter Olympics because of insufficient popular support, a list of (funny if they weren’t true) IOC requests might have contributed to their decision:

    • All “IOC members will be received with a smile on arrival at the hotel.”
    • The temperature of meeting rooms should be 20 degrees celsius (68 degrees Fahrenheit).
    • IOC members will meet with the king before the opening ceremony and then after at a cocktail reception for which Norway will pay.
    • Separate lanes will be reserved for IOC members and traffic lights will be synchronized to prioritize IOC travel.
    • IOC members will have separate airport entrances and exits.
    • The hotel bar must extend hours and minibars should exclusively provide Coke.

    So now, with Krakow, Stockholm, Munich, Davos/St. Moritz and Lviv (Ukraine) out also, only Beijing and Almaty, Kazakhstan remain.

    Where are we going? To the return on investment for mega sports events.

    World Cup ROIs

    Now that everyone is gone, Brazil is left with 12 state-of-the-art World Cup soccer stadiums that cost them $3.6 billion. For their investment to make sense, those venues need to be used.

    In the table below, sports economist Victor Matheson presents World Cup stadium ROIs since 1994 by comparing stadium use to stadium cost. His figures indicate that like most World Cup and Olympics hosts, Brazil’s stadiums will not get enough use. By contrast, the U.S. built no new stadiums when it hosted the World Cup in 1994.

    SUI refers to his stadium use index. Based on attendance divided by capacity, the SUI is good when it is higher. For his FCI (fan cost index), it is better to have a lower construction cost per fan.

    Insufficient return on investment from the World Cup.

    From: Nate Sliver’s FiveThiryEight. Note that data for Brazil are projections used past attendance statistics.

    Looking ahead to 2018, Russia expects to spend $7 billion on World Cup stadiums while for Qatar in 2022… who knows.

    Our Bottom Line: The Bottom Line

    Return on investment is all about cost and benefit. In a February 2014 non-binding referendum on the 2022 Olympics, a majority of the voters seemed to have a pretty sound grasp of the importance of a respectable ROI.

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  • A misery index number conveys the potential distress created by unemployment and inflation.

    An Economist’s Definition of Misery

    Oct 26 • Behavioral Economics, Developing Economies, Economic Growth, Economic History, Economic Thinkers, Government, Households, Labor, Macroeconomic Measurement • 100 Views

    Just by looking at inflation and unemployment, an economist can explain misery.

    Created by Arthur Okun, the misery index is a yardstick of economic distress. By adding together the inflation rate and the unemployment rate, we can measure the extent to which prices and unemployment have risen. You can imagine that when purchasing power dips and lots of people are jobless, there are fewer smiles.

    High and Low Misery Indices

    Curious about the world’s misery indices, I went into ieconomics to access my data and calculated an index for 40 randomly selected countries. Using the most recent annual inflation and unemployment rates as of September 2014, I discovered that Venezuela had the highest misery numbers and Switzerland, the lowest.

    While the misery index weights unemployment and inflation equally, scholars have suggested that unemployment has a much greater impact on our happiness–precisely 2.5%. Yes, in a Boston Federal Reserve paper, scholars hypothesized that unemployment causes 2.5 times as much misery as rising prices. (Interesting because inflation could be even more worrisome but, unless out of control, is less noticeable.)

    If the Boston Fed paper is right, then Venezuelans (inflation rate 63.42%; unemployment rate 6.7%) are not as unhappy as their misery index indicates. Meanwhile, eurozone countries have misleadingly low misery indices that, based on unemployment, could be higher.

    Eurozone Unemployment Rates:

    Data From: ieconomics

    Data From: ieconomics

    We should note that using MIT’s billion price project, all misery indices would be higher.

    Our Bottom Line: Eurozone Problems

    With the misery index elevated by different levels of eurozone unemployment, we are returning to questions about the efficacy of a common monetary policy without centralized fiscal (taxing, spending, borrowing) power.

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  • The econlife.com Weekly Roundup

    Our Weekly Roundup: From North Carolina to Norway

    Oct 25 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, Gender Issues, Government, International Trade and Finance, Labor, Regulation, Thinking Economically • 117 Views

    McDonald's Delivers in Many Developing Nations. SUNDAY 10.19.2014

    The reason the Russian McDonald’s is shrinking…more

    Ebola's impact on GDP is mostly from our behavior. MONDAY 10.20.2014

    The economic impact of ebola fear…more

    Because of new attitudes and economics, there is less supply of "marriageable" men and more valuable women in marriage markets. TUESDAY 10.21.2014

    How more valuable women lead to less marriage…more


    Everyday economics and Norway's EV Subsidies WEDNESDAY 10.22.2014

    Why Norway has so many Teslas…more


    Everyday economics and The issue of occupational licenses is really a market or government debate. THURSDAY 10.23.2014

    The damage from occupational licenses…more

    Because of monopolistic competition, gasoline retailers has some control over price. FRIDAY 10.24.2014

    The problem with sticky gas prices…more


    Economic Ideas Roundup

    • monopolistic competition
    • sticky prices
    • subsidies
    • regulation
    • supply and demand
    • opportunity cost
    • incentives
    • marginal utility
    • foreign direct investment (FDI)
    • comparative advantage

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