Alex Tabarrok

Kidney-DiseaseThe latest issue of the American Journal of Transplantation has an excellent and comprehensive cost-benefit analysis of paying kidney donors by Held, McCormick, Ojo, and Roberts. Earlier, Becker and Elias estimated that a payment of $15,000 per living donor would be sufficient to eliminate the US waiting list. The authors adopt a larger figure of $45,000 for living donors and $10,000 for deceased donors and find that even at these rates paying donors generates benefits far in excess of costs.

In particular, a program of government compensation of kidney donors would provide the following benefits (quoting from the article):

  • Transplant kidneys would be readily available to all patients who had a medical need for them, which would prevent 5000 to 10 000 premature deaths each year and significantly reduce the suffering of 100 000 more receiving dialysis.
  • This would be particularly beneficial to patients who are poor and African American because they are considerably overrepresented on the transplant waiting list. Indeed, it would be a boon to poor kidney recipients because it would enable them to reap the great benefits of transplantation at very little expense to themselves.
  • Because transplant candidates would no longer have to spend almost 5 years receiving dialysis while waiting for a transplant kidney, they would be younger and healthier when they receive their transplant, increasing the chances of a successful transplantation.
  • With a large number of transplant kidneys available, it would be much easier to ensure the medical compatibility of donors and recipients, which would increase the success rate of transplantation.
  • Taxpayers would save about $12 billion each year. Dialysis is not only an inferior therapy for end-stage renadisease (ESRD), it is also almost 4 times as expensive pequality-adjusted life-year (QALY) gained as a transplant.

My latest piece is on the Syrian refugees and I’m delighted that it’s in Playboy. Next step is to get invited to the Mansion. Here’s the opening:

refugeeEven 4-year-old Syrian orphans are too dangerous to welcome to the United States, says New Jersey Gov. Chris Christie. What sort of man turns away desperate orphans out of fear? Christie’s words and actions are shameful and unbecoming of a great nation—as are those of 25 other governors who said they will work to keep Syrian refugees from moving to their state. Is America no longer the home of the brave?

Since 9/11 we have been told many times that our nation is at war. Our troops understand, and they have fought bravely whenever and wherever they have been called upon. Not once have they backed down or refused the call. Yet, when faced with the risk of orphan refugees, some of our leaders protest that the risk is too great. How can we ask so much of our troops but so little of ourselves?

Do read the whole thing. The link is surprisingly safe for work, at least when I clicked, but use at your own risk.

Principles of Macroeconomics, the new course by Tyler and myself, has just launched at MRUniversity. We will be covering unemployment, inflation, business cycles, growth and much more. The first section which is up now covers GDP including

As usual, all the videos are free and will work with any textbook although of course they go best with the best textbook, Modern Principles.

Here is the introduction to GDP:

A meme going around compares Syrian refugees to jelly beans:

If i gave you a bag of 50000 jellybeans and told you 100 are poisonous, you wouldnt accept them right? Then why would we accept 50000 refugees if some of them are bad?

evil-jelly-bean-300x225I like jelly beans and numbers so I did a back of the envelope calculation. In the US there are about 15,000 murders per year. Most murderers kill only one person. Even serial killers kill only 2.8 people on average. Thus, 15,000 is also approximately the number of murderers in a year.

Let’s say that people live on average for 50 years–that’s a bit low but our figure for the number of murderers was a bit high–this means that in the current population there will be approximately 15000*50=750,000 murderers.

750,000 killers among us struck me as an awful lot when I first calculated the number but there are approximately 166,700 people in prison for murder right now and of the 750,000 some of them are not yet murderers and some of them won’t be caught. Thus, on reflection, 750,000 seems like a scary, yet reasonable estimate.

The current US population is 322 million so there are .0023 murderers per capita or 2.33 murderers per 1000 or 116 murderers per 50,000 people in the United States. Put differently, about 116 American babies out of every 50,000 will grow up to murder someone. (Perhaps the NYMag should rerun its poll?). In contrast, only 100 of the 50000 jelly beans were poisonous.

Thus, if anything, Syrian jelly beans look pretty good compared to American jelly beans.

Addendum: See Alex Nowrasteh for calculations going beyond jelly beans.

Whistleblowers for Innovation

by on November 17, 2015 at 7:21 am in Economics, Law | Permalink

We reward whistle blowers who help to prosecute people who are defrauding the government by giving them a share of the proceeds. Bradley Birkenfeld, for example, provided evidence to the US government that the Swiss bank UBS was illegally enabling US tax evaders. The case led to a $780 million dollar fine against UBS and Birkenfeld collected a sweet cut, $104 million.

Derek Khanna at the R Street Institute suggests a similar system to reward innovators (pdf).

Imagine a research team developed a cancer drug that could save the federal government $1 billion a year. Under the innovation savings program, a portion of those savings would flow back to the researchers themselves, in exchange for their not patenting the technology. In order to be eligible for a prize payout, the innovation would need to meet a minimum cost-savings threshold established by Congress (e.g., $100 million). Since the researchers would be paid out of funds already authorized by Congress, there would be no additional cost to taxpayers, who instead would expect to see still additional savings.

…This idea is directly inspired by the centuries-old concept of “qui tam” claims. Qui tam statutes allowed a private citizen to bring action on behalf of a government to recover a penalty….

But programs that seek only to stamp out waste, fraud and abuse do little to encourage the kinds of innovations that would reduce costs on the “front end.” That’s the goal of the innovation savings program: to provide a profit mechanism, separate and apart from patents and direct subsidies, to encourage innovations that could revolutionize such fields as medical technology, energy efficiency and payment processing

The benefits of such a system are not only that it avoids some of the costs of patents but that it would also work when patents are not available. It only works when the government is a big player but that’s a huge share of the economy.

Gambling Can Save Science!

by on November 13, 2015 at 9:00 am in Economics | Permalink

Some 25 years ago, our colleague Robin Hanson published Could Gambling Save Science?, one of the first papers explaining and advocating prediction markets. Since that time prediction markets have been used to better predict political events, Hollywood movie revenues, and corporate sales but perhaps oddly little has been done in the field that Robin initially proposed, science.

That has now changed. As part of the reproducibility project economists at the Stockholm School of Economics set up a market to predict which psychology papers would fail to replicate. From Ed Yong at The Atlantic:

Dreber’s experiment was born in a bar. Over drinks with her husband Johan Almenberg and roommate Thomas Pfeiffer, she was talking about an attention-grabbing psychological study that she thought was “cute, but unlikely to be true.” When she wondered how good her instincts were, Pfeiffer brought up another paper by economist Robin Hanson at George Mason University. Titled Could Gambling Save Science?, it suggested that researchers could get a more honest consensus on scientific controversies by betting on their outcomes, in the way that traders bet on the future prices of goods.

“It blew us all away,” says Dreber. In 2012, she and her colleagues contacted Nosek, who agreed to add prediction markets to his big Reproducibility Project.

The markets worked well and, verifying the wisdom of the crowds, they worked far better than any individual in the market. The authors of the study argue that prediction markets could be used more extensively in science:

[P]rediction markets are a promising tool for assessing the reproducibility of published scientific results. The prediction markets also allow us to estimate probabilities for the hypotheses being true at different testing stages, which provides valuable information regarding the temporal dynamics of scientific discovery. We find that the hypotheses being tested in psychology typically have low prior probabilities of being true (median, 9%) and that a “statistically significant” finding needs to be confirmed in a well-powered replication to have a high probability of being true. We argue that prediction markets could be used to obtain speedy information about reproducibility at low cost and could potentially even be used to determine which studies to replicate to optimally allocate limited resources into replications.

Some surprising findings from researchers at the Institute for Fiscal Studies about education in England:

All ethnic minority groups in England are now, on average, more likely to go to university than their White British peers. This is the case even amongst groups who were previously under-represented in higher education, such as those of Black Caribbean ethnic origin, a relatively recent change.

These differences also vary by socio-economic background, and in some cases are very large indeed. For example, Chinese pupils in the lowest socio-economic quintile group are, on average, more than 10 percentage points more likely to go to university than White British pupils in the highest socio-economic quintile group. By contrast, White British pupils in the lowest socio-economic quintile group have participation rates that are more than 10 percentage points lower than those observed for any other ethnic group.

Combined with the Case-Deaton results about rising/not falling death rates among middle aged white Americans and the other measures of increasing social polarization among white Americans that Charles Murray discusses in Coming Apart this may be signs of a trend.

Hat tip: Tim Harford.

Bhagwan Chowdhry, a professor of finance at UCLA, has nominated Satoshi Nakamoto, the creator of Bitcoin, for a Nobel prize in economics. It’s an excellent choice. Nakamoto made a fundamental breakthrough that combined cryptography and a distributed database to create the first decentralized cryptocurrency. Moreover, Nakamoto implemented his theoretical breakthrough to create a working cryptocurrency with real benefits to potentially billions of consumers.

Chowdry writes:

The invention of bitcoin — a digital currency — is nothing short of revolutionary….It offers many advantages over both physical and paper currencies. It is secure, relying on almost unbreakable cryptographic code, can be divided into millions of smaller sub-units, and can be transferred securely and nearly instantaneously from one person to any other person in the world with access to internet bypassing governments, central banks and financial intermediaries such as Visa, Mastercard, Paypal or commercial banks eliminating time delays and transactions costs.

But beyond demonstrating the possibility of creating a reliable digital currency, Satoshi Nakamoto’s Bitcoin Protocol has spawned exciting innovations in the FinTech space by showing how many financial contracts — not just currencies — can be digitized, securely verified and stored, and transferred instantaneously from one party to another.

…Not only will Satoshi Nakamoto’s contribution change the way we think about money, it is likely to upend the role central banks play in conducting monetary policy, destroy high-cost money transfer services such as Western Union, eliminate the 2-4% transactions tax imposed by intermediaries such as Visa, MasterCard and Paypal, eliminate the time-consuming and expensive notary and escrow services and indeed transform the landscape of legal contracts completely. Many industries such as Banking, Finance, Law will see a big upheaval. The consumers will be big beneficiaries and indeed the poor and marginal sections of the society will reap the benefits of financial and social inclusion in the coming decades. I can barely think of another innovation in Economic and Finance in the last several decades whose influence surpasses the welfare increases that will be engendered by Satoshi Nakamoto’s brilliant, path-breaking invention. That is why I am nominating him for the Nobel Prize in Economics.

Since no one knows who Nakamoto is it might seem difficult to award him a prize but Chowdry notes that bitcoin itself provides a solution:

The Nobel committee can easily buy bitcoins for the award money from any reputed online Bitcoin exchange and transfer it to him instantaneously. A very early bitcoin transaction suggests that the bitcoin address 1HLoD9E4SDFFPDiYfNYnkBLQ85Y51J3Zb1 likely belongs to him. Of course, he could easily and verifiably let the committee know which address he wants the money to be transferred to.

Swiss Referendum on 100% Reserves

by on November 5, 2015 at 7:25 am in Economics, History | Permalink

A Swiss group has collected the 100,000 signatures necessary to require a national referendum on requiring banks to hold 100% reserves.

In a nut shell, the proposal extends the Swiss Federation’s existing exclusive right to create coins and notes, to also include deposits.  With the full power of new money creation exclusively in the hands of the Swiss National Bank, the commercial banks would no longer have the power to create money through lending. The Swiss National Bank’s primary role becomes the management of the money supply relative to the productive economy, while the decision concerning how new money is introduced debt free into the economy would reside with the government.

After interest in the 1930s Chicago plan of Fisher and Simons died off, Murray Rothbard and other libertarians were virtually the only people calling for 100% reserves. More recently, however, the idea has almost become mainstream. Consider Martin Wolf’s FT column:

Printing counterfeit banknotes is illegal, but creating private money is not. The interdependence between the state and the businesses that can do this is the source of much of the instability of our economies. It could – and should – be terminated.

…Banks create deposits as a byproduct of their lending. In the UK, such deposits make up about 97 per cent of the money supply. Some people object that deposits are not money but only transferable private debts. Yet the public views the banks’ imitation money as electronic cash: a safe source of purchasing power.

Banking is therefore not a normal market activity, because it provides two linked public goods: money and the payments network. On one side of banks’ balance sheets lie risky assets; on the other lie liabilities the public thinks safe. This is why central banks act as lenders of last resort and governments provide deposit insurance and equity injections. It is also why banking is heavily regulated. Yet credit cycles are still hugely destabilising.

What is to be done? A minimum response would leave this industry largely as it is but both tighten regulation and insist that a bigger proportion of the balance sheet be financed with equity or credibly loss-absorbing debt.

…A maximum response would be to give the state a monopoly on money creation. One of the most important such proposals was in the Chicago Plan, advanced in the 1930s by, among others, a great economist, Irving Fisher. Its core was the requirement for 100 per cent reserves against deposits. Fisher argued that this would greatly reduce business cycles, end bank runs and drastically reduce public debt. A 2012 study by International Monetary Fund staff suggests this plan could work well.

Similar ideas have come from Laurence Kotlikoff of Boston University in Jimmy Stewart is Dead, and Andrew Jackson and Ben Dyson in Modernising Money.

Hat tip on the Swiss proposal to Dirk Niepelt who offers further comment.

Minor Vapists

by on November 4, 2015 at 10:30 am in Economics, Medicine | Permalink

The Yale School of Medicine reports on some of the benefits of vaping and some of the costs of bans:

More than 40 states have banned the sale of electronic cigarettes to minors, but a new study out of the Yale School of Public Health indicates that these measures have an unintended and dangerous consequence: increasing adolescents’ use of conventional cigarettes.

Using data from the National Survey on Drug Use and Health, the research finds that state bans on e-cigarette sales to minors yield a 0.9 percentage point increase in rates of recent conventional cigarette use by 12 to 17 year olds, relative to states without these bans.

“Conventional cigarette use has been falling somewhat steadily among this age group since the start of the 21st century. This paper shows that bans on e-cigarette sales to minors appear to have slowed this decline by about 70 percent in the states that implemented them,” said Abigail Friedman, assistant professor of public health and the study’s author. “In other words, as a result of these bans, more teenagers are using conventional cigarettes than otherwise would have done so.”

The paper by Abigail Friedman is forthcoming in the Journal of Health Economics (working paper version).

Hat tip: Mitch Berkson.

Free Market Food Banks

by on November 3, 2015 at 7:27 am in Economics, Education, Food and Drink | Permalink

Feeding America, the third largest non-profit in the United States, distributes billions of pounds of food every year. Most of the food comes from large firms like Kraft, ConAgra and Walmart that have a surplus of some item and scarce warehouse space. Feeding America coordinates the supply of surplus food with the demand from food banks across the U.S..

Allocating food is not an easy problem. How do you decide who gets what while taking into account local needs, local tastes, what foods the bank has already, what abilities the banks have to store food on a particular day, transportation costs and so forth. Alex Teytelboym writing at The Week points out:

…Before 2005, Feeding America allocated food centrally, and according to its rather subjective perception of what food banks needed. Headquarters would call up the food banks in a priority order and offer them a truckload of food. Bizarrely, all food was treated more or less equally, irrespective of its nutritional content. A pound of chicken was the same as a pound of french fries. If the food bank accepted the load, it paid the transportation costs and had the truck sent to them. If the food bank refused, Feeding America would judge this food bank as having lower need and push it down the priority list. Unsurprisingly, food banks went out of their way to avoid refusing food loads — even if they were already stocked with that particular food.

This Soviet-style system was hugely inefficient. Some urban food banks had great access to local food donations and often ended up with a surplus of food. A lot of food rotted in places where it was not needed, while many shelves in other food banks stood empty. Feeding America simply knew too little about what their food banks needed on a given day.

In 2005, however, a group of Chicago academics, including economists, worked with Feeding America to redesign the system using market principles. Today Feeding America no longer sends trucks of potatoes to food banks in Idaho and a pound of chicken is no longer treated the same as a pound of french fries. Instead food banks bid on food deliveries and the market discovers the internal market-prices that clear the system. The auction system even allows negative prices so that food banks can be “paid” to pick up food that is not highly desired–this helps Feeding America keep both its donors and donees happy.

Food banks are not bidding in dollars, however, but in a new, internal currency called shares.

Every day, each food bank is allocated a pot of fiat currency called “shares.” Food banks in areas with bigger populations and more poverty receive larger numbers of shares. Twice a day, they can use their shares to bid online on any of the 30 to 40 truckloads of food that were donated directly to Feeding America. The winners of the auction pay for the truckloads with their shares. Then, all the shares spent on a particular day are reallocated back to food banks at midnight. That means that food banks that did not spend their shares on a particular day would end up with more shares and thus a greater ability to bid the next day. In this way, the system has built-in fairness: If a large food bank could afford to spend a fortune on a truck of frozen chicken, its shares would show up on the balance of smaller food banks the next day. Moreover, neighboring food banks can now team up to bid jointly to reduce their transport costs.

Initially, there was plenty of resistance. As one food bank director told Canice Prendergast, an economist advising Feeding America, “I am a socialist. That’s why I run a food bank. I don’t believe in markets. I’m not saying I won’t listen, but I am against this.” But the Chicago economists managed to design a market that worked even for participants who did not believe in it. Within half a year of the auction system being introduced, 97 percent of food banks won at least one load, and the amount of food allocated from Feeding America’s headquarters rose by over 35 percent, to the delight of volunteers and donors.

Teytelboym’s very good, short account is working off a longer, more detailed paper by Canice Prendergast, The Allocation of Food to Food Banks.

Canice’s paper would be a great teaching tool in an intermediate or graduate micro economics class. Pair it with Hayek’s The Use of Knowledge in Society. Under the earlier centralized system, Feeding America didn’t know when a food bank was out of refrigerator space or which food banks had hot dogs but wanted hot dog buns and which the reverse–under the market system this information, which Hayek called “knowledge of the particular circumstances of time and place” is used and as a result less food is wasted and the food is used to satisfy more urgent needs.

The Feeding America auction system is also the best illustration that I know of the second fundamental theorem of welfare economics.

Even monetary economics comes into play. Feeding America created a new currency and thus had to deal with the problem of the aggregate money supply. How should the supply of shares be determined so that relative prices were free to change but the price level would remain relatively stable? How could the baby-sitting co-op problem be avoided? Scott Sumner will be disappointed to learn that they choose pound targeting rather than nominal-pound targeting but some of the key issues of monetary economics are present even in this simple economy.

One of the themes of our textbook, Modern Principles, is that Markets Link the World. Here’s a great illustration of that theme showing how markets link China’s One Two Child policy to New Zealand dairy farmers and the New Zealand dollar. It’s also a great example of how quickly financial markets incorporate new information.


For another example see our MRUniversity video I, Rose and the discussion in our textbook.

Hat tip: Lars Christensen.

Writing in Quartz, Atanu Dey and Rajesh Jain have a very interesting argument that historically slow growth and many of India’s other problems can be traced back to its extractive constitution, which was largely inherited from the British.

For nearly a century, India was under comprehensive colonial British rule. As can be rationally expected, the government that the British imposed on India was not primarily directed towards development, but rather towards extraction. That is only reasonable because wealth extraction is the rationale for colonial rule.

The British, therefore, created the institutional structures, which necessarily includes the government that controlled India through comprehensive government control of the economy. This structure administration and control was left intact when the British decided to leave India, and was taken over by the government of Independent India. Although India attained political independence from the British raj, Indians did not become free of a controlling—and extractive—government.

…The conclusion has to be that India’s problem is structural and systemic, and not idiosyncratic. If the constitution were to change, the ultimate rules of the game would change, the policies (the derived rules) will change, and thus the action on the ground (the play of the game) will change, and therefore the outcome will change.

India needs a new constitution that is consistent with a nation of free individuals living in a complex, modern, large economy. This modern constitution has to be one that guarantees economic freedom to the individual, prohibits the government from making any laws that discriminate among citizens, guarantees freedom of speech and the press, prohibits the government from entering into businesses that are properly the domain of the private sector, and so on. In other words, India needs a constitution that protects the comprehensive freedom of the individual: economic, social and political.

What would be the best form of constitution for India? Westminster or Presidential? First past the post or proportional rule?  Single-member or mixed-member districts? Plurality rule or Borda count? Federalism? Certainly. But what kind of federalism enforced in what way? A Supreme court? How appointed? And what would be the most important rights to codify in a bill of rights?

Apple Should Buy a University

by on October 28, 2015 at 7:25 am in Economics, Education, Science | Permalink

Apple has more than $205 billion in cash. What should they do with the money? Apple should buy a university and rebuild it from the ground up.

In recent years, some private equity firms have bought universities and turned them into for-profits. The for-profit model, however, has yet to produce a world-class university. But consider Jerry Falwell’s Liberty University, it was only established in 1984 and yet today with its online students it’s the largest private, non-profit university in the United States. Liberty University doesn’t get accolades but it is a technology leader and it shows what is possible starting from a small budget.

Apple_Campus_2_renderingApple is a for-profit corporation not a charity but there are plenty of ways to make money from a non-profit university. Aside from the tax breaks and other deductions, Apple University would be a proving ground for educational technologies that would be sold to every other university in the world. New textbooks built for the iPad and its successors would greatly increase the demand for iPads. Apple-designed courses built using online technologies, a.i. tutors, and virtual reality experimental worlds could become the leading form of education worldwide. Big data analytics from Apple University textbooks and courses would lead to new and better ways of teaching. As a new university, Apple could experiment with new ways of organizing degrees and departments and certifying knowledge. Campuses in Delhi, Seoul, Shanghai, Berlin, and Sao Paulo could provide opportunities for studying abroad. Apple’s reputation would attract top students, especially, for example, if it started with a design and business school. Top students would lead Apple University to be highly ranked. The more prestigious Apple University became the greater would be the demand for Apple University educational products.

Apple already has the beginning of this model with iTunes U and its own internal Apple University for training in business and design. By buying a university, Apple would commit to a learning process to develop these technologies in entirely new ways.

More than a century ago Stanford, Carnegie, and Rockefeller used their industrial-age fortunes to build some of our best universities. Isn’t it time for another great university built for the information age?

SSRN: Directors from academia served on the boards of around 40% of S&P 1,500 firms over the 1998-2011 period. This paper investigates the effects of academic directors on corporate governance and firm performance. We find that companies with directors from academia are associated with higher performance and this relation is driven by professors without administrative jobs. We also find that academic directors play an important governance role through their advising and monitoring functions. Specifically, our results show that the presence of academic directors is associated with higher acquisition performance, higher number of patents and citations, higher stock price informativeness, lower discretionary accruals, lower CEO compensation, and higher CEO forced turnover-performance sensitivity. Overall, our results provide supportive evidence that academic directors are valuable advisors and effective monitors and that, in general, firms benefit from having academic directors.

I blogged an earlier version of this paper several years ago but the result continues to hold with five more years of data so you know who to call.

Hat tip: Professor Bainbridge.