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Tag Archives: austerity

four color theorem

Reading about the 4-color theorem for maps, I realized it was about a lot more than math.

My story starts with an recent obituary about one of the mathematicians, Kenneth Appel, who first proved the 4-color theorem. Completing a quest that started in 1852 by Francis Guthrie, Kenneth Appel and his colleague, Wolfgang Haken proved in 1976 that a flat map needs no more than 4 colors.

Probably.

Until 1976, mathematicians intuitively agreed that maps could be drawn with a 4-color minimum but couldn’t prove it. The reason? It was tough to account for 1,936 potential map configurations like, for example, a nation surrounded by 4 others.

That takes us to the University of Illinois, the 1970s, and a state-of-the-art IBM computer that was as big as a room but had less memory than a cell phone. Still, it provided Appel and Haken the opportunity to prove that the 1,936 configurations needed no more than 4 colors to avoid having 2 adjacent countries with the same color. Concerned with accuracy, though, Dr. Appel had family members checking for typos and accurate print-outs. His sister Laurie found 800 mistakes.

Although Dr. Appel’s obituary described him as having “solved a longstanding problem concerning colors on a map,” not everyone agrees. As one Berkeley mathematician commented, “”Like a landmark Supreme Court case, the proof’s legacy is still felt and hotly debated.” In proofs that depend on computers, transparency is impossible because no one can check for bugs and the unseeable.

A 4 Color US Map

4 color US map

Computer transparency took me to 1998 and the Long-Term Capital bailout. One of the first computer related financial debacles, the demise of Long-Term Capital involved Nobel Prize winning economists. Using programs they developed, the firm claimed to have an infallible model for making money. Essentially, they had programmed the past to determine the future. The problem? The past did not repeat itself. The result? A bailout to avert a financial crisis.

Fast forward to 2013 and Harvard economists Kenneth Rogoff and Carmen Reinhart. Challenged by a University of Massachusetts graduate student, their computations conclude that a relatively large national debt constrains GDP growth. Assuming we are totally neutral on whether they are right or wrong, we can confirm that one of their spread sheets had an incorrect number that skewed computerized results.

You can see where we are going. Whether making maps, investing money or determining economic policy, computer models have a gargantuan impact. I wonder why we are not questioning them more frequently.

Sources and Resources: I recommend reading the NY Times obituary for Kenneth Appel and then more on the four-color theorem in an excellent Economist article from 2005. If you want to continue with more of the math (and my map source), this paper is a possibility. On the economics side of mathematical modeling, here is the Reinhart/Rogoff response to the controversy surrounding their work and a brief BBC overview from the always interesting Tim Harford.

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basketball

Although fans think a basketball player can have “hot hands,” psychologists disagree. We might just be displaying our tendency to select facts that support what we already believe–our confirmation bias.

Citing the “hot-hand phenomenon,” many basketball fans believe that players have a greater chance of shooting successfully following several previous points. Then, because they expect a hot hand, they are more likely to identify it. And yet, it just isn’t so. Studying more than a season of Philadelphia 76er games, researchers concluded that there was “no evidence for a positive correlation between the outcomes of successive shots.” Instead, the data echoed random sets of numbers.

Confirmation bias might also affect how we respond to the Rogoff-Reinhart controversy.

Very simply stated, the research of Harvard economists Kenneth Rogoff and Carmen Reinhart tells us that a 90% debt to GDP ratio is a tipping point. With more debt, GDP growth evaporates. Because their work indicates that austerity rather than stimulus can provide the path to economic health, the Rogoff-Reinhart studies have given academic validity to spending cutbacks.

Now, new research from the University of Massachusetts says the Rogoff-Reinhart work has quantitative inaccuracies. Finding a mistaken number and (what they say is) questionable data weighting and country selection, these economists challenge the underpinnings of the Rogoff-Reinhart conclusions.

Reading the exchange, I suspect we will see confirmation bias. Costly for any researcher to negate previous conclusions, I wonder whether each side will choose data to confirm a previously held point of view.

Sources and Resources: If you doubt the accuracy of a challenge to the “hot-hand” phenomenon, do read the original Tversky et al paper here. Then, this Wired article connects it to confirmation bias. (Please note that Wired questions the sources used by its author but I checked and all appear accurate.) As for the challenge to Rogoff and Reinhart, these two BusinessInsider articles, here and here, provide an ideal overview and the R/R response.

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Self-interest represents the seeds that blossom into economic growth.

Yesterday, the UN published a preview of its world economic outlook. While projections are always debatable, their graphs provide a snapshot of key economic issues.

GDP Outlook:

Slow GDP Growth for 2013

Oil Prices:

Less World Demand Might Depress Oil Price

Grain Prices:

 

World Grain Prices DipThese projections and comments from a Société Générale Report also are helpful. Most enlightening, perhaps, is the potential drag on the world economy from the euro zone.

Euro Zone Drag on World Economic Growth

Sources and Resources: Société Générale data is from Business Insider while the preview of the UN Report is here. For a summary, this NY Times article discusses its dismal outlook.

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euro zone map

Will international creditors say yes again to Greece after today’s meeting in Brussels?

Part of the deal involves selling or leasing whatever the Greek government owns. The proceeds reduce the debt and meanwhile, by building roads and business parks, resuscitating ports and recapitalizing banks, foreign investors pour money into the country.

It has not been quite that easy, though.

A closer look at government-owned beaches that were for sale revealed squatter communities composed of thousands of undocumented houses. In addition, because Greek property registries are woefully inaccurate, land transfers everywhere have been problematic. (If you can’t prove you own the land, then no one will buy it from you.)

The ports? Greek citizens are worried about prime assets being transferred to foreign ownership or worse, to Greek oligarches awaiting a fire sale. In addition, no one appears to be quite sure how much ownership the government should retain. And even if the Greek parliament settles all of that, foreign banks hestitate to finance Greek deals and the Greek banks need recapitalization.

All of these privatization complications made me wonder how many deals could be involved so I went through a month of articles at eKathimerini.com and came up with this random list of government-owned properties that could be partially or entirely sold or leased. They represent only a small proportion of the hundred of deals that might transpire but do provide a picture of the massive task facing the Greek government.

  • Public Power Corporation
  • Gaming company, OPAP
  • State lottery licenses
  • Public Gas Corporation
  • Gas transmission operators
  • Hellenic Postbank
  • Elliniko International Airport
  • Athens Water Company
  • Hellenic Petroleum
  • Hellenic Vehicles
  • Assorted Port Authorities
  • Buildings that house state agencies
  • Thessaloniki Water Company
  • Larco, Europe’s largest ferronickel producer
  • Egnatia motorway

Finally, where will the money go? Satisfying the bailout “troika,” the IMF, the European Central bank, and the European Commission, the Greek Parliament has issued “decrees” that direct the money to an escrow fund dedicated to paying the Greek debt.

Sources and Resources: I recommend these NY Times articles, here and here, for interesting stories while a Greek perspective is at eKathimerini.

Finally, the following Merle Hazard “Greek Debt Song” is always fun to watch.

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euro zone map

The Greek government needs its newest bailout infusion. But in return, austerity would include (among many other requirements) cutting certain civil servants’ salaries by as much as 35%, raising the retirement age again but this time to 67, and plunging the number of associate professors at public universities from 15,226 to 2,000. The Greek Parliament has to decide before November 12.

This takes us to olive oil.

In a March 2012 report, the consulting firm McKinsey & Company proposed a development plan for Greece that would be spearheaded by an Economic Development and Reform Unit. Industry by industry, specific changes were proposed. Looking at what McKinsey suggests for olive oil as a prototype example, do you think the Greeks can leap from their current crisis to economic growth during the next decade?

Here are the broad goals and then the olive oil plan:

Broad Goals:

  • Focus on tradable sectors
  • Attract foreign and domestic investment
  • Generate more productivity
  • Ensure tax compliance
  • Create employment opportunities
  • Simplify bureaucracy
  • Expand the court system

 

Olive Oil:

Although Greece is the world’s third largest olive oil producer, Italy is the main beneficiary. Because Greece sends its olive oil in bulk to Italy where it is packaged and marketed, Italy enjoys a 50% premium from the price of the retail product. McKinsey suggests that instead, Greece has to add to its factory capacity at home, develop a “cachet” for the “Made in Greece” label, and sell directly to targeted markets abroad. North America, the UK, Germany & Austria, and the Balkans would be top priority markets. (The McKinsey chart below is interesting.)

Reading the report, you start to realize that while Greece has immense economic potential, the chasm between their current plight and jumpstarting economic development is massive. In addition, since the report was issued, Fage moved its headquarters to Luxembourg and Coca-Cola switched its main stock market listing to London.

Can olive oil and tourism, feta and yogurt help to fuel the Greek economy?

Sources and Resources: My current facts about Greece receiving its newest tranche are from this NY Times article. Thinking of the future, the McKinsey report resounds until, I suspect, it connects to Greece’s political and economic problems. As a counterpoint, you might want to look at this Business Insider slide show detailing the impact of a “Grexit” and this econlife post about Greece.

From McKinsey, “Greece 10 Years Ahead,” p. 49:

Greek Economic Development and Olive Oil

 

 

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