Alex Tabarrok

Here’s the latest video from our MRUniversity course on the Principles of Macroeconomics; it’s an introduction to growth rates and comparing countries across time.

Powerball

by on January 9, 2016 at 4:00 am in Current Affairs, Economics | Permalink

Today’s Powerball lottery offers a prize of $800 million. Is the prize high enough to make it worth playing for an economist? In other words, is the prize high enough to be a net gain in expected value terms? Almost!

The odds of winning are 1 in 292.2 million. So the expected value of a ticket is $800*1/292.2=$2.73. A ticket only costs $2 so that’s a positive expected value purchase! We do have to make a few adjustments, however. The $800 million is paid out over 30 years while the $2 is paid out today. The instant payout is about $496 million so that makes the expected value 496*1/292.2=$1.70. We also have to adjust for the possibility that more than one person wins the prize. If you play variants of your birthday or “lucky” numbers that’s a strong possibility. If you let the computer choose your chances are better but with so many people playing it wouldn’t be surprising if two people had the same number–I give it at least 25%. So that knocks your winnings down to $372 million in expectation.

Finally the government will take at least 40% of your winnings, leaving you with $223 million in expectation. At a net $223 million the expected value of a $2 ticket is about 75 cents. Thus, a Powerball ticket doesn’t have positive net expected value but the net price of $1.25 is significantly less than the sticker price of $2. $1.25 is not much but to get your money’s worth buy early to extend the pleasure of anticipation.

Washington, DC has a juvenile curfew law. Anyone “under the age of 17 cannot remain in or on a street, park or other outdoor public place, in a vehicle or on the premises of any establishment within the District of Columbia during curfew hours.” (There are exemptions for juveniles accompanied by a parent and for travel for jobs (no detours allowed.))

Curfew laws keep some juveniles off the streets during curfew hours but which ones? The criminals seem the least likely to be deterred and with fewer people on the street perhaps the criminals are emboldened.

The DC curfew switches from midnight to 11 pm on Sept 1 of every year. In a working paper, Jennifer L. Doleac and Jillian Carr test the effect of DCs juvenile curfew on gun violence by looking at the number of gunshots heard in the 11pm to midnight “switching hour” just before and just after Sept 1. From a summary:

…the September 1 change provides a clean natural experiment. If curfews reduce gun violence, then when the curfew shifts to 11:00 p.m. rather than midnight, gunfire between 11:00 p.m. and midnight should go down. Does it?

Just the opposite. Using data on gunfire incidents from ShotSpotter (acoustic gunshot sensors that cover the most violent neighborhoods in D.C.), we find that after the curfew switches from midnight to 11:00 p.m., the number of gunshot incidents increases by 150 percent during the 11:00 p.m. hour. This amounts to 7 additional gunfire incidents city-wide per week, during that hour alone. Jane Jacobs was right: the deterrent effect of having lots of people out on the streets is powerful. This makes juvenile curfew policies counter-productive.

The use of ShotSpotter data is innovative and avoids some problems with issues of police enforcement. Calls to 911, however, don’t show the same pattern as the ShotSpotter data which is worrying.

I’d also like to see more information on the proposed mechanism. Is it really the case that significantly fewer people are out on the streets at say 11:30 pm after the curfew has been lowered to 11pm than when the curfew was set at midnight? The curfew only directly affects people under 17 and, as noted above, there are quite a few exemptions. Also what are the ages of those typically arrested on the basis of ShotSpotter alerts?

By the way, on a typical day in DC there are almost 15 gunfire incidents heard by ShotSpotter (data here, the authors report 8 but that may be from a restricted sample). A lot of gunfire is heard around a handful of schools. The ShotSpotter system is quite accurate. Although it misses some shots it distinguishes shots from car backfires better than people do. I also found this note from the Washington Post amusing in a frightening way:

About a third of detected gunshot incidents in the city happen on New Year’s Eve or around July 4. Officials explain the high rate as celebratory gunfire.

Here are the top ten MR posts from 2015, mostly as measured by page views. The number one viewed post was:

  1. Apple Should Buy a University. People really like to talk about Apple and this post was picked up all over the web, most notably at Reddit where it received over 2500 comments.

Next most highly viewed were my post(s) on the California water shortage.

2. The Economics of California’s Water Shortage followed closely 4) by The Misallocation of Water.

3. Our guest blogger Ramez Naam earned the number 3 spot with his excellent post on Crispr, Genetically Engineering Humans Isn’t So Scary.

5. My post explaining why Martin Shkreli was able to jack up the price of Daraprim and how this argued in favor of drug reciprocity was timely and got attention: Daraprim Generic Drug Regulation and Pharmaceutical Price-Jacking

6. What was Gary Becker’s Biggest Mistake? generated lots of views and discussion.

7. Tyler’s post Bully for Ben Carson provided plenty of fodder for argument.

8. The Effect of Police Body Cameras–they work and should be mandatory.

9. Do workers benefit when laws require that employers provide them with benefits? I discussed the economics in The Happy Meal Fallacy.

10. Finally, Tyler discussed What Economic Theories are Especially Misunderstood.

Posts on immigration tend to get the most comments. The Case for Getting Rid of Borders generated over 700 comments here and over 1700 comments and 57 thousand likes at The Atlantic where the longer article appeared.

Other highly viewed posts included two questions, Is it Worse if foreigners kill us? from Tyler and Should we Care if the Human Race Goes Extinct? from myself.

The Ferguson Kleptocracy and Tyler’s posts, Greece and Syriza lost the public relations battle and a Simple Primer for Understanding China’s downturn (see also Tyler’s excellent video on this topic) were also highly viewed.

I would also point to Tyler’s best of lists as worthy of review including Best Fiction of 2015, Best Non-Fiction of 2015 and Best Movies of 2015. You can also see Tyler’s book recommendations from previous years here.

A Bitcoin Magic Trick

by on December 28, 2015 at 7:25 am in Books, Economics, Games | Permalink

I love this scene from Digital Gold, Nathaniel Popper’s entertaining book on the history of and people behind Bitcoin. Wences Casares, a successful internet entrepreneur and Bitcoin enthusiast, is at a party of millionaires and billionaires and he wants to impress the crowd:

To prove how easy this all was, Wences asked Blodget to take out his phone and helped him to create an empty Bitcoin wallet. Once it was up, and Wences had Blodget’s new Bitcoin address, Wences used the wallet on his own phone to send Blodget $250,000..the money was then passed to the phones of other people around the table once they had set up wallets. Anyone could have run off with Wences’s $250,000, but that wasn’t a risk with this particular crowd. Instead, as the money went around, Wences saw the guests’ laughter and wide-eyed amazement at what they were watching.

Wences is something of a character. Russ Roberts did a good interview with him on EconTalk.

The Christmas Market

by on December 25, 2015 at 7:20 am in Current Affairs, Economics, The Arts | Permalink

Erfurt Christmas Market

In a new NBER paper, Accounting for the Rise in College Tuition, Grey Gordon and Aaron Hedlund create a sophisticated model of the college market and find that a large fraction of the increase in tuition can be explained by increases in subsidies.

With all factors present, net tuition increases from $6,100 to $12,559. As column 4 demonstrates, the demand shocks— which consist mostly of changes in financial aid—account for the lion’s share of the higher tuition. Specifically, with demand shocks alone, equilibrium tuition rises by 102%, almost fully matching the 106% from the benchmark. By contrast, with all factors present except the demand shocks (column 7), net tuition only rises by 16%.

These results accord strongly with the Bennett hypothesis, which asserts that colleges respond to expansions of financial aid by increasing tuition.

Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.

In fact, the tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline from 33% to 27% in the new equilibrium with only demand shocks. Furthermore, the students who do enroll take out $6,876 in loans compared to $4,663 in the initial steady state….Lastly, the model predicts that demand shocks in isolation generate a surge in the default rate from 17% to 32%. Essentially, demand shocks lead to higher college costs and more debt, and in the absence of higher labor market returns, more loan default inevitably occurs.

Sound familiar? Some of these results appear too large to me and the authors caution that they need to assume a lot of monopoly power to solve their model so the results should be taken as an upper bound. Nevertheless, the Econ 101 insight that subsidies increase prices (even net for those who are not fully subsidized) holds true.

I wonder where else (& here) we could apply this insight?

The latest Freakonomics radio podcast grapples with the question Is Migration a Basic Human Right? (itunes) As usual, Stephen Dubner and his team have put together a compelling story with multiple-angles and perspectives. I provide the jumping off point:

There are fundamental human rights. There are rights which accrue to everyone, no matter who they are, no matter where they are on the globe. Those rights include the right to free expression. They include the right to freedom of religion. And I believe they should also include the right to move about the Earth.

but many other voices are also heard including Madeleine Albright, the great Michael Clemens, Casey Mulligan, refugee Basel Esa and others.

By the way, a new book on global justice is of interest, Justice at a Distance, by philosopher Loren Lomasky and legal scholar Fernando Teson.

Roland Fryer gave an outstanding seminar last week on Education, Inequality, & Incentives as part of GMU’s Buchanan Speaker Series. Fryer was passionate, funny, and informed as he recounted his journey pounding away at Stata in the late 1990s in an effort to show that Neal and Johnson were wrong and that racism just had to account for differences in wages and other outcomes between blacks and whites; to coming to accept that a large portion of the difference is determined by differences in human capital; to his shocking discovery that the Harlem Children’s Zone was dramatically increasing human capital among minorities; and finally to abandoning the academic game of estimating the different effects of beef and chicken soup (but in really cool and precise ways!) to instead throw himself into the messy work of taking the lessons from the best charter schools and applying and scaling those lessons to public schools across the nation.

I had long been aware of Fryer’s academic work but I had not realized how much he and his team at the Harvard EdLabs have actually done on the ground to remake dozens of schools in Houston, Denver and elsewhere–in the process showing that the best practices of the best charter schools can be scaled to the entire nation. Remarkable.

He starts off at 3:10 slightly hesitant but he really builds.

The FDA and Magical Thinking

by on December 15, 2015 at 7:25 am in Economics, Law, Medicine | Permalink

Vox had a piece yesterday on the Cruz-Lee proposal to make it easier for U.S. patients to access drugs and devices already approved in other developed countries. The Vox piece had some howlers. Most notably this:

“There’s no evidence the FDA blocks innovation or makes innovation harder or makes it more costly,” said Kesselheim.

Frankly, that would be laughable were it not coming from a professor of medicine at Harvard Medical School. It costs well over a billion dollars to get the average new drug approved and much of that cost comes from FDA required clinical trials. Longer and larger clinical trials mean that the drugs that are eventually approved are safer. But longer trials also mean that good drugs are delayed. And the more expensive it is to produce new drugs the fewer new drugs will be produced. In short, longer and larger trials mean drug delay and drug loss.

We live in a world of tradeoffs. Let’s debate the tradeoffs. But let’s not engage in magical thinking where there are no tradeoffs and “no evidence” that the FDA makes drug development more costly.

A more subtle error was committed by the author who writes:

But it’s not clear that this legislation can solve the biggest problem here — the lack of promising treatments in the pipeline. In other words, a faster approval process can’t fix a dearth of innovation from labs themselves.

Many factors go into drug development that are outside the FDA’s purview. Nevertheless, faster drug approval can and does increase innovation. Approving drugs more quickly is equivalent to a decrease in the costs of research and development. Time is money. Reducing the cost of development increases the incentive to develop new drugs.

The Prescription Drug User Fee Act, for example, reduced drug approval times by about 10 months. Philipson et al. calculate that:

…the more rapid access of drugs on the market enabled by PDUFA saved the equivalent of 140,000 to 310,000 life years.

(PDUFA does not appear to have materially affected safety but Philipson et al. calculate that even under a worst case scenario the benefits of PDUFDA far exceeded the costs).

Moreover, Vernon et al. find that the reduction in approval time from PDUFA increased new drug development:

Controlling for other factors such as pharmaceutical profitability and cash flows, we estimate that a 10% decrease (increase) in FDA approval times leads to an increase (decrease) in R&D spending from between 1.4% and 2.0%. Combining this estimate with recent research on the link between PDUFA and FDA approval times…we calculate PDUFA may have incentivized an additional $10.8 billion to $15.4 billion in pharmaceutical R&D. Recent economic research has shown that the social rate of return on pharmaceutical R&D is very high; therefore, the social benefits of PDUFA (over and above the benefits of more rapid consumer access) are likely to be substantial.

Finally, return to the issue of reciprocity. Many of the critics of reciprocity respond with simple appeals to nationalism. We are the best! Rah, rah, rah! But if the critics were German or French they would argue that the EMA is superior to the FDA. Indeed, when I raise the issue of reciprocity with Europeans they respond in exactly the same way as Americans. How could anyone suggest that the EMA automatically approve drugs approved by the FDA! The horror.

The argument for reciprocity, however, isn’t that the FDA is uniquely bad or always worse than the EMA or vice-versa. The argument is that it’s wasteful to duplicate the lengthy approval process and that both agencies sometimes make mistakes. As a result, it’s simple common sense to let Americans avail themselves of drugs and devices approved in other developed countries.

Senators Ted Cruz (R-Texas) and Mike Lee (R-Utah) have just introduced a bill that would implement an idea that I have long championed, making drugs, devices and biologics that are approved in other developed countries also approved for sale in the United States. Highlights of the “Reciprocity Ensures Streamlined Use of Lifesaving Treatments Act (S. 2388), or the RESULT Act,” include:

  • Amending the Food, Drug and Cosmetic Act to allow for reciprocal approval of drugs, devices and biologics from foreign sponsors in certain trusted, developed countries including EU member countries, Israel, Australia, Canada and Japan.
  • Encouraging the FDA to expeditiously review life-saving drug and device applications, this legislation would provide the FDA with a 30-day window to approve or deny a sponsor’s application….
  • The HHS Secretary is instructed to approve a drug, device or biologic if the FDA confirms the product is:
    • Lawfully approved for sale in one of the listed countries;
    • Not a banned device by current FDA standards;
    • There is a public health or unmet medical need for the product.
  • If a promising application for a life-saving drug is declined Congress is granted the authority to disapprove of a denied application and override an FDA decision with a majority vote via a joint resolution.

In explaining why he introduced the bill Senator Cruz argued:

We continue to lose far too many of our loved ones to the “invisible graveyard,” as economist Alex Tabarrok has described: lives that could have been saved but for a bureaucratic barrier that rejects medical cures and innovation…The bill I am introducing takes the first step to reverse this trend. It provides for reciprocal drug approval, so that cures and medical devices that are already approved in other countries can more expeditiously come to the U.S.

No Good Men Among the Living

by on December 13, 2015 at 12:07 pm in Books, Current Affairs | Permalink

Anand Gopal’s No Good Men Among the Livinghis new and shocking indictment demonstrates that the failures of the [Afghanistan] intervention were worse than even the most cynical believed. Gopal, a Wall Street Journal and Christian Science Monitor reporter, investigates, for example, a US counterterrorist operation in January 2002. US Central Command in Tampa, Florida, had identified two sites as likely “al-Qaeda compounds.” It sent in a Special Forces team by helicopter; the commander, Master Sergeant Anthony Pryor, was attacked by an unknown assailant, broke his neck as they fought and then killed him with his pistol; he used his weapon to shoot further adversaries, seized prisoners, and flew out again, like a Hollywood hero.

As Gopal explains, however, the American team did not attack al-Qaeda or even the Taliban. They attacked the offices of two district governors, both of whom were opponents of the Taliban. They shot the guards, handcuffed one district governor in his bed and executed him, scooped up twenty-six prisoners, sent in AC-130 gunships to blow up most of what remained, and left a calling card behind in the wreckage saying “Have a nice day. From Damage, Inc.” Weeks later, having tortured the prisoners, they released them with apologies. It turned out in this case, as in hundreds of others, that an Afghan “ally” had falsely informed the US that his rivals were Taliban in order to have them eliminated. In Gopal’s words:

The toll…: twenty-one pro-American leaders and their employees dead, twenty-six taken prisoner, and a few who could not be accounted for. Not one member of the Taliban or al-Qaeda was among the victims. Instead, in a single thirty-minute stretch the United States had managed to eradicate both of Khas Uruzgan’s potential governments, the core of any future anti-Taliban leadership—stalwarts who had outlasted the Russian invasion, the civil war, and the Taliban years but would not survive their own allies.

Gopal then finds the interview that the US Special Forces commander gave a year and a half later in which he celebrated the derring-do, and recorded that seven of his team were awarded bronze stars, and that he himself received a silver star for gallantry.

From a 2014 review by Rory Stewart in the NYReview of Books. Have a nice day.

A timely chart from Christopher Ingraham at Wonkblog. Christopher concludes that compared to wives, husbands wait till the last minute to gift shop for their spouse. A plausible interpretation, although do note that it’s not the case that women are searching earlier just less.

xmas giving

Yesterday, Thomas Schelling gave a seminar on climate change here at the Center for Study of Public Choice. Schelling’s main argument was that lots of resources are going into predicting and understanding climate change but very little thought or resources are going into planning for adaptation.

If Washington, DC, Boston and Manhattan are to remain dry, for example, we are almost certainly going to need flood control efforts on the level of the Netherlands. It takes twenty years just to come up with a plan and figure out how to pay for these kinds of projects let alone to actually implement them so it’s not too early to beginning planning for adaptation even if we don’t expect to need these adaptations for another forty or fifty years. So far, however, nothing is being done. Climate deniers think planning for adaptation is a waste and many climate change proponents think planning for adaptation is giving up.

Schelling mentioned a few bold ideas. We can protect every city on the Mediterranean from Marseilles to Alexandria to Tel Aviv or we could dam the Strait of Gibraltar. Damming the strait would be the world’s largest construction project–by far–yet by letting the Mediterranean evaporate somewhat it could also generate enough hydro-electric power to replace perhaps all of the fossil fuel stations in Europe and Africa.

Schelling didn’t mention it but in the 1920s German engineer Herman Sörgel  proposed such a project calling it Atlantropa (more here). In addition to power, damming the strait would open up a huge swath of valuable land. Gene Roddenberry and Phillip K. Dick were fans but needless to say the idea never got very far. A cost-benefit analysis, however, might show that despite the difficulty, damming the strait would be cheaper than trying to save Mediterranean cities one by one. But, as Schelling argued, no one is thinking seriously about these issues.

I argued that capital depreciates so even many of our buildings, the longest-lived capital, will need to be replaced anyway. Here, for example, is a map showing the age of every building in New York City. A large fraction, though by no means all, are less than one hundred years old. If we let the areas most under threat slowly deteriorate the cost of moving inland won’t be as high as one might imagine–at least if the water rises slowly (not guaranteed!). Schelling agreed that this was the case for private structures but he doubted that we would be willing to let the White House go.

If we are going to save cities, especially buildings not yet built, should we not start taxing land today that is under threat of future flood? Act now to mitigate future moral hazard problems. John Nye and Robin Hanson raised this issue. See Robin’s post for more.

It was an enjoyable seminar. At 94, Schelling remains sharp, provocative, and in command of the facts.

A Dual-Track Drug Approval Process

by on December 2, 2015 at 7:22 am in Economics, Law, Medicine | Permalink

In a post earlier this year I noted that Japan has significantly liberalized its approval process for regenerative medicine. Writing in Forbes, Bart Madden and Nobelist Vernon Smith outline a similar proposal for the United States.

Recently, Japanese legislation has implemented the core Free To Choose Medicine (FTCM) principles of allowing not-yet-approved drugs to be sold after safety and early efficacy has been demonstrated; in addition, observational data gathered for up to seven years from initial launch will be used to determine if formal drug approval is granted.

…FTCM legislation in the U.S. would create a dual track system (see figure below) that preserves the existing FDA clinical trial process while offering patients an alternative. Patients, advised by their doctors, would be able to contract with a drug developer to use not-yet-approved drugs after Phase I safety trials are successfully completed and one or more Phase II trials have demonstrated continued safety and initial efficacy. The resulting early access could make FTCM drugs available up to seven years before conventional FDA approval, which entails Phase III randomized control trials and a lengthy FDA review before the FDA makes an approval decision.

bartgraph

…The heart of the dual track system is the Tradeoff Evaluation Drug Database (TEDD) which would be available to the public through a government-supervised web portal. TEDD would contain all treatment results of FTCM drugs including patients’ health characteristics and relevant biomarkers, but no personal identification. This open access database would be a treasure-trove of information to aid drug developers in making better R&D decisions consistent with fast-paced learning and innovation.

…Today’s world of accelerating medical advancements is ushering in an age of personalized medicine in which patients’ unique genetic makeup and biomarkers will increasingly lead to customized therapies in which samples are inherently small. This calls for a fast-learning, adaptable FTCM environment for generating new data. In sharp contrast, the status quo FDA environment provides a yes/no approval decision based on statistical tests for an average patient, i.e., a one-size-fits-all drug approval process.

I hold the Bartley J. Madden Chair in Economics at the Mercatus Center so I am biased but this is an important proposal. Japan is leading the way and similar ideas are being discussed in Great Britain but as the most important pharmaceutical market in the world, the United States has an outsize influence on world drug development. We need to lower costs and speed new drugs to market.