EconTalk this week

Richard Epstein of New York University and Stanford University's Hoover Institution talks with EconTalk host Russ Roberts about the U.S. Constitution. Topics covered in this wide-ranging conversation include how the interpretation of the Constitution has changed over time, the relationship between state and federal power, judicial activism, the increasing importance of administrative agencies' regulatory power, and political influences on the Supreme Court.

Interesting blog bits

1. Sam Richardson asks Events capital = big returns, right?

   The New Zealand Herald today is reporting that Auckland is a more successful city than Sydney at attracting and hosting major events. Auckland Mayor Len Brown says: "Major sporting events are big business and bring substantial economic benefits to the host region, so there is fierce competition globally to secure events." There certainly is fierce competition all right - but not a whole lot in the way of compelling evidence that the economic impacts of events are as substantive as commonly thought.

2. Matt Zwolinski asks Should You Buy a T-Shirt Made in Bangladesh?

   Recent events in Bangladesh have brought moral questions surrounding sweatshops into the spotlight again. And many consumers are wondering whether they might be doing something wrong by purchasing goods that are made in Bangladeshi textile firms.

3. Mario Rizzo on Bangladeshi Garment Workers and the Perversion of Ethics

   This is another instance of the simplistic pseudo-morality of those who can only see what is right in front of them at the present moment. This attitude is closer to a sympathetic reflex than a reasoned moral judgment.

4. George Hall and Thomas J. Sargent on Fiscal prioritisation: Lessons from three wars

   Can we learn from previous instances of fiscal prioritisation? This column surveys the US Treasury’s response to three wars – the Revolutionary War, The War of 1812 and the Civil War. Contemporary advocates of engaging in fiscal discrimination might ponder the actions of previous US Presidents Madison and Grant, who honoured all existing federal obligations despite challenging fiscal conditions.

5. Chris Dillow on Adam Smith on Immigration

   UKIP claims that its tax policies are derived from Adam Smith. But what would the great man make of its anti-immigration policies? I suspect the answer is: not much.

6. Klaus Desmet and Stephen L. Parente on Unleashing growth: The decline of innovation-blocking institutions

   Innovation is the beating heart of modern growth. This column argues that innovation-blocking institutions weaken when markets expand and competition intensifies. The rise and decline of medieval Italian crafts guilds offer valuable insights into this process. Policies that promote greater market integration and stronger competition are key steps in lowering the barriers to innovation.

7. John Taylor on Why Title II of Dodd-Frank Has Not Reduced the Likelihood of Bailouts

   Today the House Financial Services Subcommittee on Oversight and Investigations held a hearing on whether the Orderly Liquidation Authority (OLA) in Title II of the Dodd Frank Act has reduced the likelihood of bailouts of large financial firms. I was one of the witnesses. Here is a summary of my 5 minute opening statement.

8. William Kerr on Cuddly or not, the design of worker insurance is critically important

   Do economies’ social policies affect their innovative outcomes? This column uses the case of venture capital investors to argue that it may. Countries that protect workers rather than jobs – and thus avoid employment-protection laws – developed stronger venture-capital markets over 1999-2008, especially in highly volatile sectors like computers or energy.

9. Gary Becker on The Rise in College Tuition and Student Loans

   Many commentators have criticized these large tuition increases. Colleges and universities are said to be too greedy and are charging what the traffic will bear, or colleges are claimed to conspire together to increase tuition. Although colleges do conspire on some financial issues, such as agreeing through the NCAA to prevent payments to college athletes, conspiracy is not likely to be important in determining tuition since over 4000 colleges and universities compete fiercely for students, faculty, and funding.

10. Richard Posner on College Costs and Quality
    

    I graduated from Yale College in 1959. Tuition, room, and board at Yale in the late 1950s was $2000 a year; this year it is $60,000. Adjusted for inflation, this is a more than threefold increase. Average salary for a full professor at Yale went from $13,000 in 1959 to $186,000 this year (excluding medical school faculty), which after correction for inflation, an almost twofold increase. The rates of increase in these two variables varies from college to college, but I believe it is generally true that college costs have risen significantly faster than faculty costs. One thing that has depressed the increase in faculty costs is the increasing use of graduate students and other part-time faculty in lieu of tenure-track faculty. In addition, the administrative staffs of colleges have grown rapidly, in part because of increased legal regulation of education. Also, colleges have increased the quality of student housing and provided other amenities for students, in an effort to compete more effectively for rich kids. In addition, greatly reduced state subsidies for state colleges, in the wake of the economic depression that began in 2008, have forced state colleges to increase tuition.

EconTalk this week

Austin Frakt of Boston University and blogger at The Incidental Economist talks with EconTalk host Russ Roberts about Medicaid and the recent results released from the Oregon Medicaid study, a randomized experiment that looked at individuals with and without access to Medicaid. Recent released results from that study found no significant impact of Medicaid access on basic health measures such as blood pressure and cholesterol levels, but did find reduced financial stress and better mental health. Frakt gives his interpretation of those results and the implications for the Affordable Care Act. The conversation closes with a discussion of the reliability of empirical work in general and how it might or might not affect our positions on social and economic policy.

Will "big data" be big?

What effect will the increasing use of very large data sets have on economics? Liran Einav and Jonathan D. Levin look a the effects of "big data" on economic analysis in a new NBER working paper The Data Revolution and Economic Analysis.

There is little doubt that "big data" will change the landscape of economic policy and economic research. Something worth noting however is that big data will not be a substitute for common sense, economic theory, or the need for careful research designs. This may come as a shock to many economics students who these days are taught that all economics amounts to is pushing the "regress" button and picking whatever results confirm your prejudices. Data is a complement to real economics. In the case of "big data" how exactly remains to be seen. Einav and Levin look at the opportunities, as well as challenges, that come with the ongoing data revolution.

The abstract reads

Many believe that "big data" will transform business, government and other aspects of the economy. In this article we discuss how new data may impact economic policy and economic research. Large-scale administrative datasets and proprietary private sector data can greatly improve the way we measure, track and describe economic activity. They also can enable novel research designs that allow researchers to trace the consequences of different events or policies. We outline some of the challenges in accessing and making use of these data. We also consider whether the big data predictive modeling tools that have emerged in statistics and computer science may prove useful in economics.

Interesting blog bits

1. Yasuyuki Todo on Estimating the effect of the TPP on Japan’s growth
   

   Japan looks set to participate in the Trans-Pacific Partnership (TPP) negotiations. Reflecting the current debate in Japan, this column assesses what effect the Partnership will have on Japan’s growth. Evidence suggests that the economic effects may be far bigger than the current consensus suggests.

2. Richard Wellings makes The case for raising speed limits
   

   If major roads were privately owned and freed of government regulation, the setting of speed limits would be a commercial decision. Entrepreneurs would seek to attract customers to their routes in order to maximise toll revenues, and one way of doing so would be to offer fast journey times by allowing high speeds.

3. Jeffrey Chwieroth and Andrew Walteron on Banking crises and political survival over the long run – why Great Expectations matter
   

   The economic consequences of financial crises have been systematically explored. Their political consequences haven’t. This column argues that without paying attention to politics, crises will remain poorly understood. After all, politics shapes policy choices, market sentiment and, ultimately, economic outcomes. Evidence from the effects of banking crises over the past century show that crises have a dramatic impact on the survival prospects of governments.

4. Steve Davies argues Free banking was robust and effective
   

   In an earlier blog post, Philip Booth discussed the likely scenarios for Scottish monetary policy in the event of Scottish independence and the difficulties, both political and economic, associated with these. What can be very useful is to add historical perspective and to see how things worked out in the past, given that Scotland has an interesting monetary and banking history which is very different from that of England.

5. Bas van Der Vossen on Libertarian Human Rights?

   When you read about the philosophy of human rights it’s hard to not to notice the nearly complete absence of libertarian input. This post is a call for a libertarian take on human rights.

6. Balázs Égert on France’s weak economic performance: Sick of taxation?
   

   France has recorded one of the lowest real per capita income growth levels in the OECD over the last 20 years or so. One of the many structural weaknesses causing this weak performance is the French tax system. This column argues that complexity, instability and non-neutrality coupled with very high effective tax rates in many areas of the French tax system put a heavy burden on the economy.

7. Tatiana Didier and Sergio Schmukler on Finance and growth in China and India: Have firms benefited from the capital-market expansion?
   

   The growth of China and India’s financial sectors is hard to ignore. This column presents a new dataset on domestic and international capital raising activity and performance of the publicly listed firms in China and India. The data suggest that expanding capital markets might tend to directly benefit the largest firms – those able to reach some minimum threshold size for issuance. More widespread direct and indirect effects are more difficult to elucidate.

8. Gary Becker on Alternatives to the War on Drugs
   

   The 40 year-old American “war on drugs” has been a colossal failure. No progress in dealing with drugs can be expected until that basic truth is recognized. Every conceivable approach has been tried to help the war succeed, such as long prison terms for persons convicted of selling or using drugs, trying to prevent drugs from entering the US from Mexico and other countries, and confiscating huge quantities of drugs (remember The French Connection?). At some point all wars that fail are terminated, and alternative approaches explored. The two main alternatives to the war on drugs are decriminalization and legalization of drugs. Decriminalizing drugs means that using drugs would no longer be a criminal activity, while trafficking in drugs would remain a crime. Legalization of drugs means that trafficking in drugs as well as using drugs would not be a crime.

9. Richard Posner asks is there a Breakthough in the War on Drugs?
   

   The publication of a White House “National Drug Control Strategy” is an annual event, which wordily (the 2013 version is 95 pages long) heralds nonexistent progress and makes false promises of more to come. The General Accountability Office has evaluated the 2013 version and found it wanting, noting the government’s lack of progress toward achieviing the goals of diminished drug use stated in the 2010 version.

Did FDR end or extend the depression?

Thanks to NotPC I came across this video in which Lee Ohanian, Professor of Economics at UCLA, challenges this conventional wisdom that President Franklin Roosevelt's "New Deal," rescued America from the Great Depression of the 1930's.

The knowledge problem

One thing anti-market types don't seem to get is the importance of being able to coordinate diffuse private knowledge. Markets are surprisingly good at this, governments are not. This is part of what is known as the "Knowledge Problem". The knowledge problem in fact has has two main components:

• Complexity knowledge problem: The difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge
• Contextual knowledge problem: The epistemic fact that some knowledge relevant to such coordination does not exist outside of the market context; such knowledge is either created in the process of market interaction, tacit knowledge that is not consciously known, or inarticulate knowledge that is difficult to express or aggregate.

Lynne Kiesling of Northwestern University and the Knowledge Problem blog has a recent article surveying the literature on the Knowledge Problem. The abstract reads,

Hayek's (1945) elaboration of the difficulty of aggregating diffuse private knowledge is the best-known articulation of the knowledge problem, and is an example of the difficulty of coordinating individual plans and choices in the ubiquitous and unavoidable presence of dispersed, private, subjective knowledge; prices communicate some of this private knowledge and thus serve as knowledge surrogates. The knowledge problem has a deep provenance in economics and epistemology. Subsequent scholars have also developed the knowledge problem in various directions, and have applied it to areas such as robust political economy. In fact, the knowledge problem is a deep epistemological challenge, one with which several scholars in the Austrian tradition have grappled. This essay analyzes the development of the knowledge problem in its two main categories: the complexity knowledge problem (coordination in the face of diffuse private knowledge) and the contextual knowledge problem (some knowledge relevant to such coordination does not exist outside of the market context). It also provides an overview of the development of the knowledge problem as a concept that has both complexity and epistemic dimensions, the knowledge problemʼs relation to and differences from modern game theory and mechanism design, and its implications for institutional design and robust political economy.

A debate about the patent system

A debate about patent law between the Honorable Judge Richard Posner (7th Circuit) and Professor Richard Epstein (the Hoover Institution & New York University School of Law).

Christchurch stadium, again

The issue of a new sports stadium for Christchurch in in the news again with a couple of recent articles on Stuff ("Stadium concept 'would be money maker'" and "New stadium plan 'smart, bold'"). Fortunately there are those at Massey who are on the ball when it comes to stadiums. Massey economist Sam Richardson writes at his blog Fair Play and Forward Passes:

A stadium will only ever be used sparingly. That is reality. Westpac Stadium is used for between 40-50 event days per year - and it has been making operating surpluses since it has been opened. Westpac Stadium was also built with a mere 1/3 of its funding from local and regional government. It is not clear yet where exactly the funding for Christchurch's stadium plans is coming from, but it is fair to say that it will be largely funded by taxpayers - locally, regionally and nationally to some degree. As such, if my taxpayers money is going into funding a stadium, I would like to see some evidence that this amenity is going to be at least self-sustaining, and should not be detrimental to the local area. The idea that office buildings will make the stadium profitable is missing the point. If the office blocks are the profit-making parts of the venture, why not just build the office blocks? If they must be built as part of a stadium plan, we have to acknowledge that the rents earned by stadium offices will simply be transferred from other office spaces elsewhere within the city. It may well be the case that office space is at a premium in Christchurch, in which case the stadium offices may be beneficial to the city of Christchurch in that clients who were previously unable to obtain office space may now be able to do so. If, however, the offices are simply populated by clients who relocated from the suburbs, then this isn't making money (nor necessarily welfare enhancing either) at all - it is merely redistributing the rents on office space from the suburbs back into the CBD.

It is exactly the same argument as the claim that stadiums generate conference revenues too - which is only beneficial if the conferences wouldn't have been held in the city in the first place without the stadium conference spaces.*

Sure, the office rents may make the bottom line of the stadium better (if indeed things pan out as projected). But from a wider (city or regional) perspective, is it really regenerating or simply redistributing? That's the question that ratepayers need to be asking of their policymakers.

One further question I would ask is about the opportunity cost of any taxpayer money used for the stadium. There are many other (better?) things to use money on in Christchurch right now. Sam's response to that question is,

Is a stadium an essential or luxury for Christchurch? I know they have the 'temporary' stadium, but surely there are more compelling alternative uses of scarce government funds at this time. Decisionmakers should at least be open about the fact that it is highly unlikely to be a money maker for the city. If you build it for public good purposes, show us the value of the public goods it will generate.

I have to agree with Sam about seeing evidence about the value of any public goods a stadium will provide. Off the top of my head I can't think of any. So those backing the stadium need to front-up with details as to what the real reasons for the stadium are.

Hogan on cricket

Ignore Jeremy at the beginning, Hogan comes in at about the 3:50 mark.

• What if economics could help cricket teams win matches? And what if teams employed economists alongside their sports psychologists, conditioning coaches and physiotherapists?

• Why is it that New Zealand traditionally punches above its weight in the One Day International (ODI) format of the game?

• Why has the batting powerplay had so little effect on team ODI scores on average?

• And how is economics remotely related to cricket anyway?

Sports teams are increasingly using detailed statistical analysis to help give them an advantage over their opposition. In contrast, the economics of sport mostly focuses on sport as a business rather than on-field strategy. During this session, I am going to discuss how ODI cricket is a natural subject for the application of economics reasoning and how this reasoning can be a useful tool both for helping teams think about strategy and for informing spectators about the state of a game as it's played out.

EconTalk this week

William Bernstein talks with EconTalk host Russ Roberts about his latest book, Masters of the Word. Bernstein traces the history of language, writing, and communication and its impact on freedom. The discussion begins with the evolution of language and the written word and continues up through radio and the internet. A particular focus of the conversation is how tyrants use information technology to oppress their people but at the same time, technology can be used to liberate people from oppression.