Economics

Let us start with “Teheran markets in everything”:

I think this happens only in Tehran. Some people get paid to walk behind your car, so the traffic cameras can not capture your plate number when you enter the restricted traffic areas!

The photo alas does not reproduce, and that is from a fascinating Quora discussion on “what is a job that exists only in your country?”

The Vietnamese water bag carriers are impressive (you get into a plastic bag and they pull you across a river).  Here is some Indian arbitrage:

Disabled people get 50-75% concession on train ticket from Indian Railways. Additionally, they can take one person as escort who will be entitled to the same amount of concession.

Some disabled people earn their living with this scheme. Their only job is travelling between different cities and taking Strangers (who actually want to go to some city) as escorts. These strangers pay 75% of the fare to the disabled people. Thus Stranger saves money, Disabled person earns profit.

This also was new to me:

In China, when there are big traffic jams, you can pay a fee to have two people on a motorcycle drive to your vehicle, where one takes your place at the steering wheel, and the other will take you wherever you need to go on his motorcycle.

Nor had I known about the “pet food taster” (Simon and Marks) or the costumes of those Australian Meter Maids.  India is prominent on the list but Mexico makes an appearance as well:

In Mexico we have men who make a living by discharging electricity into the bodies of consenting drunk people (who gladly pay a couple of dollars for the experience). These men usually hang around bars and areas where nightlife abounds and yell “toques toques!”(“discharges, discharges!”) while banging the two metallic handles of their contraption together. The device is a battery-operated metal box with a voltage regulator that can increase the intensity of the electrical current depending on how much the customer can take. It is generally accepted by Mexicans that a bit of electricity will increase your buzz…

It costs about $2-$4 per jolt.  Maybe the real winner should be this one:

United States of America: Man who walks on the moon (currently on hiatus).

I believe I owe thanks to somebody on Twitter, alas I can no longer recall to whom.

I enjoyed this piece by Sarah Turcotte:

Tour caddies are well-compensated. The winning looper this week will pocket a nice $144,000. But they earn that 10 percent. A long-running joke among caddies is that there are only three rules: Show up, keep up and shut up. Truth is, their jobs might be tougher than the players’. Well maybe not quite, but it’s close. Caddies are part pack mule, part meteorologist, part psychologist (BIG part), part mathematician, part scapegoat, part psychic and sometimes even part bartender. When I played in the LPGA’s Michelob Ultra Open a few years back, a veteran caddie suggested to the man on my bag a little Drambuie and Sprite to calm my nerves. (Full disclosure: He did have a water bottle filled with Chardonnay available at all times. We never used it, but it was a comfort knowing it was there.)

Caddies do not appear to do very much, yet most people could not hold a job as an effective caddy for a good golf professional.  This, in a nutshell, is why the transition toward the new service sector jobs will not run smoothly for everybody.

And even if you really do make the grade, “…job security for caddies is non-existent.”

Department of Uh-Oh

by on April 16, 2014 at 12:31 am in Data Source, Economics, Medicine | Permalink

A four-year slowdown in health spending growth could be coming to an end.

Americans used more medical care in 2013 as the economy recovered, new reports show. Federal data suggests that health care spending is now growing just as quickly as it was prior to the recession.

“We’re at the highest level of growth since the slowdown began,” Paul Hughes-Cromwick, a senior health economist at the Altarum Institute, which tracks health spending. “You have to go back seven years to see growth like this.”

There is more here, from Sarah Kliff.  Note that is only from one quarter, however.  Kevin Drum remains more sanguine.

Here is what I had to say:

Tyler Cowen, a professor of economics at George Mason University, argues that the very definitions of labor and capital are arbitrary. Instead, he looks around the world to find the relatively scarce factors of production and finds two: natural resources, which are dwindling, and good ideas, which can reach larger markets than ever before.

If you possess one of those, then you will reap most of the rewards of growth. If you don’t, you will not.

There you go, you can tell I studied with Ludwig Lachmann.  The article is interesting throughout.  Here is a slightly earlier post, “Joseph Nocera calls me on the phone.”

From a report from today’s WaPo:

No examples have surfaced of anyone actually exploiting the vulnerability.

Of course that is no longer true, as The Royal Canadian Mounted Police are investigating the cases of 900 Canadian identity theft victims.  And there are likely undetected further cases.  Still, when I hear this crisis described as “On the scale of 1 to 10, this is an 11,” I conclude that economists think about risk differently than do most people, including tech consultants.  (To flip this coin on its other side, I am not especially reassured about the web sites judged as “safe” — should we now start trusting such judgments so strongly?)

What can the deadweight loss be of a previously unnoticed crisis?  And if that is an 11, what does a 12 look like?  How many Canadian victims would be needed to get us up to 13?

Well, at which margin?  At current margins, not for all donors and it seems not for “warm glow” donors.  Here is a new paper by Dean Karlan and Daniel H. Wood.  Every sentence in the abstract is interesting:

We test how donors respond to new information about a charity’s effectiveness. Freedom from Hunger implemented a test of its direct marketing solicitations, varying letters by whether they include a discussion of their program’s impact as measured by scientific research. The base script, used for both treatment and control, included a standard qualitative story about an individual beneficiary. Adding scientific impact information has no effect on whether someone donates, or how much, in the full sample. However, we find that amongst recent prior donors (those we posit more likely to open the mail and thus notice the treatment), large prior donors increase the likelihood of giving in response to information on aid effectiveness, whereas small prior donors decrease their giving. We motivate the analysis and experiment with a theoretical model that highlights two predictions. First, larger gift amounts, holding education and income constant, is a proxy for altruism giving (as it is associated with giving more to fewer charities) versus warm glow giving (giving less to more charities). Second, those motivated by altruism will respond positively to appeals based on evidence, whereas those motivated by warm glow may respond negatively to appeals based on evidence as it turns off the emotional trigger for giving, or highlights uncertainty in aid effectiveness.

How is that for a chilling final sentence?: “…those motivated by altruism will respond positively to appeals based on evidence, whereas those motivated by warm glow may respond negatively to appeals based on evidence as it turns off the emotional trigger for giving, or highlights uncertainty in aid effectiveness.”

The BirdReturns program, financed by the Nature Conservancy, then pays rice farmers in the birds’ flight path to keep their fields flooded with irrigation water from the Sacramento River as migrating flocks arrive. The prices are determined by reverse auction, in which farmers bid for leases and the lowest bidder wins.

Because the program pays for only several weeks of water instead of buying the habitat, the sums are modest; the conservancy does not disclose bids because that might affect future auctions, but it says the figures were both above and below the $45 per acre that the federal government pays for bird-friendly practices.

The project’s first season ended last month, as birds headed north from newly flooded fields. Researchers said all of the birds whose numbers they hoped to improve were seen on “pop up” wetlands — a temporary steppingstone for the birds’ journey north. This happened when the field would have ordinarily been drained, an indication that the approach was working. More analysis will be done this month. The fields will be flooded again in the fall for the birds’ return journey. Eventually, using this and other approaches, the conservationists at BirdReturns hope to increase the number of shorebirds that stop in the Central Valley to 400,000, from current levels of 170,000.

There is more here, not like what you see in those movies!

Yes doing things now can have good side effects, but unless something changes in the side-effect processes, doing things later should have exactly the same sort of side effects. And because of positive interest rates, you can do more later, and thus induce more of those good side effects. (Also, almost everyone can trade time for money, and so convert money or time now into more money or time later.)

For example, if you can earn 7% interest you can convert $1 now into $2 a decade from now. Yes, that $1 now might lend respectability now, induce others to copy your act soon, and induce learning by the charity and its observers. But that $2 in a decade should be able to induce twice as much of all those benefits, just delayed by a decade.

In math terms, good side effects are multipliers, which multiply the gains from your good act. But multipliers are just not good reasons to prefer $1 over $2, if both of them will get the same multiplier. If the multiplier is M, you’d just be preferring $1M to $2M.

…I think one should in general be rather suspicious of investing or donating to groups on the basis that they, or you, or now, is special. Better to just do what would be good even if you aren’t special. Because usually, you aren’t.

There is more here.

There is a new paper by Kelly Shue and Richard Townsend (pdf), it is quite intriguing though note it is preliminary work. I am not linking to it but the authors appear to have distributed the abstract on the internet:

We explore a rigidity-based explanation of the dramatic and off-trend growth in US executive compensation during the late 1990s and early 2000s. We show that executive option and stock grants are rigid in the number of shares granted. In addition, salary and bonus exhibit downward nominal rigidity. Rigidity implies that the value of executive pay will grow with firm equity returns, which averaged 30% annually during the Tech Boom. Rigidity also explains the increased dispersion in pay across firms, the difference in growth rates between the US and other countries, and the increased correlation between pay and firm-specific equity returns. Regulatory changes requiring the disclosure of the value of option grants help explain the moderation in executive pay in the late 2000s. Finally, we find suggestive evidence that number-rigidity in executive pay is generated by money illusion and reference-dependent motivation, the same behavioral biases that may underlie downward nominal wage rigidity among rank and file workers.

For the pointer I thank Robert J. Shiller.

Addendum: The authors recommend this link to a new version of the paper.

From an excellent column by Wolfgang Münchau:

The reason Greece was able to attract so much interest in last week’s bond issue was a combination of the promise of a high yield and the maturity profile of existing Greek debt. Official loans – from eurozone member states and the International Monetary Fund – make up 80 per cent of the total debt. Greece will not start to repay this until 2023. In other words the country is solvent in the short run. But long-run solvency is far from certain.

The rest of the FT piece is here.  He suggests (without advocating it) that this could be the moment for Greece to default.

Henry Aaron and the Lucas Critique

by on April 12, 2014 at 6:57 am in Economics, Sports | Permalink

No, not the Henry Aaron at the Brookings Institution.  I mean what the ten year old Tyler Cowen would have called “the real Henry Aaron.”  Nate Silver writes:

What if Aaron had never hit a home run? What if those 755 round-trippers had fallen for base hits instead? (If we’re trying to isolate the effect of his power, that seems like the fairer way to do it, instead of turning them into popups or something.) Would he still be a Hall of Famer?

If all of his homers had been singles, Aaron would still have his 3,771 hits. Instead of being the second-best home-run hitter of all time, he’d be the third-best singles hitter of all time, after Ty Cobb and Pete Rose. His RBI total would have gone way down; based on the number of runs that Aaron knocked in on home runs and singles throughout his career, I estimate that he’d have 1,232 of them rather than 2,297. But 1,232 isn’t a shabby total; it would rank Aaron 141st all time, in the general vicinity of Derek Jeter, Edgar Martinez and George Sisler. He’d still be a lifetime .305 hitter and have a .374 on-base average.

OK, here is where Lucas comes in.  If Hank Aaron did not carry significant home run potential to the plate, he would have seen a lot more blazing fastballs, pitchers’ “best stuff,” and so on.  Why not challenge the hitter and try to blow it by him if all you are risking is a single up the middle?  As it was, pitchers often threw Aaron a variety of slower curves and off-speed junk, stuff he might grab a piece of with the bat but would have a harder time drilling straight over the fence.

And thus a homer-less version of Aaron probably would have had a harder time making contact at all.  And he certainly would have had many fewer walks.  But yet, with the amazing wrists he had…pitchers were afraid of him.

It is funny how the Lucas critique went from one of the most underrated ideas in economics (pre-Lucas), to one of the most overrated ideas (1980s-early 1990s), and now it is back as one of the most underrated ideas again.  If we vary one policy or one element of a calculation or algorithm, other individuals will respond strategically.

Addendum: Scott Sumner adds comment.

Here is the new paper (pdf):

This article shows that official statistics substantially underestimate the net foreign asset positions of rich countries because they fail to capture most of the assets held by households in offshore tax havens. Drawing on a unique Swiss data set and exploiting systematic anomalies in countries’ portfolio investment positions, I find that around 8% of the global financial wealth of households is held in tax havens, three-quarters of which goes unrecorded. On the basis of plausible assumptions, accounting for unrecorded assets turns the eurozone, officially the world’s second largest net debtor, into a net creditor. It also reduces the U.S. net debt significantly. The results shed new light on global imbalances and challenge the widespread view that after a decade of poor-to-rich capital flows, external assets are now in poor countries and debts in rich countries. I provide concrete proposals to improve international statistics.
The original pointer was from Paul Krugman.  Yesterday I was at an IMF forum with Jeff Sachs and he too was placing great stress on this issue.

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.

Should we regulate Bitcoin?

by on April 11, 2014 at 9:16 am in Economics, Law, Web/Tech | Permalink

There is a new paper by Jerry Brito, Houman Shadab, and Andrea Castillo, the abstract is here:

The next major wave of Bitcoin regulation will likely be aimed at financial instruments, including securities and derivatives, as well as prediction markets and even gambling. While there are many easily regulated intermediaries when it comes to traditional securities and derivatives, emerging bitcoin-denominated instruments rely much less on traditional intermediaries. Additionally, the block chain technology that Bitcoin introduced for the first time makes completely decentralized markets and exchanges possible, thus eliminating the need for intermediaries in complex financial transactions.

In this article we survey the type of financial instruments and transactions that will most likely be of interest to regulators, including traditional securities and derivatives, new bitcoin-denominated instruments, and completely decentralized markets and exchanges. We find that bitcoin derivatives would likely not be subject to the full scope of regulation under the Commodities and Exchange Act because such derivatives would likely involve physical delivery (as opposed to cash settlement) and would not be capable of being centrally cleared. We also find that some laws, including those aimed at online gambling, do not contemplate a payment method like Bitcoin, thus placing many transactions in a legal gray area.

Following the approach to Bitcoin taken by FinCEN, we conclude that other financial regulators should consider exempting or excluding certain financial transactions denominated in Bitcoin from the full scope of the regulations, much like private securities offerings and forward contracts are treated. We also suggest that to the extent that regulation and enforcement becomes more costly than its benefits, policymakers should consider and pursue strategies consistent with that new reality, such as efforts to encourage resilience and adaptation.

Along related lines, you might consider Adam Thierer’s excellent new book Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom.

There is yet another paper on this topic, I know you are weary of it, but I remain glued to the screen, so here goes:

Stock theft is an endemic crime particularly affecting deep rural areas of Pakistan. Analysis of a series of cases was conducted to describe features of herds and farmers who have been the victims of cattle and/buffalo theft in various villages of Punjab in Pakistan during the year 2012. A structured interview was administered to a sample of fifty three affected farmers. The following were the important findings: i) incidents of theft were more amongst small scale farmers, ii) the rate of repeat victimization was high, iii) stealing was the most common modus operandi, iv) the majority of animals were adult, having high sale values, v) more cases occurred during nights with crescent moon, vi) only a proportion of victims stated to have the incident reported to the police, vii) many farmers had a history of making compensation agreements with thieves, viii) foot tracking failed in the majority of the cases, ix) all the respondents were willing to invest in radio frequency identification devices and advocated revision of existing laws. The study has implications for policy makers and proposes a relationship between crime science and veterinary medicine.

The link is here, and for the pointer I thank Ben Southwood.  This is in fact a significant and understudied topic in development economics, namely small-scale predation in rural settings.

Not surprisingly, that piece appeared in the Berliner und Münchener tierärztliche Wochenschrift.