Month: September 2004

Bombing Iraq to Prosperity

The actual headline is no less absurd: “Economic Growth from Hurricanes Could Outweigh Costs”. The story is here, courtesy of USA Today.

The body of the story is worse:

Although natural disasters spread destruction and economic pain to a wide variety of businesses, for some, it can mean a burst in activity and revenue.

For that reason, economists tallying the numbers expect the hurricanes will be neutral in their effect on the U.S. economy, or may even give it a slight boost, particularly because of an expected reconstruction boom in the already red-hot construction industry.

Or how about this?

Cochrane estimates that in Florida, the state hit hardest by the storms, 20,000 jobs will be created that otherwise would not have been. Two-thirds of those jobs will be in construction. The rest will be in areas including utilities, retailing, insurance and business services. Another 2,500 jobs will likely be added in Mobile, Ala., according to

Economic consulting firm Global Insight estimates the hurricanes at most will shave two-tenths of a percentage point off gross domestic product, the broadest gauge of U.S. economic activity, in the third or fourth quarters. That will be offset by reconstruction activity.

I would not have dared this as satire. Nor is it presented as a sophisticated critique of national income accounting, which in fact does treat such expenditures as productive. Will it next be suggested that excess productivity is our main economic problem?

That is all for tonight folks, I am headed out to the crying bar.

New economics blogs

Will the diversity of the blogosphere ever cease?

This morning alone I have learned of three new blogs. The first is on Sabernomics, or econometrics as applied to baseball.

The second is a new blog on economic development issue; read this post on happiness research around the world.

Finally, Johan Norberg, libertarian crusader for global capitalism, posts on his views and efforts on behalf of liberty.

Who will win the next Nobel Prize in economics?

Let us look at the betting market, as noted by guest-blogger Michael Stastny on his home blog Mahalanobis. The leaders are:

1) Ed Prescott – A powerhouse economic theorist. He has seminal insights into the role of “real” (i.e., non-monetary) forces in business cycles and whether returns on stocks (7% average) and bonds (a little over 1% on average) reflect the relative risk of these instruments. I am also a fan of his work on monopolies –often government monopolies — as barriers to innovation. His latest work suggests that Americans work more than Europeans because our marginal tax rates are lower.

2) Eugene Fama – His work on empirical finance tested whether the market rewards risk-taking and which variables might predict “excess returns.”

3) Gordon Tullock – My colleague, read my previous remarks.

4) Oliver Williamson – Asset specificity is his key idea. You invest in relationships with business partners and much of the value is specific to that relationship. Then things start going wrong…

5) Paul Krugman – Krugman winning the prize today would mean something very different than Krugman winning the prize five years ago. The chance of this happening is either much greater or much less than I think, I am simply not sure which.

6) Robert Barro – He has shown longer “legs” than his critics seemed to think he would. A powerhouse of macroeconomics and growth. It is less well known that he also did early versions of political business cycle theory and sticky price macroeconomics. I do not believe, however, that the Swedes will choose this year to reward someone who has to some (relative) extent defended Bush economic policies. (If you are wondering, Hans Blix is a heavy favorite to win the Peace Prize.) Barro is a very effective economic popularizer, in addition to his scholarly work.

7) Edmund Phelps – His work on labor markets laid the basis for the next thirty years of macroeconomics. He is not leading the betting market, but many observers consider him to be “due.”

Who is missing? Thomas Schelling is the most notable living theorist of spontaneous order and a key father of applied game theory. Like Phelps, he is “due.” Most of the people on the “New Candidates” list don’t have much of a chance, and here is a list of expired candidates.

Did life come from sugar in space?

A cotton candy-like cloud of simple sugar drifts in the unspeakably cold center of the Milky Way about 26,000 light years away, offering a remote, yet tantalizing, hint of how the building blocks of life may have reached Earth billions of years ago.

This frigid cloud is composed of molecular glycolaldehyde, a sugar that, when it reacts with other sugars or carbon molecules, can form a more complex sugar called ribose, the starting point for DNA and RNA, which carry the genetic code for all living things.

The simple sugar molecule glycolaldehyde was found in this dust and gas cloud, Sagittarius B2. The colors indicate radio emissions of different strengths.

Astronomers have known about sugar in space for some time, but new research reported last week in the Astrophysical Journal Letters showed that gaseous sugar could exist at extremely low temperatures, as are found in regions on the fringes of the solar system where comets are born.

Here is the full story. Here is the press release.

MP3 blogs

Why not use blogs to become a virtual DJ? The latest blogging trend is to offer MP3 files to your readers, combined with commentary and useful links. The tracks tend to be obscure rather than from mainstream pop, which everybody knows about anyway. Copyright status is often black or grey but so far the marketing has proven useful and these blogs have not been a legal target.

Could this be the future of marketing in the music industry? Here is an article on the phenomenon.

Here is one example of such a music blog.

The bottom line: Why don’t econ bloggers post their classroom and public lectures? Or short answers to public questions of the day? Hmm…

“Do you feel lucky kid?”

Brad DeLong offers a useful chart of the U.S. federal budget deficit, obviously the picture is grim.

All will be well, however, if the growth rate of the economy exceeds the real rate of interest (it is a little more complicated than this; Alex and I still cannot agree on the exact conditions required). In economic parlance, “g > r”. We could then simply grow out of our debt over time, here is some heavy lifting on the topic.

Now what is the chance of this rosy scenario?

My stab says 35 percent. g has exceeded r for a good bit of the last dozen years. But will high rates of productivity growth continue?

I guess a 20 percent chance that some catastrophic event, possibly related to terrorism, will bring the world economy to a crashing halt.

I guess a 20 percent chance that aging demographics will return our high rate of productivity growth to earlier levels.

I guess a 25 percent chance that our high rate of productivity growth will disappear for no discernible reason whatsoever.

That gives us a 35 percent chance of the rosy scenario. I once asked Daniel Drezner, Jane Galt, Alex, and Randall Parker their best guesses at the odds; now that was a fun conversation. But in the meantime, we are playing Russian Roulette with our future.

And if that doesn’t worry you, this article about our failing pension systems will.

Haitian update

Can it get worse? With Haiti the answer is always yes. This is from The Independent:

It now looks certain that more than 2,000 Haitians lost their lives in the flooding that followed Tropical Storm Jeanne last weekend. A similar number drowned in floods in May…simply a light rainstorm that swept away their shanty homes.

That is just the beginning. At least a quarter of a million Haitians face two more coming storms. They have no food and many are still living on rooftops. Human and animal corpses are drifting down the dirty river, which currently provides the only source of drinking water. Starving dogs have been seen tearing off the limbs of human corpses. The morgues are not working and there is risk of a large-scale epidemic. And social cooperation has broken down. The Washington Post reports:

Hungry, thirsty and increasingly desperate residents attacked each other in a panic Thursday to get scarce food and water as workers struggled to bury hundreds of corpses five days after the city was struck by Tropical Storm Jeanne.

To make matters worse, radical deforestation, caused by ill-defined property rights, may make Haiti a virtual desert by the end of the decade. In the 1950s, 25 percent of the country was forest, now it is 2 percent. Floods of this kind will only get worse.

Outside of wartime, Haiti represents new depths in how bad things can get. The current standard of living is well below that of most hunter-gatherer societies. We don’t spend much time studying economies with negative real rates of return; I am sorry to report that developing such a theory is becoming increasing relevant.

The Fable of the Cows

Here is a contrasting story about deforestation:

Do cows improve the view? That is a question which interests the Swiss government, given that it subsidises farmers heavily to graze their cows in the mountains. One justification for the subsidy is that cows eat young trees, and fewer trees mean better vistas of the sort beloved by tourists. But just how much do cows improve the view and where do they provide most value for money?

To help answer these questions, Kai Nagel and his colleagues at the Swiss Federal Institute of Technology, in Zurich, have developed computer models of the Alps and populated them with virtual tourists (or “autonomous agents” in computer-speak) that can wander the electronic landscape. The agents are programmed to behave, as far as possible, like real tourists, and to record their impressions as they go.

Here is the full story. I do not favor the heavy burden of Swiss agricultural subsidies, but it is rarely appreciated how much the “pristine” landscapes of that country owe to careful human planning. Thanks to James Barnett for the pointer.

Proxying Human Capital

One of the most puzzling results in the literature on economic growth is that it is difficult to show that increases in human capital increase economic growth. In regressions, sometimes human capital shows up positive and significant but sometimes it’s not significant, sometimes it’s null and sometimes it’s negative depending on the precise set of countries and time periods examined. (See Tyler’s earlier post for further skepticism on the link between human capital and growth).

A team of economists at the University of Ottawa, working with Statistics Canada, has concluded that the problem may be one of measurement. They argue that literacy scores (i.e. actual skills) might be a better proxy for human capital than the typical measure, years of schooling, and furthermore, literacy scores are not subject to the usual problems related to the comparability of education systems across countries. Their human capital indicators are based on the results of the 1994 International Adult Literacy Survey, as nicely explained by The Economist:

They use the International Adult Literacy Survey, which tested 16-65-year-olds in [1994], to estimate the skills of people in 14 countries entering the workforce at different times between 1960 and 1995. This is achieved by looking at tests of different age cohorts. For example, the literacy levels of people aged [51-59 when tested in 1994] are used to estimate the competencies of 17-25-year-olds in 1960, and hence the human-capital investment that had just been made in the course of that cohort’s education.

The biggest flaw of that study is that the indicators impute levels of literacy to individuals earlier in their lives, without correcting for the adjustement in the quality of human capital that occurs during an individual’s lifetime through learning and human capital depreciation, however, as The Economist notes, “the fact that it finds such a strong correlation between skills and growth gives a significant boost to human-capital theory”. Click here to read the executive summary or click here to read the entire study.

More on what Prediction Markets Mean

Michael’s post on Charles Manski’s paper challenging prediction markets has been widely discussed. Manski’s paper is difficult and a number of people wrote asking me for further explanation. Luckily, Daniel Davies has done some of the heavy lifting. Michael also offers further comments here.

My take: Manski shows that the market price is not, for example, the mean subjective belief of the market participants. But who said it was? The argument of prediction market proponents is that the market price is a good, perhaps the best, predictor of the future event. Manski does not challenge this argument. In particular, Manski does not show (or try to show) that there is an alternative way of aggregating individual information that results in better predictions. In this sense, I think the Manski paper is something of a red herring.

I would not claim, however, that information markets cannot be improved. Movements in the price of oil tell us something about trouble in the Middle East. But the oil market was not designed to elicit information about the Middle East. The information in markets is an accidental byproduct of trading. It would be a real surprise if the rules that make for good oil trading are the same rules that make for good prediction of events in the Middle East. Sundering information markets from trading markets, therefore, is a big advance and one that is likely to lead to better market design for information revelation, perhaps with help from papers like Manski’s (contra Daniel, who argues that to work well information markets must be tied to trading markets).

Addendum: Victor, a former student of Manski’s, at the Dead Parrots Society adds considerable wisdom to the discussion.

Who volunteers the most?

The Norwegians come in a clear first, with 52% of their adult population doing volunteer work in a significant way. The UK and Sweden come in second and third, with 30% and 28% rates of volunteering. Uganda is next with 23% and then the United States with 22%.

Of the cited countries Mexico comes in last with a volunteering rate of 0.1%. Eastern Europe, Egypt, and Japan fare poorly as well. I would like to see follow-up work on whether these low rates are correlated with tight family structures, or whether they simply represent a low rate of cooperation overall. Might a high aggregate level of volunteering be a response to loneliness and lack of community within the family, or are the two forms of cooperation complements?

The information is from Global Civil Society, by Lester Salamon, S. Wojciech Sokolowski, and Associates. Here is the home page of the research project, with links to data as well.

The same volume (p.78) offers a carefully constructed “civil society index,” although for my tastes it does not distinguish enough between private and public sector efforts. The top five countries for civil society are Netherlands, Norway, U.S., Sweden, and the UK; some of the East African nations (Tanzania, Uganda) score surprisingly well. Mexico, Romania, and Pakistan do poorly.

How the Chinese will corrupt Hong Kong cinema

Hong Kong produced many of the coolest movies of the 1980s and 1990s. But we have entered more troubling times:

…the mainland Chinese government passed an initiative called the Cooperative Economic Partnership Agreement. CEPA was basically a bone-toss to various Hong Kong industries–it offers them small tax breaks on their imports to the mainland. But to the Hong Kong film industry, CEPA offered more: the chance for Hong Kong films to be considered “local” (as opposed to foreign) for the purposes of mainland Chinese distribution. This is a big deal, because China imposes limits on foreign films–only about 25 are allowed in each year. On paper, at least, CEPA looks to be a lifesaver for Hong Kong film.

But there’s a catch–a big one–which Pang explained to me when we spoke in his office. “In order to get in with CEPA, one-third of your cast has to be mainland actors, and you have to have a mainland production partner. OK, but then, you have to submit your script to the Chinese censorship guy. And you submit your film after you make it. They have rules: You can’t make movies about ghosts. You can’t have sex. Forget about politics. And bad guys always have to lose; good guys must always win.”

Pang’s Men Suddenly in Black is about four errant husbands who go out on a yearly mission to get themselves laid. They romp through Hong Kong’s brothels and nightclubs, swapping juicy Cantonese double-entendres as they go. I’m shocked when Pang tells me that this film actually got screened in mainland China. “They dubbed it into Mandarin and just wrote new dialogue over the parts that were too heavy. Like when they were in the massage parlor in Mongkok, in the new version they were just someplace waiting for a friend. I couldn’t believe what I was hearing.”

Here is the full story.

Bonuses for good doctors

1. Over the last year, six California health plans have been monitoring the performance of 45,000 doctors. The top performers will split a bonus pool of $40 to $60 million

2. 35 health plans, covering some 30 million patients, now tie doctor bonuses to performance. Preventive care and measure to encourage “patient follow-up” receive special rewards.

3. Bonus-based coverage is expected to double in size over the next year.

4. Some experts predict that pay-for-performance eventually will account for 20% to 30% of what the federal government pays health care providers.

The insurance companies feel that better doctor performance will lower their long-run costs. Many doctors don’t like these incentives. Their financial risk is increased, and they cannot always control how well the patient sticks to the prescribed regimen. Still, if greater medical skill does not show up in the numbers, over a reasonably large sample of patients, why do we spend so much time and money educating doctors?

I predict that as information technology progresses, and performance becomes easier to measure, the American economy will resort to many more bonuses of this type, across many professions.

Here is the story, WSJ subscription and password required.

By the way, regular MR readers will not be surprised to learn who first wrote up the idea of rewarding doctors for superior performance: our ever-inventive colleague Robin Hanson. More recently Harvard economist David Cutler has promoted the idea as well.

For those who care: Here is a thorough AEI estimate of the cost impacts of the Kerry and Bush health care plans. If you are concerned about our fiscal future, this makes for scary reading.

The growing cost of textbooks

As many textbooks now break the $100 barrier, complaints are rising

Some college and public-interest groups charge that the publishing industry is forcing textbook prices higher by introducing unnecessary new editions and packaging books with expensive study materials that not all students want or need. The National Association of College Bookstores says wholesale prices of college textbooks have risen nearly 40 percent in the past five years.

And students are finding that many of the same books are sold overseas at much lower prices.

Note, by the way, that textbook prices have not risen as rapidly as tuition and fees (admittedly the latter is difficult to calculate in real terms, given different way of valuing financial aid). This makes it harder for universities to make a stink.

The economic problem is simple: professors assign a book without worrying much about the cost that students will pay. In fact a pricey book might be a nice way to drive down your enrollment and lower your workload.

But do we really need Congressional hearings on the matter?

How about this for a simple solution? If a professor can lower the price of classroom materials, the university adds one-tenth of the class’s gain to that professor’s salary or research account. Yes in the short run there might be inefficient skimping but in the longer run prices should come down. Some professors, of course, might resort to teaching their classes through blogs. As the subtitle of this blog notes, “Small Ideas for a Much Better World.”

Arnold Kling, a master expositor of economics, has another excellent solution.