Wednesday 30 September 2009

EconTalk this week

William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, talks with EconTalk host Russ Roberts about the life and death of Bear Stearns. The discussion starts with how Bear Stearns and other Wall Street firms made money and how they financed their operations. The conversation then turns to the collapse of Bear Stearns's hedge funds in the summer of 2007 and how that collapse and the firm's investments in subprime mortgages led to the death of the firm in March of 2008. Cohan explains the role of borrowed money in the financial crisis and Bear Stearns in particular. The conversation concludes with the incentives facing Wall Street executives and the price they paid or didn't pay for the gambles they made with other people's money

Wednesday 23 September 2009

EconTalk this week

Paul Buchheit, developer of Gmail and founder of FriendFeed, talks with EconTalk host Russ Roberts about the evolution of the Gmail project, how innovation works and doesn't work in a large corporation, how Google has changed as it has grown, and corporate culture generally. The conversation then turns to social networking and what might be coming next. The discussion concludes with Buchheit's observations on Silicon Valley and the power of failure.

Thursday 17 September 2009

EconTalk this week and last

Tyler Cowen of George Mason University and author of Create Your Own Economy talks with EconTalk host Russ Roberts about the ideas in his recent book. The conversation ranges across a wide array of topics related to information, the arts, and the culture of the internet. Topics include how autistics perceive information and what non-autistics can learn from them, what Buddhism might teach us about our digital lives, the pace of change in the use of technology, Nozick's experience machine and the relative importance of authenticity and what the Alchian and Allen theorem has to do with the internet and culture.

John Nye of George Mason University talks with EconTalk host Russ Roberts about the Great Depression, the evolution of the State, and attitudes people have toward free markets. Nye argues that support for modern capitalism is fragile because people have trouble trusting the market process which is based on anonymous exchange with strangers. So when a crisis comes, it leads to demands for a larger role for top-down decision making. Nye sees the Great Depression as part of a larger public disillusionment beginning in World War I.

Monday 7 September 2009

Hurricane Katrina: benefits for student evacuees

In this audio from Bruce Sacerdote of Dartmouth College talks to Romesh Vaitilingam about his research on the academic performance of school children from New Orleans who were forced to relocate as a result of Hurricane Katrina in August 2005.

The price America paid for the September 11 attacks

Tim Harford at asks what is the economic price that America has paid for the September 11 attacks. He writes,
Early estimates suggested that the economic cost alone might be grievous. The International Monetary Fund’s World Economic Outlook, published three months after the attacks, thought that losses to the US economy could total $75bn. Others thought the economic damage would be greater. Robert E. Looney, a professor at the Naval Postgraduate School, estimated in 2002 that direct costs exceeded $27bn but the effect of the disruption might total $500bn. A study by the New York City Comptroller’s Office estimated that the city alone would lose a cumulative $58bn between 2001 and 2004 as a result of the attacks.
There have been some very ingenious attempts at answering the question.
Alberto Abadie of Harvard and Sofia Dermisi of Roosevelt University looked not at New York but at Chicago to estimate one consequence of the attacks. Chicago, after all, suffered no damage and enjoyed no reconstruction boom. But as the home of the Sears Tower, the tallest building in the US, Chicago might have suffered a psychological blow as a possible target for a future attack. Sure enough, vacancy rates in and near the Sears Tower and two other famous Chicago skyscrapers rose sharply relative to rates elsewhere in the city.
Harford notes that a recent issue of the journal Peace Economics, Peace Science and Public Policy looks at the economic impact of the September 11 attacks in two different ways.
One approach is to look at the entire economy and try to figure out what damage was done by the attacks – no easy task given the fact that the dotcom bubble had been deflating and the economy was entering recession at about the time the terrorists struck. The other approach is narrower, looking at – for example – the impact on New York City rents and wages.
The results?
Reading the full range of studies, I have concluded that the direct physical effects of such a horrific attack had been smaller than most people expected. Perhaps $25bn of buildings were destroyed; the lifetime wages of the victims would have been about $10bn, which is a crude way of calculating the narrow economic impact of a mass murder. But beyond that, there seem to have been few immediate economic consequences for New York City.

Sunday 6 September 2009

The worth of a medal?

During a beer tasting which I attended last week, which included a number of the medal winners from the recent Beervana, the discussion turned to the usefulness, or otherwise, of such awards for the ranking of different beers. Do the rankings that come out of such shows really tell us much about the quality of the beers? Now this is not just a problem for beer awards, another obvious example of the issue is wine awards and there is some research that suggest that the rankings that come out of a given wine show aren't worth that much.

There is an interesting article, "An Analysis of the Concordance Among 13 U.S. Wine Competitions" by Robert T. Hodgon, in the Journal of Wine Economics, Vol. 4, No. 1, 1-9. The abstract reads,
An analysis of over 4000 wines entered in 13 U.S. wine competitions shows little concordance among the venues in awarding Gold medals. Of the 2,440 wines entered in more than three competitions, 47 percent received Gold medals, but 84 percent of these same wines also received no award in another competition. Thus, many wines that are viewed as extraordinarily good at some competitions are viewed as below average at others. An analysis of the number of Gold medals received in multiple competitions indicates that the probability of winning a Gold medal at one competition is stochastically independent of the probability of receiving a Gold at another competition, indicating that winning a Gold medal is greatly influenced by chance alone.
I would be willing to bet that beer wards are not that much different to wine awards in this regard.

The power of the poor

Thanks to Brad Taylor for pointing out this video of economist Hernando de Soto:

Saturday 5 September 2009

The truth is out there ...

its just that some people don't what you to know it. The simple truth is that nanny state public health interventions really are nanny state interventions. At Offsetting Behaviour Eric Crampton notes that George Thompson, one of the usual suspects at Otago at Wellington's Public Health department, warns that his preferred nanny state interventions are increasingly being accurately labelled as nanny state. Knowing this simple truth is, in George's view, a bad thing, He says
“There’s a need to reframe public health activity as stewardship that protects people. Governments are expected to balance the public good against the interests of big business, and to care for the vulnerable in society. We need to create the language to reflect this, which looks behind slogans and the stereotyping of opposition to unhealthy products.”

Dr Thomson said there’s a need to reframe and analyse businesses that inflict health damage to people, as leeches on society.
This Orwellian world view has been rightly attacked by Liberty Scott. George Thompson is of the view that,
“The increased use of these terms [nanny state] appears to be driven by industries that are afraid of increased control over the marketing of unhealthy products"
But Liberty Scott points out the truth to George,
No it's not Dr Thomson, it is as much by individuals afraid of you controlling our choices in our lives. You don't get this, it is called freedom. Many people, fully aware of the risks, don't want to be told how to live their lives by do gooders.
Thomson is,
The lead presenter of research into how media articles framed public health initiatives
and he,
told delegates in Dunedin the use of negative language (such as political correctness, or bureaucracy) stereotyped and undermined those initiatives.
This guy get funding to research "how media articles framed public health initiatives"? I'm glad to see our tax dollars are being spent so wisely ...... NOT! I can't help but think there are more important issues in public health than "how media articles framed public health initiatives". Especially when the media are telling the truth, for once.

Interesting blog bits

  1. Viral Acharya on Systemic risk and deposit insurance premiums. Financial institutions enjoy a large number of government guarantees. This column says that we ought to be charging banks for such subsidies and doing so in a way that promotes financial stability. It uses the example of demand deposit insurance in the US to explore the poor design of funding for such guarantees.
  2. Eric Crampton on Tiebout and Auckland: Sir Roger gets it. Eric has complained before that nobody else seems to have noticed that Auckland's amalgamation will reduce Tiebout competition. But Sir Roger Douglas seems to have gotten the idea.
  3. Jeffrey Miron on Antitrust Policy and Uncertainty. One negative of antitrust policy is increased uncertainty and delay for relevant market participants. The pending purchase of Sun Microsystems by Oracle provides a good example argues Miron.
  4. Don Boudreaux on Sourpuss Monopolists. Lawrence Graham argues, in a letter in the Wall Street Journal, that the quota that US imposes on sugar imports should be raised. Mr. Graham isn’t quite correct: that quota should be abolished.
  5. BK Drinkwater asks Why Tax Cows? Methane emissions from livestock is not a big issue.
  6. Robert Fogel on Forecasting the Cost of U.S. Healthcare. It aren't easy!

Putting a price on organ donation

An interview including Alex Tabarrok (of Marginal Revolution fame), Sally Satel, and Frank Delmonico, covering the range of viewpoints on the subject of organ donation.
Organ trafficking allegations in New Jersey this summer cast a new spotlight on the debate over the best ways to get more people to donate legally. Last year more than 4,500 people in the US died waiting for a kidney, and all sides acknowledge that the need for organs overwhelms the supply. Beyond that, disagreements flare up about which incentives are ethical and practical.
Me, I think we should have a market in organs, but many people find the idea of trading such things repugnant. In fact organ markets are one of the classic examples of what Al Roth refers to as "repugnant markets".

Friday 4 September 2009

What's a cup of tea worth? (updated)

Many economic historians would argue that living standards stagnated for millennia before the Industrial Revolution. New work by two economists attributes that conclusion to a measurement error in real wage indices. In their view the introduction of new goods such as coffee, sugar, and tea to England in the 1700s and 1800s dramatically raised living standards – perhaps more than 15%.

This is the conclusion of work by Jonathan Hersh and Hans-Joachim Voth summarised in an article at entitled Coffee, consumer choice, and the consequences of Columbus. They write,
The problem of accounting for new goods is not new. Both the Stigler Commission (1961) and the Boskin Commission (1996) noted that there is a new product bias in the Consumer Price Index. This occurs when new products are either not added to the CPI or are included only with a long lag. There are now several approaches to deal with these problems; we use one that is particularly suited to the challenges of our dataset.

One method pioneered by Hausman (1996) looks at the welfare gain from the introduction of Apple-Cinnamon Cheerios, a relatively marginal improvement of the art of breakfast cereals. He still finds a welfare gain equivalent to 0.002% of 1992 consumption expenditure. Other scholars have looked at gains from the introduction of the minivan (Petrin 2002), online booksellers (Brynjolfsson et al. 2003), and satellite TV (Goolsbee and Petrin 2004), finding significant gains. Most of these methods rely on household level data for adoption rates and price variation across consumers – data requirements that are exacting in an historical context.

Greenwood and Kopecky (2009) introduce a method that makes less stringent demands of the data. Their approach is more macroeconomic and requires aggregate data on prices and take-up rates of a new consumption item. When working with historical data, this is an advantage. They calculate welfare gains by estimating the value of the first unit of a new good. Effectively, they ask which degree of preference for the new good can be inferred from changes in consumption patterns in the aggregate, given a known path for quantities consumed and prices. It is their measurement approach that we implement with our historical data.

Equivalent variation (EV) is the amount of additional income you would have to give to a consumer so that his or her welfare without the new good is equivalent to that obtained with the good. Our results for 1850 show a gain of 8.0% for sugar, 7.9% for tea, and 1.5% for coffee. Combined, this implies that the average Englishman’s welfare was improved by 17% through the addition of these three goods alone. At a technical level, the reason why we find such a large gain is that English citizens consumed much more tea, sugar, and coffee even when the price had only fallen by a little, shortly after the introduction of the good. This means that the reservation price – the price that would set demand to zero – is quite high. Consequently, towards the end of the early modern period, when prices were much lower, consumers could reap a huge windfall. They could buy goods they valued enormously for a song.

Our analysis is complicated by the vagaries of the data. Smuggling for some of the goods was rife. Data is particularly scattered in the early years of adoption. Tariff changes and wars influenced volumes consumed. We attempt to account for all of these factors and find that our results are unaffected. As a further robustness check, we adopt an alternative “short-cut” method suggested by Hausman and find welfare gains of 13.5% for sugar and tea alone.

We think of our results for tea, sugar, and coffee as a lower bound on the discoveries’ overall effect. They stand pars pro toto for a wider range of “new goods” that arrived on European shores as a result of overseas expansion. The addition of tomatoes, potatoes, exotic spices, polenta, and tobacco transformed consumption habits in even more fundamental ways than did sugar, tea, and coffee. If the rise in consumption of all of these colonial goods was measured accurately, welfare gains for European consumers after 1492 would have been even larger than our findings suggest.
Hersh and Voth conclude their column by noting
There is a broad consensus that living standards stagnated for millennia before the Industrial Revolution. Only after the “Malthus to Solow” transition (Hansen and Prescott 2002, Galor 2005) did welfare start to increase. Clark (2007) concluded that the average Englishman in 1800 lived no better than their ancestors on the African savannahs. We argue that stagnating long-run real wage indices partly reflect measurement error. Life in early modern Britain got better – much better. By the 18th century at the latest, consumption habits had undergone a profound transformation. Previously unmeasured welfare gains added at least 15% to the income of Englishmen by 1850.
So a good cup of tea has more going for it than you may think.

Update: Eric Crampton covers this article here, while the Economist does so here.

Where does monopoly power come from?

At EconLog Bryan Caplan asks Where Does Monopoly Power Come From? He writes,
You can't analyze the consequences of monopoly if you don't know where the monopoly came from.

If the monopoly came from government, then it's silly to fret about market failure and muse about antitrust remedies; you've got to unleash your inner libertarian and call for free competition.

If the monopoly came from superior efficiency, broadly defined, you've got to realize that antitrust "remedies" penalize excellence - which almost any economic theory admits is a bad idea in the long-run.

If you've got some non-government non-efficiency story, you've got to explain why neither of the two simple explanations for the existence of monopoly work. It's not impossible to craft such an explanation, but it's harder than it looks. If you blame monopoly on long-term contracts, for example, this begs a crucial question: Why did customers sign these contracts in the first place? By hypothesis, you're not allowed to answer, "The firm had a government monopoly" or "The firm was more efficient than any of its competitors."
Caplan's question is a simple but important one for those who support anti-trust policy against "monopoly". If they can't answer it then, how can they correctly deal with alleged monopoly?

Dixit on game theory

In this audio from Avinash Dixit of Princeton University talks to Romesh Vaitilingam about game theory in economics: its emergence and development after the Second World War, particularly from the 1970s onwards; its applications in business, public policy and daily life; and the future research agenda.

Leeson review

Caleb Crain reviews Peter Leeson's book The Invisible Hook: The Hidden Economics of Pirates in the New Yorker.
A brisk, clever new book, “The Invisible Hook” (Princeton; $24.95), by Peter T. Leeson, an economist who claims to have owned a pirate skull ring as a child and to have had supply-and-demand curves tattooed on his right biceps when he was seventeen, offers a different approach. Rather than directly challenging pirates’ leftist credentials, Leeson says that their apparent espousal of liberty, equality, and fraternity derived not from idealism but from a desire for profit. “Ignoble pirate motives generated ‘enlightened’ outcomes,” Leeson writes. Whether this should comfort politicians on the left or on the right turns out to be a subtle question.

Thursday 3 September 2009

Banks maximise profit

Not only in New Zealand, but also, it would appear, in the UK. But some see this as a bad thing. This from David Rawcliffe at the Adam Smith Institute blog,
FSA chief Lord Turner, interviewed recently in Prospect magazine, calls much of the banking industry “socially useless”, attacking its “excessive activity and profits.” The City’s response to these criticisms has been sensible, but bankers have been afraid to make explicit the crucial counterargument: that making money is, in itself, socially useful.

The argument is so simple as to be trivial: firms, provided they are subject to laws preventing theft and violence, can only gain revenue by selling things that people want; they can only make a profit if they sell these things for more than they cost to produce; and in the process of production they employ people who prefer that job to any other they could find. That is, profit-making firms create wealth (in the broadest sense of the word) for their customers, owners, and employees. They take wealth from no-one.

Turner talks vaguely of the banks failing to be ‘socially useful’. The truth is this: any industry that makes money is ‘socially useful’, in the very concrete sense that it makes all those involved better off. Banks made enormous amounts of money over the last decade because they promised something extremely useful: the efficient distribution of capital and risk. The wealth they created was found in the share prices and dividends of banks, the welfare of their customers, the pockets of their employees, and the coffers of the exchequer.
The desire to make a profit has long driven businessmen to find trades which are beneficial to all those involved. This desire for profits causes people to innovate, to compete, to generate wealth and to better the lot of society in general. It is a process we must harness, not constrain.

Bureaucracy is a wonderful thing

(HT: Homepaddock)

Economic literacy in New Zealand

This from the New Zaland Herald,
BERL chief economist Ganesh Nana agreed with Mr Hickey that property was the problem.

Economic literacy in New Zealand was "not economic" because all anyone wanted to know about was interest rates and property prices.
So economic literacy in New Zealand isn't economic, then just what the hell is it? Isn't knowing about interest rates and property prices part of being economically literate?

Firms maximise profit!

At least banks do, according to Kiwibank chief executive Sam Knowles,
Most banks are only interested in making as much money as possible out of their current customers, Kiwibank chief executive Sam Knowles says.
And he adds,
While Kiwibank aimed to grow its customer base to increase profit, the Australian-owned banks wanted to make money off current customers, said Knowles.
As a theory of the firm man I'm bloody glad to hear it. We always assume firms maximise profits, so its good have have this confirmed.


Wednesday 2 September 2009

Test Scores and biological father's income

Earlier I noted The least surprising correlation of all time. This is a graph from Greg Mankiw's blog showing that kids from higher income families get higher average SAT scores. Now Mankiw has blogged again on this topic. He writes,

MIT's David Cesarini sends me the above chart with this note:
Dear Professor Mankiw,

I prepared a graph which I think nicely illustrates the simple point you made in your blogpost on the spurious association between SES and test scores. The graph is attached. The dataset is comprised of a large sample of men born in Sweden between 1955 and 1970 who took an IQ test at conscription, at the age of 18. Income is measured as the biological father's income in the 1970 census.

The red line is the average measured IQ of the non-adoptees, plotted against the biological father's income decile. The blue line shows the same relationship for adoptees and their biological fathers. The patterns are remarkably similar,even though the biological fathers of adoptees did not raise these children.The fact that the biological father's income is almost an equally strong predictor of a child's test scores even when the biological father was not present in the household clearly suggests that most of the association between income and test scores does indeed arise because of omitted variable bias. Of course, an important caveat here is that it is quite likely that non-random assignment of adoptees may explain some of the similarity between the two lines.

I hope you find this useful.

Best wishes,
David Cesarini
So, as Mankiw argued in his first post, omitted variable bias does seem to explain the relationship between income and test scores.

Field experiments in economics

See here for a link to videos of talks given at the NBER on the subject of Field Experiments in Economics.

Using Field Experiments in Economics: An Introduction
John List, University of Chicago and NBER


Conducting Field Research in Developing Countries
Michael Kremer, Harvard University and NBER

Tuesday 1 September 2009

Martin Feldstein Lecture

The Inaugural Martin Feldstein Lecture given by John Taylor of Stanford University and NBER

Empirically Evaluating Economic Policy in Real Time

Martin Feldstein Lecture - 7/12/2009 from NBER on Vimeo.

Incentives matter: famine file

Not for the first time famine stalks Ethiopia:
The spectre of famine has returned to the Horn of Africa nearly a quarter of a century after the world's pop stars gathered to banish it at Live Aid, raising £150m for relief efforts in 1985. Millions of impoverished Ethiopians face the threat of malnutrition and possibly starvation this winter in what is shaping up to be the country's worst food crisis for decades.
An obvious question is Why does this keep happening? One factor is incentives. Tim Worstall writes,
[...] all land is State owned. There is no incentive for a farmer to invest in improving the productivity of his land for it simply ain't his land. In more detail, Meles Zenawi, the Ethiopian Prime Minister:
Now we have, as I am sure all of you know, rejected the concept of changing land into a commodity in Ethiopia. We feel that this choice in our context is not economically rational. That is why we don’t accept it. Why do we think it is not economically rational? By fully privatizing land ownership, one starts the process of differentiation. The creative, vigorous peasant farmer gets to own larger pieces of land and the less effective get to be left to live in doubt.
He then goes on to reject this and insist that as they have lots of peasants thus they should have lots of peasant farms. Oh, and, while the land is held by the peasant "in perpetuity" the government still reserves the right to reallocate at any time. So it's not actually in perpetuity and of course as it cannot be owned privately it cannot be used as security for a loan to improve its productivity.

Until those incentives are sorted out Ethiopia is condemned to have repetetive famines, sadly.

What - or Who - Started the Great Depression? (updated)

A new NBER Working Paper (No. 15258, issued in August 2009) by Lee E. Ohanian. The abstract reads
Herbert Hoover. I develop a theory of labor market failure for the Great Depression based on Hoover's industrial labor program that provided industry with protection from unions in return for keeping nominal wages fixed. I find that the theory accounts for much of the depth of the Depression and for the asymmetry of the depression across sectors. The theory also can reconcile why deflation and low levels of nominal spending apparently had such large real effects during the 1930s, but not during other periods of significant deflation.
Steve Horwitz comments at the Austrian Economists blog,
Not surprisingly, he's taking a beating in the left-oriented press (see an example from Salon here) from those who simply cannot imagine that Hoover was anything but Rush Limbaugh's spiritual ancestor. The fact that Hoover might have been a significant interventionist, many of whose policies foreshadowed the New Deal, is one their brains simply cannot accept, no matter how much evidence there is. Of course, the fact that Rothbard and Vedder/Gallaway have hammered this point before is not discussed at all.
Looks like this paper could ruffle a few feathers.

Update: Mark Perry comments here.

EconTalk this week

Michael Munger of Duke University talks with EconTalk host Russ Roberts about cultural norms--the subtle signals we send to each other in our daily interactions. Mike, having returned from a four-month stint as a visiting professor in Germany, talks about the challenges of being an American in a different culture with very different expectations on how people will interact. Our speech patterns, how we wait in line, how we treat each other at the grocery, the interaction between a teacher and a student, how we drive, how we tip for services rendered, even how we listen to music all emerge from our culture and are often different in different countries. The listener will learn what Ted Williams and Joe Dimaggio have to do with the Book of Judges along with the relative merits of Williams and Dimaggio performances in 1941.