Category Archives: Economics

A robot can drive you to work, but can it advise you on your finances?

The founding father of artificial intelligence Marvin Minsky once said that his ultimate goal was not so much to build a computer he could be proud of as to build one that would be proud of him. MIT Sloan Professor Andrew Lo mentioned this anecdote in a recent piece about financial advisers in The Wall Street Journal. In essence, he poses the question: Can a robot do the job?

Andrew LoLo says that while tech-savvy millennials would be just as happy interacting with an app as with a human adviser, robo advisers can’t take into account the emotion of investors. “When the stock market roils, investors freak out,” Lo explains. “They need comfort and encouragement.” During the recent stock-market rout, he notes that Vanguard Group was so besieged with calls from jittery investors it had to pull staff from across the company to handle the call volume. “Investing is an emotional process,” Lo says, and “robo advisers don’t do emotion.” At least not right now.

Integrating human feeling into the digital advising process is probably the greatest challenge of financial technology. Lo likens the present state of digital financial advising to a rotary phone in an iPhone world. He points out that investing is much more complex and nuanced than tasks like driving, “which is why driverless cars are already more successful than even the best robo advisers.”

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How much is a living wage? MIT Sloan faculty experts weigh in

Arguably, a living wage is the goal of all civilized societies—that is, the amount of money a person needs to maintain a basic standard of living. But what exactly is a sufficient wage? And will increasing the minimum wage create a knee-jerk effect among employers to hit the brakes on hiring?

At present, the hourly minimum wage in the United States is $7.25, and the Democratic Party platform is advocating more than doubling that rate to $15. MIT Sloan asked three of the School’s top economic and labor experts to weigh in on the idea of raising the minimum wage. Here’s what they had to say:

ErikErik Brynjolfsson
MIT Sloan Professor of Information Technology
Director, MIT Initiative on the Digital Economy

Having more people working and earning good wages is good not just for the people we help, but for all of us: People who work are more engaged in community, creating a virtuous cycle. If we do these three things, we’ll be on track to becoming a richer, more engaged, and more dynamic nation.

#1 Expand the Earned Income Tax Credit
Suppose that someone is earning $12 per hour, and we’d like them to earn $15. With an Earned Income Tax Credit (EITC) they’d get an additional $3 per hour worked from the government. The money to pay for this would come from general tax revenue including income taxes, or ideally increased taxes on carbon dioxide emissions, congestion, and other things we’d like to discourage.

#2 Reinvent Education
The wage gap between the most and least educated workers has grown enormously since the 1980s, and better-educated workers also have much lower unemployment rates and higher rates of workforce participation. But it’s not enough to simply do more of the same. We need to reinvent education for an age where machines are increasingly doing cognitive tasks—the second machine age. That means a greater emphasis on skills like teamwork, project management, persuasion, leadership, coaching, and creativity.

#3 Reduce unnecessary occupational licensing
Over 25 percent of workers now require a license to do their jobs, a five-fold increase since the 1950s. While some licenses are important for safety or other reasons, research has shown that excessive licensing requirements reduce employment and mobility.

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Improving the prediction of currency movements

ForbesExchange rates—they don’t exactly make the world go round, but when they fluctuate, they can give it a bumpy ride. As MIT Sloan Professor Kristin Forbes wrote on the commerce website MarketWatch recently, movements in exchange rates can significantly affect a country’s competitiveness. On a macro level, they can have an impact on everything from export competitiveness to GDP growth and can make it harder to repay foreign debt and reduce earnings on foreign investments. On a micro level, exchange rates can push up or down the prices of key merchandise, from oil to oranges.

“Currency movements also have big implications for the outlook for inflation,” says Forbes, who is an external member of the Monetary Policy Committee for the Bank of England. “This relationship is known as ‘pass through’…it captures how changes in the exchange rate pass through to import prices and inflation…for those of us tasked with setting monetary policy, understanding how currency movements pass through into inflation is critical to our decision on when to adjust interest rates.”

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  Economics  Finance  

Lester Thurow: Tribute to a Global Economic Pioneer

Lester ThurowMIT Sloan Professor Lester Thurow, dean of the School from 1987 to 1993, was one of the few economists in the 20th century to become a household name—in part, because he discussed topics of interest to ordinary citizens in words they could understand.

Thurow, who died on March 25 at the age of 77, spoke out early and eloquently about income inequality, believing that a more equitable sharing of economic burdens and benefits would generate prosperity. In a tribute to him in The New York Times, Jared Bernstein of the Center on Budget and Policy Priorities noted that “he was one of the first important economists to suggest that too much inequality is bad for society.”

Thurow was a true thought leader, advising governments, speaking to diverse groups, from economists to senior citizens, and writing iconic books like the 1980 bestseller The Zero Sum Society: Distribution and the Possibilities for Change, which offered recommendations about the best way to balance free-market aspirations and government stewardship of the economy. In The New York Review of Books, John Kenneth Galbraith called it “an extraordinarily good and lucid examination of current economic difficulties.”

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Resuscitating the Spanish economy—a lesson in strategic thinking

José-Maria Fernández, SF ’10After a precipitous free fall beginning in 2008, the Spanish economy, the fourth largest in the Eurozone, is beginning to climb out of recession, and there is nothing serendipitous about the recovery. José-Maria Fernández, SF ’10, Director General of the Spanish Treasury, and his team devote a major share of their working life to in-depth analysis and strategic thinking on how to finance the country and the implications for taxpayers in the short, medium, and long terms. “All our thinking translates into a relatively small number of decisions and actions,” Fernández says—actions, of course, that have wide-ranging impact and potentially long-term consequences.

“We raise approximately 240 billion euros a year selling bonds and bills globally to investors while executing only 50 or 60 funding transactions annually,” Fernández adds. “We probably spend 90% of our time designing, evaluating, and revising our financial strategy in light of market, economic, and budgetary conditions. That means only 10% of our activity is devoted to execution.” The equation, he believes, is as it should be.

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Should we be bullish or bearish on BRICS?

When the alliance first formed in 2001, many investors were bullish about BRIC, the association of what were then considered four burgeoning economies—Brazil, Russia, India, and China (South Africa joined in 2010). BRICS nations represent 40% of the world’s population and account for almost $16 trillion in GDP. The idea was that BRICS would create an international financial network that would rival the prevailing western-dominated system. But 15 years out, how much of a threat to the status quo does BRICS actually constitute?

Andrew LoAndrew Lo, Charles E. and Susan T. Harris Professor of Finance, believes that when it comes to BRICS, much depends on political factors. “The stability and credibility of BRICS governments is vital. If they can manage the volatility, including the threat of hyperinflation, and implement more disciplined monetary policies, it could be just a matter of time before they play a more important role.”

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Governing in an Interdependent World

Autonomy is so 20th century—at least in terms of governing nations. A half century ago, governments were relatively independent entities. They could make fairly autonomous decisions about their nations’ economic futures. MIT Sloan Senior Lecturer Otto Scharmer, a noted economist, sees a new world order today in which individual governments no longer enjoy the same kind of economic independence they once had.

OttoA world economy, Scharmer explains, is one in which capital accumulation proceeds throughout the world, while a global economy has the capacity to function as a single unit “in real time on a planetary order.” A world economy has existed for five centuries, he points out, but a global economy has been in place for only the last two decades, driven by new infrastructures built on advances in information and communication technologies.

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The World Bank: Reinvention in response to global pressures

It’s common to criticize many of the world’s mega-organizations for being resistant to change, but reinventing large organizations—across borders, across cultures, across governments—can be a daunting feat. Nevertheless, the World Bank Group, with 188 member countries, is tackling an unprecedented reinvention in an effort to boost the organization’s impact.

0115-wassimyAs the Middle East North Africa regional manager for the Trade & Industry Competitiveness Program of the International Finance Corporation (IFC), the private sector investment arm of the World Bank, Hazem ElWassimy, SF ’09, is on the front lines of the historic transformation at the World Bank Group (WBG). For the last two decades, he has been working for and with multilateral organizations and government entities to generate investments and spark innovations that help countries modernize and expand economic opportunities.

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Cryptocurrencies: Is your wallet going digital?

It can be argued that money has been digital for a long time. The Bitcoincredit card, of course, is digital currency, and there are parts of the world—Scandinavia, for example—where consumers use credit cards for nearly every transaction, big or small, not bothering to carry cash at all. And innovations like Apple Pay mean you don’t even have to show your credit card. You can present your phone instead, which is linked to your credit card account. But perhaps the most controversial digital iteration is cryptocurrency, a digital currency that can be transferred directly from one “wallet” to another without ever going through a bank. What you get in lieu of paper money is a highly complex mathematical code. Your computer receives the code, solves the problem, and releases the sum from the “block chain,” a digital vault where the cryptocurrency is stored.

After a few hits and misses, Bitcoin and Dogecoin, the two major players in the cryptocurrency realm, have rendered their codes increasingly uncrackable. And Silicon Valley startup Coinbase has launched the first major exchange for online currency. Persistent hackers, however, have been able to decipher the encrypted strings of text used by less rigorous cryptocurrencies. Given that hackers—who are intent on proving that cryptocurrencies will never be fully secure—are continually finding vulnerabilities in the system, we asked MIT Sloan finance faculty whether this form of digital currency has a future.

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Dealing in dollars

The globally diverse and sometimes emotional response to the U.S. dollar—love, hate, begrudging respect—can make it difficult to know where the currency really stands.

But Simon Johnson, Ronald A. Kurtz (1954) Professor of Entrepreneurship and Professor of Global Economics and Management at MIT Sloan, says the position of the dollar is something every business leader should be watching. “If the potential exists for a change in the dollar’s standing as the world’s dominant currency, you can gain a huge advantage if you understand when that shift will come and what factors will drive it.”

In White House Burning, Johnson and coauthor James Kwak trace the dollar’s current position back to the 1944 United Nations Monetary and Financial Conference at Bretton Woods, where the international monetary system was rebuilt around the dollar. The decision proved widely beneficial. For the next three decades, fixing exchange rates in terms of dollars discouraged trade wars based on currency devaluation, promoted global economic stability, and facilitated rapid expansion in global trade.

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