Economics Questions

Re: My Econometric Model - Devil's Advocates Wanted

Sieben — Wed, 26 Jan 2011 00:15:26 GMT

Student:
Would you mind adding a few words about the economics modivating your model?

The philosophy of the model is that GDP today depends on all previous years, and that investment does not necessarily show net returns overnight. So delay each year's growth contribution to GDP, and spread it out over time to approximate when all the investments show returns (central limit theorem).

Student:
It is a parameter estimated by your optimization model, but what does it mean? And what does it mean to multiply that coefficient by (1-taxes)?

Something like the amount of the economy that is growing.

Student:
If you are just interested in the marginal impact of a increase in tax rates, then I would think that a straight forward regression analysis would be better suited (and would not take 5 hours to run :P)

I don't understand... I stayed away from linear type analyses because it compares growth in year X to policy in year X, when growth in year X really depends on all previous policies and growths.

Student:
And what does it mean to multiply that coefficient by (1-taxes)?

It means that each year, the government takes some of the growth. In all fairness, they gov might not take from the growth-economy at the same rate as the rest of the economy, but its an approximation. The end result is that the model assumes government spending goes down a black hole and is never used to grow (or harm) the economy.

Student:
You could just include lag variables to see the impact tax rates in year t have on GDP 5 years later (t+5)

First, I think you can get any result you want if you just set an arbitrary time shift. I *TRY* to avoid that because I don't shift everything by dt, its just centered at dt. So there's still an impact before/after, which I hope constrains my model (haven't gotten any negateve dts yet).

Student:
Could you also explain why regression analysis was illsuited for the task?

Hmm... because regression would only establish correlation... but if I build an econometric model that assumes causation, and then show that model is empirically valid, that's stronger in my dumb engineering mind.

Re: My Econometric Model - Devil's Advocates Wanted

Caley McKibbin — Tue, 25 Jan 2011 23:09:17 GMT

The tax rates and growth rates in Scandinavia have nothing to do with socialism. Take Norway for example. What is the difference between the state of Norway and any random resource corporation? One mines resources and distributes earnings to "shareholders", which are a tiny portion of the population of one state. The other mines resources and distributes earnings to "citizens", which are a tiny portion of the population of the world. The only difference is that "citizens" didn't buy their share.

The idea of socialism is, "From each according to his abilities, to each according to his needs." I'm pretty sure that more than 4.8m people have needs. Try distributing the wealth to 6 billion people and get back to me about growth rates... or should I say shrink rates?

Re: My Econometric Model - Devil's Advocates Wanted

Student — Tue, 25 Jan 2011 22:27:49 GMT

Sieben,

I think I see mathematically waht you're doing here (though I've never worked with these types of models so I could be wrong). But I am not sure I follow the economics behind it. Would you mind adding a few words about the economics modivating your model?

One thing I would like to hear about specificlaly is the growth coefficient C. It is a parameter estimated by your optimization model, but what does it mean? And what does it mean to multiply that coefficient by (1-taxes)?

If you are just interested in the marginal impact of a increase in tax rates, then I would think that a straight forward regression analysis would be better suited (and would not take 5 hours to run :P). You could just include lag variables to see the impact tax rates in year t have on GDP 5 years later (t+5). Plus you would be able to explicitly include other factors that influence growth besides taxes. But I might be missing something/ Could you also explain why regression analysis was illsuited for the task?

Re: My Econometric Model - Devil's Advocates Wanted

Sieben — Sat, 25 Dec 2010 22:19:17 GMT

I changed my model a bit. Initially, C, the growth coefficient, had been constant throughout. This doesn't allow the model to grow at late time. I eventually got a flat curve when fitting the USA from 1929 to 2003.

Instead, C is updated to grow as the model grows. So if the model predicts 2% growth in year 1, C grows by 2%. This growth is cumulative. The model fits the C in the following equation, and the model uses Ci for year i.

I fit the US economy from 1929 to 2003, and obtained an r2 = .9811, correl = .9905

Here's a chart of the total effects selected years have on the economy. The initiall blue line looks wonky because it is the sum of the initial decline from past years, as well as the SCED from 1929.

The optimal time shift was 3 years. I have yet to rerun the other simulations with this model.

I'll probably tweak some things, think about it, and repost results in a week or two when people are back from xmas.

Re: My Econometric Model - Devil's Advocates Wanted

Johnny Doe — Sat, 25 Dec 2010 14:54:59 GMT

Sieben:
I think the idea is that you educate the poor, and then they are no longer poor. They pay taxes with their higher incomes, and you use that to help more poor people still.

So once they're educated and upper-middle class, they don't matter anymore.

Equality/inequality = relative poverty, i.e. as long as people are different, politicians will wage a war on "poverty".

Re: My Econometric Model - Devil's Advocates Wanted

Sieben — Fri, 24 Dec 2010 23:38:12 GMT

I just tried to fit the United States from 1929 to 2003. The curve fits well for the first 15 years but then it can't keep up. This is because there is allowed no growth in the coefficient.... I programmed it as a 4th parameter to optimize and its running now. I know I'll get a better fit but idk how much better.

Maybe I'll go back and see if there's a way I can just put growth to be a positive function of time instead. I think I really do need to have a way to change the growth coefficient over time.

Maybe it makes sense to take the average of the previous 3 years' capital...?

[edit] Ahh I know. I can multiply each C by PCGDP(n+1)/PCGDP(n), so that it will grow when the economy grows and shrink when it shrinks.

Re: My Econometric Model - Devil's Advocates Wanted

Sieben — Fri, 24 Dec 2010 23:34:36 GMT

ThreeTrees:

Anyway! Regarding the good ol' central limit theorem; Market outcomes tend not to follow normal distribution. I would refer you to Nassim Taleb's work:

One problem, labeled the ludic fallacy by Taleb, is the belief that the unstructured randomness found in life resembles the structured randomness found in games. This stems from the assumption that the unexpected may be predicted by extrapolating from variations in statistics based on past observations, especially when these statistics are presumed to represent samples from a bell-shaped curve. These concerns often are highly relevant in financial markets, where major players use value at risk models, which imply normal distributions, although market returns typically have fat tail distributions.

First, almost by definition, I cannot predict a black swan event. No one can. My model doesn't even try to build in any snap changes to the economy.

Second, the central limit theorem does not assume that the underlying structure is normally distributed. Market projects could be any smattering of random functions. But an aggregate sampling of functions tends towards a normal distribution by the central limit theorem. To the extent that the actual aggregate distribution tends *away* from a normal distribution is unknown, but is itself a random variable. Since each year's economic growth is an aggregate of all previous years, I'm aggregating it AGAIN, so there's an even better reason for it to come out normal :P

ThreeTrees:
Also, could you elaborate further on this part?
And I don't try to. It's actually cool that I get a good fit *without* any changing coefficients. It models economic growth parameters are intrinsic to the economy. For example, Cg most heavily depends upon the existing capital stock when the fit starts. Tau and dt are probably functions of industry type and/or interest rate.

So my base model I've been pitching has 3 coefficients. They are constant for the whole life of the economy. Because they do not change, they are unaffected by any economic changes. So if the government doubles education spending, it will not show up in the coefficients, and therefore not result in growth (insofar as the fit is still good).

The growth coefficient, C, depends mostly on how much PCGDP you have in the starting year.

ThreeTrees:
And could you describe your methodology as well? I'm very curious how you determine the values of your coefficients and am a complete noob at econometrics.

I just built an optimizer to choose the coefficients. If you have excel, you can use solver. You tell the optimizer to minimize the absolute or squared error between the model and actual PCGDP. My optimizer is a lot more robust than excel (you risk finding a local minimum), but it takes a long time.

Re: My Econometric Model - Devil's Advocates Wanted

Sieben — Fri, 24 Dec 2010 23:25:19 GMT

Emperor Nero:
The point with getting an education is, hopefully, to get a well-paying job. And if you get a job then you have to pay a lot of income taxes. (The model in northern European "socialist" countries is to pay for social programs trough high personal income taxes and leave corporate taxes relatively low, because corporations flee taxation.) So getting an education directly leads to having to pay a lot of taxes. The very taxes that are used to pay for education. In other words, poor people receive no free lunch, the state merely redistributes their future income to them at the point of a gun.

I think the idea is that you educate the poor, and then they are no longer poor. They pay taxes with their higher incomes, and you use that to help more poor people still.

So once they're educated and upper-middle class, they don't matter anymore.

Emperor Nero:
The free market can do that more efficiently. Those who can't pay for their education out-of-pocket would simply sell percentage-shares of their future income. Investors would buy these shares for a few percentages in profit, it would be cheaper than taxes. These shares would be valued depending on what your future income is likely to be, i.e. what you study and how well you do. Buying these shares would be like investing in a car company.

The issue is not whether postive NPV projects will be undertaken, the issue is with perpetual inequality.

Emperor Nero:
So the poor can pay for an education just fine. And the rich will not be getting richer just because they have money. On the contrary, those who feel they are spending their own money to get educated will be more motivated to learn than those who get their education paid for by their parents.

The rich can just live off the interest of their fortunes. They can pay poor mathematical geniuses to manage it for them.

The only possible argument we can make is that there will be *more* mobility in free markets vs the status quo.

/lefty-advocate

Re: My Econometric Model - Devil's Advocates Wanted

ThreeTrees — Fri, 24 Dec 2010 20:36:38 GMT

Its not modeled linearly. Its kind of like a bell shaped curve (last figure of OP).

I just thought that even though I can't know the behaviour of individual investments, the central limit theorem justifies my bell shaped curves. The only suspect part is where I center it at a certain shift - dt - but the optimizer is picking pretty consistent dt values.

Sorry, this is my tenuous grasp of statistics terminology coming into play. I called it linear not based on the shape of the curve but because it appears as a "line" lol. [self_facepalm]

Anyway! Regarding the good ol' central limit theorem; Market outcomes tend not to follow normal distribution. I would refer you to Nassim Taleb's work:

One problem, labeled the ludic fallacy by Taleb, is the belief that the unstructured randomness found in life resembles the structured randomness found in games. This stems from the assumption that the unexpected may be predicted by extrapolating from variations in statistics based on past observations, especially when these statistics are presumed to represent samples from a bell-shaped curve. These concerns often are highly relevant in financial markets, where major players use value at risk models, which imply normal distributions, although market returns typically have fat tail distributions.

http://en.wikipedia.org/wiki/Black_swan_theory

Also, could you elaborate further on this part?

And I don't try to. It's actually cool that I get a good fit *without* any changing coefficients. It models economic growth parameters are intrinsic to the economy. For example, Cg most heavily depends upon the existing capital stock when the fit starts. Tau and dt are probably functions of industry type and/or interest rate.

I'm not exactly sure what you mean. And could you describe your methodology as well? I'm very curious how you determine the values of your coefficients and am a complete noob at econometrics.

Re: My Econometric Model - Devil's Advocates Wanted

Johnny Doe — Fri, 24 Dec 2010 20:20:56 GMT

Sieben:
It isn't off topic. Education is one of those intangible benefits of socialism.

The market can't provide for education because poor people won't be able to afford as good an education as rich people.

They can`t afford "good" education/schools, what`s good about them(I`m not refering to todays system, i.e. public vs private)?

Sieben:
Even though education is always getting cheaper, there is still inequality and the rich will always get richer.

Why will the rich always get richer(relatively I assume)?

Is inequality a bad/unnatural thing, in Norway equality in the education system is being upheld to some extent by making everyone follow a rather unambitious standard curriculum, i.e. no one who are above average academically are allowed to follow there own potential, i.e. it`s against the law to divide pupils born in the same year in different groups based on ability(pupils who are below average are exempted).

Re: My Econometric Model - Devil's Advocates Wanted

Johnny Doe — Fri, 24 Dec 2010 20:11:24 GMT

Moderator can remove this post.

Re: My Econometric Model - Devil's Advocates Wanted

EmperorNero — Fri, 24 Dec 2010 19:34:03 GMT

The point with getting an education is, hopefully, to get a well-paying job. And if you get a job then you have to pay a lot of income taxes. (The model in northern European "socialist" countries is to pay for social programs trough high personal income taxes and leave corporate taxes relatively low, because corporations flee taxation.) So getting an education directly leads to having to pay a lot of taxes. The very taxes that are used to pay for education. In other words, poor people receive no free lunch, the state merely redistributes their future income to them at the point of a gun. The free market can do that more efficiently. Those who can't pay for their education out-of-pocket would simply sell percentage-shares of their future income. Investors would buy these shares for a few percentages in profit, it would be cheaper than taxes. These shares would be valued depending on what your future income is likely to be, i.e. what you study and how well you do. Buying these shares would be like investing in a car company.
So the poor can pay for an education just fine. And the rich will not be getting richer just because they have money. On the contrary, those who feel they are spending their own money to get educated will be more motivated to learn than those who get their education paid for by their parents.

Re: My Econometric Model - Devil's Advocates Wanted

Sieben — Fri, 24 Dec 2010 18:00:32 GMT

It isn't off topic. Education is one of those intangible benefits of socialism.

The market can't provide for education because poor people won't be able to afford as good an education as rich people. Even though education is always getting cheaper, there is still inequality and the rich will always get richer.

Re: My Econometric Model - Devil's Advocates Wanted

EmperorNero — Fri, 24 Dec 2010 17:48:09 GMT

If they're smart, they'll claim its a necessary but insufficient condition.

I suppose I just made you the devils advocate. Well, how is state education a necessary condition for economic well-being? What can it do that free market education can't? If you think this is off-topic, and you want to keep this thread about your econometric model, then just ignore my question.

Re: My Econometric Model - Devil's Advocates Wanted

Sieben — Fri, 24 Dec 2010 17:27:24 GMT

Ricarp:

Hey Sieben, I'm actually interested in the data you're putting out.

Question: Have you considered using a linux platform to use econometric software?

I've been brushing up on some stuff from my undergrad studies--including econometrics--becuase I'm starting a grad program in January. I was able to download open source econometric software called gretl.

I'm not looking to build anything too ornate. I'm really not *that* tech savvy with linux and all that. I'm just an engineer, and I know how to make matlab do the math I wanna do. This model should be more than enough to blow any non-math/non-economist lefty out of the water... I just want to know what actual econometricians would say about it.