Automation of an economist

While undertaking some research on income inequality I could no longer help Infometrics Ltd out with forecasting.  But before I left I caught economist Mieke Welvaert working on blueprints for my replacement.

Although I’ve defended these robots in the past (here and here) it has always been with respect to being compensated for my human capital losing value.  I’ll be sure to tell you all how that is going in future posts 😉

Why am I paying $5 for a coffee?!?

Coffee consumption and Wellingtonian’s willingness to pay for it is a puzzling topic to me.

Due to cultural habits coffee is a highly preferred morning beverage in New Zealand. There are lots of coffee shops in Wellington offering pretty much similar variety of coffee products and yet even with the flood of providers there is no lack of customers and as a result it doesn’t appear to be particularly competitive. In countries like USA, due to tough competition in catering business, a cent increase in a product would normally reduce profits of the company. The competition pushes business owners to offer constant variation in products where consumers do have more options and are more open to sample beverages that are not traditionally consumed. Most Wellingtonian cafes don’t experience this pressure and hence the options of offered beverages are on average the same. And this yet has no decline effect on profits for the NZ coffee shops.

Let’s look at why the Wellington case is particularly strange. My daily observations indicates that, seemingly irrespective of the relative prices charged, two coffee shops in Wellington will still have a sufficient number of customers. It is a puzzle to me to understand why I would be willing to pay 5$ per a cup while the next door offering is 4$? Is it an asymmetric information case where the shop owner knows about his high prices but the customer doesn’t have the information on the comparative prices? If this is the case, is the marginal difference of 1$ an information search cost for the consumer?

Last year the coffee shop “Coffix” ran an advertisement on setting flat prices ($2.5) on their coffees. Once, while waiting for my order from “Coffix”, I was observing a scenario where the customers from the next door café didn’t mind paying minimum $4 for their coffees. The question is again-why?

Why is the elasticity of willingness to pay for coffee from YOUR CAFE so low in Wellington?  I am not asking why coffee prices are so high (they are) in Wellington, but why are Wellingtonians  so unwilling to change where they buy coffee in the face of a lower price available elsewhere?

Possible explanations in my opinion might be:

  • Income relativity. If my income is above the median, the marginal difference in coffee prices (varying from 0.5$ to 1.5$) seems quite low.
  • Convenience of the place and the aura. Consumers might prefer to catch-up with friends in a cosy interior.
  • Distance of the place – even a meter vicinity might be more appealing for some customers.
  • Established relationship with the café staff. Such feelings like you are always welcomed at your usual place might prevail your low willingness to pay.

I very welcome your thoughts and arguments regarding this topic. I am very curious to read your point of view on what drives the motivation of consumers’ behaviours in New Zealand.

Marketing is all about the story

When you think of marketing geniuses there probably aren’t a lot of economists on the list. Yet, according to the Washington Post, economists are increasingly taking on the role of a company’s public face.

In a data-chic world, a chief economist is the new marketing must-have.

Economists are useful because they are experts at interpreting data. Plenty of companies generate a wealth of data and attempt to use it to provide insights for their clients. But the data does not speak for itself: it requires interpretation to be useful. My twitter feed is full of people sharing statistics and correlations but they are rarely useful because they require a framework to interpret them. For example, UK GDP just exceeded its pre-GFC peak. Is that a good thing? Relative to what? What does it mean for my income? For the wages of the poor? Without a framework it is a fairly uninformative piece of data.

This is where economists come in. Their expertise is in the application of models to interpret data and extract information from it. No wonder they are the friendly face of data-centric companies today and long may it continue!

It’s economic analysis, not commentary

Every time the statistical authority releases new data there is a surge in economic commentary. Not analysis, but commentary. A thoughtful analysis would usually say that a single new data point doesn’t provide enough information to change anything we thought previously. There’s just too much randomness and error in point estimates to be able to tell much from them. Commentary is different because it creates a narrative and fits the data into that narrative.

A good example is the narrative about double and triple-dips in the UK. Commentators made much of the ONS’ revisions to the GDP series that ‘revised away’ the triple-dip, ‘vindicating Osborne’. The revisions may have eliminated a slight dip in GDP but they didn’t change anyone’s understanding of what had happened in the macroeconomy. That data was important for commentary but not for analysis. In fairness to commentators, distinguishing genuine trends from randomness is not easy. Our eyes are drawn to ‘streaks’, whether in football games or economic time series, even when the series is essentially random. Economists are always looking for techniques to separate the streaks from the randomness. The problem we face is that many of the tools are fairly impenetrable to casual observers and hard to explain.

Edward Tufte has suggested using randomised sparklines to visually distinguish genuine trends from deceptive streaks, so I thought I’d give it a go with the last four years of UK unemployment data. Here is the monthly change in the UK unemployment rate since June 2009: Monthly percentage point change in UK unemployment rate: June 2009-October 2013. We think that a recovery has begun so the recent years’ falling unemployment looks good. Now let’s try randomising the values and see if the ‘streak’ disappears. Read more

The economist and the politician

There has been a small kerfuffle over the appearance of Jonathan Portes, Director of NIESR, at the Treasury Select Committee. Portes was there to discuss NIESR’s latest economic forecasts and encountered unexpectedly aggressive questioning about his political beliefs from one of the Members. Jesse Norman claimed Portes’ statement that the Government’s austerity plans had ‘failed’ relied upon his personal politics. Portes responded that, while his opinions might be politically relevant, they were purely positive economics.

Norman has now clarified on his blog (HT) that he is specifically saying that reaching a conclusion about a policy’s ‘failure’ requires a normative judgment. Regular readers of TVHE will know that we entirely support Mr Norman’s view that policy judgements require normative statements. Given that a normative statement doesn’t have a right or wrong answer, it must at least be influenced by the same set of personal beliefs as a political view. Hence, it may be that knowing somebody’s personal, political view is helpful for interpreting some of their policy judgements. However, there is a spectrum of normative judgements from those that would be agreed with by only people who share one’s specific political views to those that would be agreeable to experts of all political stripes.

In this case it is clear that Portes statement about ‘failure’ referred to two things: the results of a NIESR modelling exercise, and a belief that the UK’s current economic predicament is due to a demand shortage. His conclusions about each require value judgements, but not the sort that would usually generate a political division among serious macroeconomists—which isn’t to say they’re not divided! Norman, despite his protestations, was not seeking to engage in a discussion about whether the specific value judgements were likely to be politically motivated. Rather, he sought to discredit Portes view of gilt rates by casting aspersions upon his independence.

It is episodes such as these that discourage experts from contributing to the policy debate, even when they have much to contribute. That is a great shame. As Antonio Fatas says

…some of what we do as academics is not useful enough for policy makers, and in these circumstances is better to be honest and stay out of the debate. But …one can find answers to those questions after careful thinking and a lot of data analysis.

policy makers need to choose a number, not a range. [Academics] can be criticized on their assumptions or calculations but not on their willingness to advance the knowledge on an issue of great policy relevance. If any, they should be praised as academics who want to go beyond writing great papers to make those papers useful for policy makers or society at large.

The unknown economist

He is known for tirelessly bringing the facts to every debate and applying economic theory in the midst of heated arguments. The unknown economist works behind a veil of nerdiness, invisible to normal people going about their daily lives. Yet through his perseverance we hope that some order is brought to the world, one internet argument at a time. We can now exclusively reveal his secret identity…
Read more