The culmination of last night’s Oscars broadcast with a Live! feed from the White House with Mrs. Obama (hangin’ with her military BFs) marks the official recognition of the Presidency as theater: like the old Western sets, no substance required.But I find myself asking, Isn't this what politics is about? Theatre, not substance? Can you imagine any politician turning down a chance to get their message across at an event like the Oscars?
Wednesday, 27 February 2013
Posted by Paul Walker at 11:12 pm
Pharmaceutical promotion, to doctors and consumers, is controversial in most countries. New Zealand has one of the more liberal sets of regulations on this topic. The effects of such promotion are surveyed in a a new NBER working paper: Effects of Pharmaceutical Promotion: A Review and Assessment by Dhaval M. Dave. The abstract reads,
This review discusses the role of consumer-directed and physician-directed promotion in the pharmaceutical market, based on the classic conceptual framework of whether such promotion is “persuasive” and/or “informative”. Implications for public health and welfare partly depend on whether, and to what extent, advertising: 1) raises “selective” or brand-specific demand versus “primary” or industry-wide demand; 2) impacts drug costs; and 3) impacts competition. Empirical evidence from the literature bearing on these effects is surveyed. These studies show that pharmaceutical promotion has both informative and persuasive elements. Consumer advertising is more effective at enlarging the market, educating consumers, inducing physician contact, expanding drug treatment, and promoting adherence among existing users. Physician advertising is primarily persuasive in nature, effectively increasing selective brand demand. Evidence bearing on the effects of promotion on competition and prices is more limited. However, there is no strong evidence that drug promotion deters entry, and there is some suggestive evidence that it may even be mildly pro-competitive. With respect to costs, some studies suggests that consumer advertising may weakly raise the average wholesale price, which is a manufacturer’s list price, but there is no strong indication that either consumer- or provider-directed promotion substantially raises retail-level prices. However, this is not to imply that potential promotion-driven substitution from non-advertised to advertised drugs cannot have effects on total drug costs. While most of these effects point to potential welfare improvements as a result of pharmaceutical promotion, there is also evidence that consumer ads may induce overuse and overtreatment in certain cases. Market expansion, overtreatment and shifting brands for non-therapeutic reasons further raise the concern of a sub-optimal patient-drug match at least for some marginal patients. A comprehensive evaluation of the welfare effects of pharmaceutical promotion requires a balanced assessment of these benefits and costs.So, as one may have thought, there are both persuasive and informative aspects to pharmaceutical advertising and a welfare analysis of such promotion needs to take both into account.
Update: It looks like Crampton beat me to the draw on this one.
Posted by Paul Walker at 1:52 pm
Tuesday, 26 February 2013
Yanis Varoufakis of the University of Athens, the University of Texas, and the economist-in-residence at Valve Software talks with EconTalk host Russ Roberts about the unusual structure of the workplace at Valve. Valve, a software company that creates online video games, has no hierarchy or bosses. Teams of software designers join spontaneously to create and ship video games without any top-down supervision. Varoufakis discusses the economics of this Hayekian workplace and how it actually functions alongside Steam--an open gaming platform created by Valve. The conversation concludes with a discussion of the economic crisis in Europe.
Posted by Paul Walker at 1:25 am
Monday, 25 February 2013
The Gunderson report referred to in the previous posting on the effects of the minimum wage in Canada also has a short section on the effects in the U.K. The interesting point about the U.K. experience is that British studies of the effect of minimum wages are effectively divided into two periods. Prior to 1993, minimum wages in the U.K. were set at the industry level by Wage Councils.
A limited number of studies evaluated their effects and found no negative effect on employment and occasionally a positive effect, albeit not statistically significant (Machin and Manning 1994, Dickens, Machin and Manning 1999). Even though this evidence is consistent with that found by Card and Kruger in the U.S., Card and Kruger (1995, p. 271) raise the concern that this lack of effect may reflect the possibility that "Wage Councils might have set rates strategically, raising them in industries that were expected to grow, and lowering them in industries that were expected to shrink."The second period started in 1999 when Britain adopted its first-ever national minimum wage.
The Low Pay Commission (2000) reported that its background studies did not find negative effects. However, these were essentially case studies or surveys indicating perceptions of the effect at the time the law was passed. More rigorous econometric evaluations, however, generally (but not always) come to a similar conclusion. More specifically:Thus the U.K. experience suggests that their more recent national minimum wage did not have negative effects except in the low-wage sector. Which is many ways is what you would expect. But Gunderson notes that there are four qualifications that should be kept in mind when looking at the recent British experience:
- Overall, there does not appear to be an adverse employment effect economy-wide (Stewart 2004).
- There was a conventional adverse employment effect, however, in the low-wage sector where minimum wages would be expected to have an impact. The elasticity of employment with respect to the minimum wage increase ranged from about -0.01 to -0.03 in the low-wage nursing home care sector, indicating that a 10% increase in the minimum wage would reduce employment by about 1% to 3%. This is exactly the “consensus” range of estimates based on earlier US studies.
- There is no evidence of spillover effects on wages near the minimum nor of any impact on wage inequality (Dickens and Manning 2004)
- There is no evidence of a negative impact on training; if anything, the effects are positive (Arulampalam, Booth and Bryan 2004).
So again, in the U.K., you see negative employment effects in the low-wage sectors of the economy.
- The case studies and surveys are based on perceptions at the time of the policy.
- The econometric studies, while solid, were done shortly after the minimum wage came into effect so that longer-run effects are not observed.
- The policy was anticipated and some adjustments may have occurred prior, making the before-and-after comparisons appear small.
- The minimum wage increases were very small and were based on “what we believed the economy and business could manage” (Low Pay Commission, 2000, p. vii). In other words the wage increases were instituted at a time when they could more easily be absorbed.
Posted by Paul Walker at 12:17 am
Sunday, 24 February 2013
What we know about the effects of the minimum wage are largely based on work from the USA. But there is evidence from other countries including Canada. This 2005 report prepared for the Federal Labour Standards Review Commission by Morley Gunderson - CIBC Professor of Youth Employment at the University of Toronto, and a Professor at the Centre for Industrial Relations and the Department of Economics. He is also a Research Associate of the Institute for Policy Analysis, the Centre for International Studies, and the Institute for Human Development, Life Course and Aging. - reviews papers on the effects of changes in the minimum wage in Canada. A summary of the findings reads:
While there are substantial differences across the different Canadian studies, the following generalisations emerge:Perhaps the most interesting result given the discussions on the effects of the minimum wage here in New Zealand is the comment that Overall it appears that the Canadian studies tend to find adverse employment effects that are at least as large and likely larger than US studies; certainly none find positive employment effects as occasionally occurs in the US. So the Canadian studies find stronger evidence for adverse employment effects of the minimum wage.
- The earlier Canadian studies (based on data prior to the 1980s) tended to find adverse employment effects that were in the range of US consensus estimates, and sometimes higher, where a 10% increase in the minimum wage would give rise to a 1-3% reduction in employment.
- Studies based on data to include the 1980s tended to find smaller effects that were at the lower end of the consensus range, and possibly zero, as was often also the case in the US.21
- However, some more recent studies using different and more sophisticated methodologies as well as more recent data (e.g., Baker, Benjamin and Stanger 1999, Yeun 2003, Baker 2005, Campolieti, Fang and Gunderson 2005a, b, Campolieti, Gunderson and Riddell, forthcoming) find larger adverse employment effects at the higher end and beyond the consensus range, especially in the longer run. The elasticities typically range from -0.3 to -0.6 for teens (slightly lower for young adults), implying that at 10 percent increase in the minimum wage would lead to a 3 to 6 percent reduction in the employment of teens. The fact that they use different data sets and methodologies suggest that these results are robust.
- Overall it appears that the Canadian studies tend to find adverse employment effects that are at least as large and likely larger than US studies; certainly none find positive employment effects as occasionally occurs in the US.
- Minimum wage increases also tend to reduce the labour force participation rate inducing some to leave the labour force and this means that not all of the employment reductions get translated into unemployment rate increases.
- There is some evidence of wage spillover effects but not in all studies.
- There is no substantial impact on schooling, although there may be some weak positive effect for older youths.
- Although data problems preclude estimating robust results, the effects on training are generally negative, although sometimes small and statistically insignificant. The most likely negative effect, however, is indirect resulting from the more substantial adverse employment effect that precludes accumulating on-the-job training and experience.
- Minimum wages tend to reduce wage inequality and disproportionately benefit low-income families. As an anti-poverty device, however, they are an exceedingly blunt instrument and not well targeted towards the poor for various reasons:
- many of the poor do not work;
- those that do often work few hours;
- there is the risk of an adverse employment effect;
- minimum wages disproportionately affect teens who are distributed throughout the family income distribution; and
- minimum wages affect individual wages while poverty is defined in terms of family income and need.
- There is, perhaps surprisingly, no direct published evidence on the differential impact of raising minimum wages in times of high unemployment or low unemployment. Basic theoretical reasoning (and the experience of Britain discussed previously) would suggest that any adverse employment effect would be mitigated if minimum wages were raised in periods of low unemployment in part because it would more likely not to be a binding constraint. As stated by Sussman and Tabi (2004, p. 6) in commenting that only 1.1% of workers in Alberta were working at the minimum wage compared to 4.1% across all of Canada and 8.5% in Newfoundland and Labrador: “more opportunities in Alberta may have translated into greater bargaining power for workers.” Certainly, any adverse employment effect would be masked by a tight labour market where its manifestation would be only slower employment growth.
Posted by Paul Walker at 3:59 pm
Saturday, 23 February 2013
A video from a ceremony to honour Dr. Israel M. Kirzner's contributions to market process theory and entrepreneurship studies,
(HT: Coordination Probletm)
Posted by Paul Walker at 5:16 pm
From the TVNZ website comes this comment:
Any Government bailout of beleaguered state-owned coalminer Solid Energy must not further devastate already struggling mining communities, the Engineering, Printing and Manufacturing Union (EPMU) says.I can't help thinking that the correct comment would have been to say there should be no "bailout of beleaguered state-owned coalminer Solid Energy". One of the problems with SOEs is exactly the issue of bailouts. The fact that the bailout option is there crates a moral hazard problem since management know the government will bail them out if their plans don't work and thus they take more risk than a private company would. The correct response by the government would be to let Solid Energy go bankrupt if it can't workout a deal with its creditors.
The TVNZ article continues,
Labour's state-owned enterprises spokesman, Clayton Cosgrove, said National's "epic mismanagement" had turned it from an export-award-winning company into a basket-case.Yes indeed. One advantage of (full) privatisation is that it will depoliticise the firm. It will increase the political cost of the bailout option and thus reduce - as much as possible - the likelihood of a bailout. The aim of privatisation is to have the greatest possible "distance" between the government and the firm. Government interference in the running of a firm is impossible to eliminate completely but a good privatisation plan will result in a situation where any government interference is as obvious and politically costly as possible. But I'm guessing privatisation isn't what Cosgrove has in mind :-(
"Solid Energy appears on the verge of collapse. This must be the first time any government has overseen such a massive failure in a state-owned asset . . . The big loser? Yet again, the taxpayer."
Posted by Paul Walker at 4:52 pm
Wednesday, 20 February 2013
Glenn Reynolds of the University of Tennessee and blogger at Instapundit talks with EconTalk host Russ Roberts about the political malaise in America, whether it could lead to a Constitutional Convention, and what might emerge were such an event to occur. Reynolds also gives his thoughts on the suggestion advanced in a recent episode of EconTalk that we should ignore the Constitution. The conversation concludes with Reynolds's views on the decentralizing power of technology and Reynolds's music career.
Posted by Paul Walker at 8:28 pm
Posted by Paul Walker at 8:03 pm
Another of the great old guard of economics has gone. As a theory of the firm man I think of Armen Alchian as one of the developers of the nexus of contracts view of the firm.
This approach to the firm was developed in papers by Alchian and Demsetz (1972), Jensen and Meckling (1976), Barzel (1997), Fama (1980) and Cheung (1983). The important innovation here was the recognition that it is difficult to draw a line between firms and markets, firms are seen as a special type of market contracting. What distinguishes firms from other forms of market contract is the continuity of the relationship between input owners.
Most famously in the Alchian and Demsetz version of this approach, they argue that the authority relationship between the employer and employee is in no way the defining characteristic of a firm. The employer has no more authority over an employee than a customer has over his grocer. ‘Firing’, of either the employee or grocer, is the ultimate punishment that either the employer or customer can use in cases of ‘disobedience’. Alchian and Demsetz argue that, in economic terms, the customer ‘firing’ his grocer is no different from the employer firing his employee. In both cases one party stops dealing with the other, terminating the ‘contract’ between them. In this approach the firm is seen as little more than a nexus of contracts, special in its legal standing and characterised by long term nature of the relationship between the input owners. In this approach it is not generally useful to talk about firms as distinctive entities, a nexus of contracts could be called more firm-like if, for example, the residual claimants belong to a concentrated group but the term ‘firm’ has little meaning beyond this.
Roberts (2004: 104) responds to this line of argument:
“[w]hile there are several objections to this argument, we focus on one. It is that, when a customer “fires” a butcher, the butcher keeps the inventory, tools, shop, and other customers she had previously. When an employee leaves a firm, in contrast, she is typically denied access to the firm’s resources. The employee cannot conduct business using the firm’s name; she cannot use its machines or patents; and she probably has limited access to the people and networks in the firm, certainly for commercial purposes and perhaps even socially”.To be fair, in later work Alchian has stated that their assertion is incorrect (Alchian 1984: 38) while Demsetz (1995: 37) claims the idea “is a mere aside” in their paper.
Alchian and Demsetz (1972) extend their discussion by noting that the firm is more than just a special legal arrangement, it is also characterised by team production. The problem that arises here is that with team production, the marginal products of the individual members of the team are hard to measure. This means that free-rider behaviour is now possible since team production can act as a cover for shirking. The Alchian and Demsetz solution is to give the right to hire and fire the members of the team to a monitor who observes the employees and their marginal products. To ensure that the efficient amount of monitoring takes place, the monitor is given the rights to the residual income of the team. Here we see the start of the "firm as a solution to moral hazard in teams approach" to the firm.
You can find this work and a lot more worth reading in Alchian’s Collected Works.
Posted by Paul Walker at 7:11 pm
Friday, 15 February 2013
Multinational firms are an obvious part of the economic landscape, and have been for a long time, perhaps the oldest still existing multinational firm is the Catholic Church having emerged in its official capacity as a result of the Edict of Milan in A.D. 313. There is a new paper out that reviews the literature on the multinational firm: Multinational Firms and the Structure of International Trade by Pol Antràs and Stephen R.Yeaple, NBER Working Paper No. 18775, February 2013.
The abstract reads,
This article reviews the state of the international trade literature on multinational firms. This literature addresses three main questions. First, why do some firms operate in more than one country while others do not? Second, what determines in which countries production facilities are located? Finally, why do firms own foreign facilities rather than simply contract with local producers or distributors? We organize our exposition of the trade literature on multinational firms around the workhorse monopolistic competition model with constant-elasticity-of-substitution (CES) preferences. On the theoretical side, we review alternative ways to introduce multinational activity into this unifying framework, illustrating some key mechanisms emphasized in the literature. On the empirical side, we discuss the key studies and provide updated empirical results and further robustness tests using new sources of data.Some people seem to see multinationals as a great evil but they don't seem to have ever asked why such firms exist and why is there structure what it is. A quick read of this paper may help them.
Posted by Paul Walker at 8:20 am
Thursday, 14 February 2013
Wednesday, 13 February 2013
Let me start this by underlying everything with a certain point – living wages are idiotic if our concern is to make sure that the worst off in society have a sufficient income. By imposing a “price floor”, you are ensuring that there are a group of people who can’t get jobs and will get hurt – unions don’t care because they don’t represent the unemployed, but I find it morally abhorrent. You want a minimum standard of living for societies worst off – have a minimum income, it’s as easy as that.One point worth emphasising is that demand curves slope downwards. Yes even labour demand curves are downwards sloping, unless you think labour is a Giffen good. You can set a living wage at any level you want if you are willing to accept the unemployment that will follow if the wage is above the equilibrium wage. The higher the living wage the higher the unemployment it will cause.
Posted by Paul Walker at 9:28 am
Tuesday, 12 February 2013
Cathy O'Neil, data scientist and blogger at mathbabe.org, talks with EconTalk host Russ Roberts about her journey from Wall Street to Occupy Wall Street. She talks about her experiences on Wall Street that ultimately led her to join the Occupy Wall Street movement. Along the way, the conversation includes a look at the reliability of financial modeling, the role financial models played in the crisis, and the potential for shame to limit dishonest behavior in the financial sector and elsewhere.
Posted by Paul Walker at 12:26 pm
Cycle helmet laws are old hat here in New Zealand. But what are the effects of such laws? There is a new NBER working paper out that looks at the Effects of Bicycle Helmet Laws on Children's Injuries. The paper is by Pinka Chatterji and Sara Markowitz and the abstract reads:
Cycling is popular among children, but results in thousands of injuries annually. In recent years, many states and localities have enacted bicycle helmet laws. We examine direct and indirect effects of these laws on injuries. Using hospital-level panel data and triple difference models, we find helmet laws are associated with reductions in bicycle-related head injuries among children. However, laws also are associated with decreases in non-head cycling injuries, as well as increases in head injuries from other wheeled sports. Thus, the observed reduction in bicycle-related head injuries may be due to reductions in bicycle riding induced by the laws.So the effects of the helmet laws may just to be stop kids riding bicycles. Which I guess was not the intended purpose. The law of unintended consequences again.
Posted by Paul Walker at 12:22 pm
Friday, 8 February 2013
Wednesday, 6 February 2013
Louis Michael Seidman of Georgetown University talks with EconTalk host Russ Roberts about the United States Constitution. Seidman argues that the we should ignore the Constitution in designing public policy, relying instead on the merits of policy regardless of their constitutionality. Seidman defends his position by citing examples in the past where constitutionality has been ignored and says it would be better to recognize our disdain for the Constitution in a transparent way. In this lively conversation, Roberts pushes back against these ideas, citing the limits of reason and the dangers of using popular sentiment to determine policy.
Posted by Paul Walker at 12:03 pm
This is the title of a new paper by Michele Boldrin and David K. Levine which appears in the latest issue (Vol. 27, Issue 1 Winter 2013) of the Journal of Economic Perspectives. Boldrin and Levine argue.
The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.I am however reminded of a comment by Jean Tirole,
Consider the patent system. It has long been recognized that patents are an inefficient method for providing incentives for innovation since they confer monopoly power on their holders. Information being a public good, it would be ex post socially optimal to award a prize to the innovator and to disseminate the innovation at a low fee. Yet the patent system has proved to be an unexpectedly robust institution. That no one has come up with a superior alternative is presumably due to the fact that, first, it is difficult to describe in advance the parameters that determine the social value of an innovation and therefore the prize to be paid to the inventor, and, second, that we do not trust a system in which a judge or arbitrator would determine ex post the social value of the innovation (perhaps because we are worried that the judge might be incompetent or would have low incentives to become informed, or else would collude with the inventor to overstate the value of the innovation or with the government to understate it). A patent system has the definite advantage of not relying on such ex ante or ex post descriptions (although the definition of the breadth of a patent does). (Jean Tirole, "Incomplete Contracts: Where Do We Stand?" Econometrica, Vol. 67, No. 4 (Jul., 1999), pp. 741-781.)So the real question is can you replace the current system with something that works better? Given how long the patent system has been around that maybe more difficult than its sounds.
Posted by Paul Walker at 12:00 pm
Sunday, 3 February 2013
In the past I have written on privatisation in general and the partial sales of state owned assets in particular. See also here. Norman Gemmell, has also been writing on asset sales, but in his case its in the New Zealand Herald. He says,
First, what might "selling off the nation's silverware" mean? This phrase seems designed to convey the notion that, like inherited family heirlooms, state assets will be lost to the nation forever if sold to the highest bidder.The point about if the Government wants to sell some assets for cash it is merely transforming one type of state asset for another - the millions of dollars it will receive, in worth keeping in mind. As Gemmell says, what is really important is what the government does with the money.
So, what heirlooms might the sale of electricity companies involve?
Well, it could be, for example, that the singular pursuit of profit in this industry destroys some of the valuable natural assets that we prize - such as scenic beauty and pollution-free rivers. Sometimes, once damaged, these things are hard to recover and government ownership might better protect against this.
The problem with this argument is that even if we accept the need to protect our natural heritage, why should it be best to give government ministers and their bureaucrat advisers the right to decide the best balance between profit and protection? Politicians are subject to all sorts of covert lobbying over their decision-making, while public servants generally have pretty limited experience either of running commercial organisations or of environmental protection in practice.
Even trade union leaders in the industry would probably do a better job than government ministers. At least those leaders have more day-to-day experience of the relevant issues. But the wider point is that, as most countries' governments now recognise, the burden of proof for state ownership and control of commercial activity should be based on demonstrating why the private sector cannot be trusted. This is quite the opposite of the "family silverware" argument that generally presumes state ownership is optimal until proved otherwise.
So what of the argument that "governments have no right to sell, to the wealthy few, assets that belong to all taxpayers"? This is another myth. Taxpayers don't "own" any of these state assets. The Crown, administered by democratically elected governments, has given itself monopoly power over numerous aspects of our lives - from the legal system under which we must all operate to the "ownership" of large swathes of the New Zealand landmass.
Over generations, however, millions of New Zealanders' (and some foreigners'!) tax payments have helped to fund many commercially and socially profitable activities. These include building up assets such as schools, hospitals and valuable commercial enterprises such as the SOEs. (Most of our taxes of course went to pay for things we've already consumed - such as teachers' and nurses' salaries and welfare payments.)
So if the Government now wants to sell some of those SOE assets for cash it is merely transforming one type of state asset for another - the millions of dollars it will receive. The real issue here is what it then does with the cash. The two main options are: (1) invest them in another type of asset - such as building more schools and hospitals; or (2) spend the cash on things we currently need, such as teachers and social welfare benefits.
The first option is trading one asset for another. The Government essentially gives up an asset that paid it an annual dividend (potentially keeping taxes lower than they otherwise would have been). It replaces it with an asset that it hopes will give an annual social return - better educated children or whatever.
The second option - spending the cash from share sales immediately on public servants, welfare payments or lower taxes - does involve fewer state assets in total. But it represents the kinds of decisions we all (governments included) make every day - namely how much of our income to invest for the future, and how much to spend now.
Posted by Paul Walker at 7:03 pm
Saturday, 2 February 2013
Earlier I noted research that showed that economists agree ..... a lot. Now Justin Wolfers has to go and do the predictable and claim that economists disagree .... a lot.
But perhaps the best comment on the agree/disagree divide comes from Bryan Caplan when he writes,
Who's closer to the truth about economists' ideological divide: Dahl and Gordon, or Wolfers? My answer: it heavily depends on whether or not your sample includes the broader public. Compared to non-economists, economists enjoy an amazing consensus. But if you only compare us to one another, we're a contentious tribe.
Posted by Paul Walker at 6:43 pm
No one foresaw that the “socialist modernization” that the post-Mao Chinese government launched would in 30 years turn into what scholars today have called China’s great economic transformation. How the actions of Chinese peasants, workers, scholars, and policymakers coalesce into this unintended consequence is the story we tried to capture. Today, we don’t need to present any statistical data to convince you the rise of the Chinese economy, even though China still faces enormous challenges ahead. Many Chinese are still poor, far fewer Chinese have access to clean water than to cell phones, and they still face many hurdles in protecting their rights and exercising their freedom. Nonetheless, China has been transformed from the inside out over the past 35 years. This transformation is the story of our time. The struggle of China, in other words, is the struggle of the world.Read the whole thing. Better still, read the book on which the article is based.
Posted by Paul Walker at 6:20 pm