Alex Tabarrok

After he won the Nobel, Tom Sargent was “interviewed” in an ad for Ally bank in which his response was simply (and correctly), “no.” The joke is even better than I realized because Sargent has a history of giving very short speeches. In 2007 he gave a graduation speech to Berkeley undergraduates summarizing economics in just 335 words.

It’s a damn fine speech.

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts,
and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That
is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their
choices. That is why it is difficult for well meaning outsiders to change
things for better or worse.

7. In the future, you too will respond to incentives. That is why there are
some promises that you’d like to make but can’t. No one will believe those
promises because they know that later it will not be in your interest to
deliver. The lesson here is this: before you make a promise, think about
whether you will want to keep it if and when your circumstances change.
This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is
what national government debts and the U.S. social security system do
(but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or
tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government
transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

Hat tip to Utopia–you are standing on it via Newmark’s Door.

“We understand that we doctors should be and are stewards of the larger society as well as of the patient in our examination room,” said Dr. Lowell E. Schnipper, the chairman of a task force on value in cancer care at the American Society of Clinical Oncology.

In practical terms, new guidelines being developed by the medical groups could result in doctors choosing one drug over another for cost reasons or even deciding that a particular treatment — at the end of life, for example — is too expensive.

More from the NYTimes.

Mexico City Recommendations

by on April 11, 2014 at 11:41 am in Food and Drink, Travel | Permalink

I will be in Mexico City next week (con la familia). Recommendations and suggestions welcome!

Breaking Bones

by on April 11, 2014 at 10:43 am in Economics | Permalink

It’s sometimes said that conservative economists are heartless bastards who don’t understand the evil of unemployment or what it’s like to live on a low income. Edward Lambert from the left-of-center Angry Bear proves that to get what they want some on the left can be equally heartless.

I would love to support continued aggressive policy to bring the economy back to full employment, but the social cost of inequality is sickening. And if stopping this disease means putting the economy back into a recession, then so be it…It is like re-breaking a bone to set it straight. If the re-breaking of a bone is not done, the bone won’t work correctly in the future. It is proper medicine.

…Current day economists seem squeamish…
Hat tip: Scott Sumner.

Sentence of the Day

by on April 10, 2014 at 10:09 am in Uncategorized | Permalink

Photovoltaic energy is already so cheap that it competes with oil, diesel and liquefied natural gas in much of Asia without subsidies.

More here.

Going Postal: My First Job

by on April 4, 2014 at 10:14 am in Economics, Education, History | Permalink

In this article some Nobel prize winners talk about their first jobs and the lessons they learned. One of my first jobs was as a scab.

One summer when I was a teenager, the Canadian postal union workers went on strike and I was hired to deliver the mail. The pay was astounding, something like $25 an hour plus benefits when I was earning $4 an hour as a stock boy. The first day was disorganized and we never got out of the depot where we were supposed to be assigned to a postal station. The second day we were taken in a van to a station but the striking workers rocked and shook the van violently and we barely made it in. The company feared for our safety so we spent the entire day twiddling our thumbs. It was boring sitting around for 8 hours but I was thrilled to head home with $200. The third day we were again trucked to a postal station but there was no mail to deliver and by early afternoon it was clear we were going nowhere and doing nothing. I decided to leave. The guy in charge looked at me incredulously but said it was my call. I slipped out a back door but several burly postal workers saw me and started to chase. I hopped over a fence into, of all places, a graveyard. I ran through the graveyard and eluded a beating. The strike ended the next day. For several years afterwards I collected some kind of pension/overtime benefit.

The summer after that I ran away and joined the circus. I worked selling tickets and cleaning up after the elephants. That was also fun.

I learned a lot from both jobs.

David Ball, a professor of risk management at Middlesex University, analyzed U.K. injury statistics and found that as in the U.S., there was no clear trend over time. “The advent of all these special surfaces for playgrounds has contributed very little, if anything at all, to the safety of children,” he told me. Ball has found some evidence that long-bone injuries, which are far more common than head injuries, are actually increasing. The best theory for that is “risk compensation”—kids don’t worry as much about falling on rubber, so they’re not as careful, and end up hurting themselves more often.

From The Overprotected Kid by Hanna Rosin in the Atlantic.

Addendum: More on the Peltzman Effect.

A hospital in Pennsylvania will soon begin clinical trials to put gunshot or other accident victims into a state of suspended animation while their organs are repaired. By all measures the people suspended will be dead for hours but with luck many will be brought back to life.

The first step is to flush cold saline through the heart and up to the brain – the areas most vulnerable to low oxygen. To do this, the lower region of their heart must be clamped and a catheter placed into the aorta – the largest artery in the body – to carry the saline. The clamp is later removed so the saline can be artificially pumped around the whole body. It takes about 15 minutes for the patient’s temperature to drop to 10 °C. At this point they will have no blood in their body, no breathing, and no brain activity. They will be clinically dead.

In this state, almost no metabolic reactions happen in the body, so cells can survive without oxygen. Instead, they may be producing energy through what’s called anaerobic glycolysis. At normal body temperatures this can sustain cells for about 2 minutes. At low temperatures, however, glycolysis rates are so low that cells can survive for hours. The patient will be disconnected from all machinery and taken to an operating room where surgeons have up to 2 hours to fix the injury. The saline is then replaced with blood. If the heart does not restart by itself, as it did in the pig trial, the patient is resuscitated. The new blood will heat the body slowly, which should help prevent any reperfusion injuries.

The technique will be tested on 10 people, and the outcome compared with another 10 who met the criteria but who weren’t treated this way because the team wasn’t on hand. The technique will be refined then tested on another 10, says Tisherman, until there are enough results to analyse.

No one knows how long people can be maintained in suspended animation before revival is impossible. We know from accidents where people drown in icy lakes that suspended animation can work for at least half an hour and experiments on pigs suggest no cognitive defects from revived animals suspended for up to an hour, mice have been suspended for up to six hours and roundworms for up to 24 hours.  If the initial trials are successful, further experiments will likely discover ways to lengthen the period of suspended animation in humans and perhaps suggest improvements to current cryonic techniques.

Hat tip: Noah Smith.

The President and other apologists for the NSA have defended the NSA’s illegal mass surveillance of US telephones by arguing that it’s “only” metadata, so “nobody is listening to our telephone calls.” But where, when, how long and to whom customers make phone calls does reveal information that could easily be used to blackmail, stifle and control. A group of computer scientists at Stanford’s Security Laboratory gathered information from volunteers who agreed to have an app on their cell phone mimic what the NSA collects. Here is an initial report.

At the outset of this study, we shared the same hypothesis as our computer science colleagues—we thought phone metadata could be very sensitive. We did not anticipate finding much evidence one way or the other, however, since the MetaPhone participant population is small and participants only provide a few months of phone activity on average.

We were wrong…The degree of sensitivity among contacts took us aback. Participants had calls with Alcoholics Anonymous, gun stores, NARAL Pro-Choice, labor unions, divorce lawyers, sexually transmitted disease clinics, a Canadian import pharmacy, strip clubs, and much more. This was not a hypothetical parade of horribles. These were simple inferences, about real phone users, that could trivially be made on a large scale.

…Though most MetaPhone participants consented to having their identity disclosed, we use pseudonyms in this report to protect participant privacy.

  • Participant A communicated with multiple local neurology groups, a specialty pharmacy, a rare condition management service, and a hotline for a pharmaceutical used solely to treat relapsing multiple sclerosis.
  • Participant B spoke at length with cardiologists at a major medical center, talked briefly with a medical laboratory, received calls from a pharmacy, and placed short calls to a home reporting hotline for a medical device used to monitor cardiac arrhythmia.
  • Participant C made a number of calls to a firearm store that specializes in the AR semiautomatic rifle platform. They also spoke at length with customer service for a firearm manufacturer that produces an AR line.
  • In a span of three weeks, Participant D contacted a home improvement store, locksmiths, a hydroponics dealer, and a head shop.
  • Participant E had a long, early morning call with her sister. Two days later, she placed a series of calls to the local Planned Parenthood location. She placed brief additional calls two weeks later, and made a final call a month after.

We were able to corroborate Participant B’s medical condition and Participant C’s firearm ownership using public information sources. Owing to the sensitivity of these matters, we elected to not contact Participants A, D, or E for confirmation.

In other news, a former president believes that his email is being monitored. He is probably correct. Monitoring presidential candidates is all too realistic.

Fortunately, President Obama has announced that the bulk collection of phone calls will end. Dismantling that illegal program is a start. Obviously, this would not have happened without the revelations of Edward Snowden.

Still Burned by the FDA

by on March 21, 2014 at 7:30 am in Economics, Law, Medicine | Permalink

Excellent piece in the Washington Post on the FDA and sunscreen:

…American beachgoers will have to make do with sunscreens that dermatologists and cancer-research groups say are less effective and have changed little over the past decade.

That’s because applications for the newer sunscreen ingredients have languished for years in the bureaucracy of the Food and Drug Administration, which must approve the products before they reach consumers.

…The agency has not expanded its list of approved sunscreen ingredients since 1999. Eight ingredient applications are pending, some dating to 2003. Many of the ingredients are designed to provide broader protection from certain types of UV rays and were approved years ago in Europe, Asia, South America and elsewhere.

If you want to understand how dysfunctional regulation has become ponder this sentence:

“This is a very intractable problem. I think, if possible, we are more frustrated than the manufacturers and you all are about this situation,”

Who said it? Janet Woodcock, director of the FDA’s Center for Drug Evaluation and Research! Or how about this:

Eleven months ago, in a hearing on Capitol Hill, FDA Commissioner Margaret A. Hamburg told lawmakers that sorting out the sunscreen issue was “one of the highest priorities.”

If this is high priority what happens to all the “low priority” drugs and medical devices?

The whole piece in the Washington Post is very good, read it all. I first wrote about this issue last year.

Addendum: See FDAReview.org for more on the FDA regulatory process and its reform.

The NYTimes has a very bad article on Tesla and auto dealer franchise laws. The worst bit is this mind blowing contradiction:

…most states have some limits on direct sales by auto manufacturers…These rules are generally meant to ensure competition, so that buyers can shop around for discounts from independent dealers, and to protect car dealers and franchises from being undercut by the automakers.

So there you have it, limits on direct sales ensure competition and protect car dealers from being undercut by the automakers. Sorry, but you can’t have it both ways. Which view is correct? Let’s begin with some background (drawing on a great article by LaFontaine and Morton).

Franchising arose early on in the history of the auto industry because, as in other industries, franchising can take advantage of local knowledge and at the same time control agency costs. Franchising rules evolved in Coasean fashion so that manufacturers could not expropriate dealers and dealers could not expropriate manufacturers. To encourage dealers to invest in a knowledgeable sales and repair staff, for example, manufactures promised dealers exclusive franchise (i.e. they would not license a competitor next door). But with exclusive franchises dealers would have an incentive to take advantage of their monopoly power and increase profits by selling fewer units at higher profits. Selling fewer units, however, works to the detriment of the manufacturer and the public (ala the double marginalization problem (video)). Thus the manufactures required dealers buy and sell a minimum quantity of cars, so-called quantity forcing. Selling more units is exactly what we want a monopoly to do, so these restrictions benefited manufactures and consumers.

Politics, however, began to intrude into this Coasean world in the 1940s and 1950s. Auto sales accounts for some 20% of sales taxes and auto dealers employ a lot of people so when it came to a battle in the state legislatures the auto dealers trumped the manufacturers. The result was franchise laws that were increasingly biased towards dealers. In essence, exclusive franchises became locked into place, manufactures lost the right to add dealers even with population expansion, quantity forcing became illegal and dealer termination became all but impossible.

The result of dealer rent seeking has been higher auto prices for consumers, about 6% higher according to one (older) study by the FTC. Consumers have been stiffed in other ways as well. In some states, for example, manufacturers were required to reimburse dealers for a repair under warranty whatever amount the dealers would have charged consumers for the same repair not under warranty. As a result, dealers had an incentive to increase their price to consumers because that increased what they would be reimbursed for repairs under warranty. The franchise laws have also resulted in a highly inefficient distribution of dealers as populations have moved but dealers have been frozen into place. The inability to close, move or consolidate dealers has impacted the big-3 American firms especially because they have older networks. As a result, a typical GM dealer sells 377 cars a year while a typical Honda dealer sells 1,062 and a Toyota dealer 1,488.

Tesla wants to sell directly to the public but more generally what we need is to restore the Coasean balance, put dealers and manufacturers back on a equal footing and let the market decide the most efficient means of retailing and distributing automobiles.

Addendum: Dan Crane and Lynne Kiesling have further posts on this topic.

Today, March 16, is Open Borders Day, a day to celebrate the right to emigrate and the right to immigrate; to peacefully move from place to place. It is a day worth celebrating everywhere both for what has been done already and for the tremendous gains in human welfare that can but are yet to be achieved. It is also a day to reflect on the moral inconsistency that says “No one can be denied equal employment opportunity because of birthplace, ancestry, culture, linguistic characteristics common to a specific ethnic group, or accent” and yet at the same time places heavily armed guards at the border to capture, imprison, turn back and sometimes kill immigrants.

OB Logo

 

The Cost of Aging Infrastructure

by on March 15, 2014 at 7:32 am in Uncategorized | Permalink

AverageAge
The complete destruction of a building in NYC from a gas explosion makes this report (pdf, summary here), from which the graphic is drawn, from the Center for an Urban Future timely. The Center also reports that the cost of building infrastructure in NYC has risen by 50% since 2000 alone. As I said in Launching the Innovation Renaissance:

Building in the United States today, for example, requires navigating a thicket of environmental, zoning and aesthetic regulations that vary not only state by state but county by county. If building a house is difficult, try building an airport. Passenger travel has more than tripled since deregulation in 1978, but in that time only one major new airport has been built: Denver’s. That airport is now the fourth busiest in the world. Indeed the top seven busiest airports are all in the United States, not so much because we are big but because without new construction we are forced to overcrowd our existing infrastructure. The result is delays and inefficiency. Meanwhile, China is building 50 to 100 new airports over the next 10 years.

…Our ancestors were bold and industrious. They built a significant portion of our energy and road infrastructure more than half a century ago. It would be almost impossible to build that system today. Could we build the Hoover Dam today? We have the technology. We seem to lack the will. Unfortunately, we cannot rely on the infrastructure of our past to travel to our future.

emptybuild

The boarded up building in the photo sits a mere 6 blocks from the White House on prime real estate but it’s been empty for 30 years! What’s the problem? The building is owned/controlled by the Federal government which often doesn’t even know what it owns, lacks the incentive to control costs and whose bureaucratic strictures make selling difficult even when motivation exists.

From an excellent piece on NPR:

Government estimates suggest there may be 77,000 empty or underutilized buildings across the country. Taxpayers own them, and even vacant, they’re expensive. The Office of Management and Budget believes these buildings could be costing taxpayers $1.7 billion a year.

…But doing something with these buildings is a complicated job. It turns out that the federal government does not know what it owns.

…even when an agency knows it has a building it would like to sell, bureaucratic hurdles limit it from doing so. No federal agency can sell anything unless it’s uncontaminated, asbestos-free and environmentally safe. Those are expensive fixes.

Then the agency has to make sure another one doesn’t want it. Then state and local governments get a crack at it, then nonprofits — and finally, a 25-year-old law requires the government to see if it could be used as a homeless shelter.

Many agencies just lock the doors and say forget it.

The NPR article is excellent but it vastly underestimates the size of the problem. In addition to empty buildings, the Federal government owns/controls millions of acres of land that are worth hundreds of billions and perhaps even trillions of dollars. The land is not being used to its full value or potential even though maintenance costs runs in the tens of billions annually.

The announcement of the new, new SAT has created a lot of hand-wringing about SAT scores and their correlations with income and also race. Wonkblog, the New York Times and many others all feature a table or chart showing how SAT scores increase with income. Wonkblog says these charts “show how the SAT knowledgeorincomefavors rich, educated families,” and the NYTimes says about the SAT, “A Test of Knowledge or Income?” The consensus explanation for these “shocking” results is the evil of test prep as summarized by NBCNews:

…there is also mounting criticism as to whether students who can afford expensive SAT test preparation courses have an unfair advantage, especially given a strong correlation between family income level and test results.

Similarly, Chris Hayes blames test prep for inequality:

We’ve had…the growth of this tremendous testing and test prep industry in New York, along with the massive rise in inequality and it has produced a system in which the school is now admitting only three, four, five black and Latino students. The students they are admitting are almost entirely white, affluent kids with tutors or second generation, first generation immigrants from Queens and other places where the parents pay for test prep. You end up with a system where who you are really letting in are the kids with access to test prep, the kids with access to resources.

All of this is almost entirely at variance with three facts, all of which are well known among education researchers.

First, test prep has only a modest effect on test scores, on the order of 20-40 points combined for a commercial test preparation service. More expensive services such as a private tutor are towards the high of this range, cheaper sources such as a high-school course towards the lower. Buchmann et al., for example, estimate that private tutors increase scores by 37 points while a high school course increases scores by 26 points.

The average SAT score among those with a family income of $20,000-$40,000 is 1402 while the average score among those with an income $100,000 higher, $120,000-$140,000, is 1581 for a 179 point difference. Even if every rich family had a private tutor and none of the poor families had any test prep whatsoever, test prep would explain only 20% of the difference 37/179. If rich families rely on tutors and poor families rely on high school courses, the difference in test prep would explain only 6% (11/179) of the difference in score.

The second surprising fact about test prep is that it doesn’t vary nearly as much by income as people imagine. In fact, some studies find no effect of income on test prep use while others find a positive but modest effect. The latter study finding (what I call) a modest effect finds that in their sample a 2-standard deviation increase in income above the mean increases the probability of using a private test prep course less than whether “Parent encouraged student to prep for SAT (yes or no).”

Since test prep differs by income only modestly and since test prep increases scores only modestly, the effect of income on test scores through test prep is small, Modest*Modest=Small. Contrary to the consensus, test prep can in no way account for the large differences in SAT score by income.

The third fact is that test prep varies by race in the opposite way that people imagine. In the quote above, Chris Hayes suggests that whites use test prep much more than blacks. In fact, blacks use test prep more than whites, as is well documented among education researchers (e.g. here, here, here), e.g. from the first link:

…blacks and Hispanics are more likely than whites from comparable backgrounds to utilize test preparation. The black-white gap is especially pronounced in the use of high school courses, private courses and private tutors.

Indeed, since blacks use test prep more than whites and blacks have lower SAT scores than whites the effect of test prep is to reduce not increase the black-white gap in scores. Of course, the net reduction in the gap is small.