Month: March 2007

Is Freakonomics Ruining Economics?

Writing in the April 02 issue of the New Republic, Noam Scheiber
argues Yes.  The article is no screed – it’s
well informed about economics and the state of the profession.  Unfortunately, it’s gated but do try find a copy somewhere.  This bit gives some of the flavor.

Several years after his paper on schooling, Angrist noticed
that the Armed Forces Qualifying Test had been misgraded for a few
years in the late ’70s. This had opened the doors to thousands of
subpar applicants and allowed Angrist to compare the lucky
underachievers with the people rejected once the glitch got corrected,
thereby isolating the impact of military service on wages. The
practical effect was to send the grad students scrambling to find other
instances in which life-altering decisions had been handed down
incorrectly. In 2000, a Harvard professor named Caroline Hoxby
discovered that streams had often formed boundaries to
nineteenth-century school districts, so that cities with more streams
historically had more school districts, even if some districts had
later merged. The discovery allowed Hoxby to show that competition
between districts improved schools. It also prompted the Harvard
students to wrack their brains for more ways in which arbitrary
boundaries had placed similar people in different circumstances.

Every few weeks, when a student would stumble onto some new
test-grading error or fatefully drawn boundary–what economists call
"instruments"–word of the discovery would rocket through the
department. The discoverer would become instantly, if momentarily,
famous, like the holder of a winning card at a Bingo hall, and
inspiring the same mix of reverence and jealousy. A typical
conversation around the snack machine at the National Bureau of
Economic Research, where many Harvard students had cubicles, went
something like: Hey, did you hear that so-and-so found this crazy
example of excess tax refunds in western Manitoba in the early ’60s? At
which point the other would reply, Uh, no, wow, that’s, uh, great, and
then scamper back to his desk to brainstorm for some similar quirk of
public policy. At an age when most people brood that life is too random
and arbitrary, these people’s biggest complaint was that it wasn’t
random and arbitrary enough.

In retrospect, I have come to see this as the moment I realized
economics had a cleverness problem. How was it that these students, who
had arrived at the country’s premier economics department intending to
solve the world’s most intractable problems–poverty, inequality,
unemployment–had ended up facing off in what sometimes felt like an
academic parlor game?

I think Scheiber is off in a few ways.  First, he conflates methods and
questions.  It’s true that clean identification is often found with
quirky experiments but a quirky experiment does not necessarily imply a
quirky question.  Hoxby’s work on education, mentioned above, is asking
a big question about the effect of competition on schools.  Levitt’s work
on crime uses quirks in police assignment as do those of his "pale imitators" (like those
guys that used terror alert levels
to estimate the effectiveness of police on the street.  Ha, ha!) but we
spend well over 100 billion dollars a year combating crime so it’s
pretty damn important to know how well police, prisons and punishment
work.  Scheiber criticizes Emily Oster’s work but his criticism has
nothing to do with his thesis, Oster’s work on AIDS, missing women and
so forth is on big questions. It’s possible to be clever and to think

The second problem is to think that if only people did less Freakonomics they
would do more big think economics.  If only it were so.  The truth is
that even today most of economics is a wasteland of boring papers on
profoundly uninteresting questions.  The choice is not Levitt v.
Heckman it’s Levitt and Heckman (and many others like Buchanan who neither Levitt nor Heckman might appreciate) versus a huge number of non-entities (many
highly paid and famous) who answer trivial questions poorly and do it
without even the courtesy of offering some entertainment on the

Addendum: Tyler has the first comment.


The new Christopher Buckley novel Boomsday concerns a blogger — Cassandra — who proposes that a cash-strapped, demographically-burdened society pay old people to do themselves in.  The elderly are to kill themselves for tax breaks.  In Swiftian fashion we can improve this idea by convexifying the choice.  Let’s make it a risk and subsidize sky-diving for the non-working elderly. 

There are two positive externalities from the resulting deaths; first, a bequest of material wealth passes to other individuals, second, the deadweight loss of taxation falls.  The negative externality from the death falls upon other family members and friends; whether the would-be victim internalized those costs in the first place is difficult to calculate.  Have I mentioned that economics has few good ways of modeling two-way altruism and keeping the standard welfare theorems intact?  Distribution and efficiency are no longer separate, but hey that’s the real world.

Here is a New York Times review.  Buckley is one of the most entertaining public speakers I have heard, hire or go hear him if you can.

The French economy and health care system

The French economy may be messed up in many ways, but at least you can’t complain about their health care system.

So wrote one MR commentator, that is my paraphrase I can’t find the exact quotation. 

It is worth noting that the French health care system and the failings of the French economy are closely linked.  The French economy is notorious for its resource immobility.  It is hard to switch sectors, hard to switch jobs, and hard to switch regions.  The upshot is that when government taxes factors of production, or caps the price they command, those factors usually have nowhere else to go other than to consume more leisure.  This makes it easier to cap health care prices and doctors’ wages: everything is frozen in place. 

The more mobile American economy would find it much harder to tax skilled labor and doctors.  For related reasons, American transfer programs tend to be more expensive per
dollar of redistribution, less easily based on the provision of quality services at low prices, and they require more complex bells and
whistles.  NB: This is an argument for not trying to copy Europe, not an argument for trying to copy Europe.  Call it a cost of resource mobility if you wish.

The more a European government takes advantage of immobility, the harder it is to break a vicious economic circle.  Instituting French factor mobility, even were it possible politically, would cause low-price, low-wage sectors to decline in quality.  Factors would flee to more entrepreneurial sectors.  In the meantime, pushing everyone into more leisure lowers wealth and makes it harder to finance a "grand bargain" of palatable economic reforms.  The economy will remain stuck, stuck, stuck.  Some sectors will enjoy a captive audience of skilled labor.

I have spent several months of my life in France, and I do understand that life there is truly splendid in many ways.  But it is hard for me to believe that the French system — viewed as the organic whole it is — is the best way forward for the United States.

Amazon and Tivo

I have long been skeptical of the potential for movie downloads but Amazon and Tivo have made a huge step forward in solving the major problems.  I reported earlier that Tivo connects to a home wireless system which means that I can program Tivo from work.  Yesterday, I rented a movie from Amazon.  The movie downloaded automatically via my home computer to Tivo.  Downloading still takes hours so it’s not on-demand service but I rented in the morning and watched the movie that night and I watched on television not some dinky computer screen.  The picture quality was good, albeit not as high as DVD.  Dramas, comedies and anything you would have watched on cable TV anyway are fine – save the action flicks for DVD.  What impressed me most was that the system worked flawlessly the first time, without any computer hack work on my part.

Bravo Tivo, Bravo Amazon.

Don’t get stuck in that kindness rut

…conventional wisdom suggests keeping a daily gratitude journal.  But one study revealed that those who had been assigned to do that ended up less happy than those who had to count their blessings only once a week.  Lyubomirsky therefore confirmed her hunch that timing is important.  So is variety, it turned out: a kindness intervention found that participants told to vary their good deeds ended up happier than those forced into a kindness rut.

Here is more.

Department of Why Not

In England, this new cognitive approach to psychosis and the efforts of Hearing Voices Network are independent of each other, and are sometimes at odds.  H.V.N.’s leading members, for instance, frequently criticize even sympathetic academic researchers for being insufficiently political.  Yet both approaches share a similar purpose in seeking to place voice-hearing within the continuum of normal human experience – one, in order to better treat patients, the other, out of a firm conviction that hearing voices need not interfere with leading an otherwise “normal” life. [emphasis added]

Of course that refers to hearing voices that aren’t actually there.  Here is the full and fascinating story.  It advises people who wish to talk back to the voices to carry around cell phones.

How extreme must a single weirdness be, before a person can’t much function in the real world or be counted as "normal"?

Credit Snobs II

The volte-face in this post by Robert Reich is a real howler.

When the Fed decides to fight inflation by raising interest rates and
cooling the economy, it’s the poor who are the first to be drafted into
the inflation fight because their jobs are the most tenuous, and
they’re the first to lose them. When the Fed decides to ease up and
reduce rates, it’s the poor who are among the first to get the new jobs
because employers who are most likely to hire at the start are small
service businesses offering jobs at the bottom rungs of the wage scale.

I might not put it that way but nothing crazy so far.  He continues:

But the Fed affects the poor in another way, too. It determines their
access to credit. And here as well, the Fed’s decisions can either be a
great boon to poorer Americans or a huge curse, depending on how
responsibly the Fed manages the credit markets.

I agree.  So where do you think the argument is going from here?  He’s going to make the point that when the Fed reduces rates that helps the poor to get credit and a too quick tightening could increase unemployment and create a credit crunch, right?  Nope.

In this respect, it’s done a lousy job in recent years. In the early
2000s, rates were so low that banks didn’t know what to do with all the
extra money they had on hand. But instead of keeping an eye on bank
lending standards, the Fed looked the other way. The result: Credit
standards were disregarded in a tidal wave of sub-prime lending to the
poor home buyers…

Ouch, that one gave me whiplash.  The Fed has done the poor a disservice by looking the other way while the poor got loans at really low rates of interest.  Thus, high interest rates are bad for the poor because they can’t get jobs and low interest rates are bad for the poor because they borrow too much money.

Reich argues this way, of course, because he thinks that the poor can’t handle their money.  I’ll add Reich to the list of credit snobs.

H/T to Steven Bass at Trivial Reasons.

P.S.  Person 1, Dave 0


Safety nets

From the loyal:

Safety nets, what kind (if any) is desirable.

Yes, we should have a safety net.  This is a huge topic, but here are a few select points:

1. The more time a person has spent working in private philanthropy, the less likely he or she is to think that private charity can substitute for the government’s safety net.

2. It remains a puzzle why we don’t have more insurance for long-term risks to health and income, but we don’t.  In the meantime we have to assume institutional failure.

3. I am a fan of David Beito’s Tocquevillean work on workingman’s societies and private club insurance in early 20th century America.  But it is a tale of how insurance institutions changed over the course of a century, and not a new recipe for how market completeness was on its way until government botched it.

4. Some societies, such as in East Asia, use the family to pick up a greater share of income and health risks.  I doubt if the highly mobile United States could do the same, but even so this option is costly.  Most of all, the welfare state liberates the productive and the creative from their sometimes burdensome family ties.  The welfare state is the Randian’s secret dream, and that is what clinches the case for a government safety net.

5. I’ll invoke an argument from authority for my libertarian readers and note that both Hayek and Friedman favored a governmental safety net.

6. A safety net (strict Asian families aside) is probably a prerequisite for a well-functioning capitalist democracy, even if its curative powers are sometimes overrated.

But on the other side of the debate, we are all going to die.  Nasty outcomes await us, no matter how much is spent on a safety net.  The "You can’t let that happen to a human being" posturing isn’t especially helpful.  We cannot rely on a safety net to remedy every human tragedy, but if society is rich enough, let’s do some safety net.

#34 in a series of 50.

What is wrong with the World Bank?

I am a fan of Sebastian Mallaby’s The World’s Banker, a biography of Jim Wolfensohn’s tenure at the World Bank.  Jeffrey Hooke’s The Dinosaur Among Us: The World Bank and its Path to Extinction is the next excellent book on this institution.  Do you want to know exactly why the Bank doesn’t do better, explained in language of property rights and incentives?

I read Hooke as placing the final blame on the very active role of the Board in the Bank’s regular operations.  The incentive is to have the Bank lend lots and create contracts which funnel money back to corporate interests in the U.S. and Western Europe.  As a result Bank loans don’t embody much accountability and the loan or aid recipients can game the system and turn it toward their own political ends and away from growth enhancement.

Contrary to what the title of the book might imply, Hooke wishes to reform rather than eliminate the Bank.  This is not "one of those libertarian rants," and it can be read with profit by all.  Hooke has spent six years working at the Bank and he knows his material very well.

And if you think, as I do, that most books should not exceed 100 pages, you will like this one all the more.  Recommended.

My favorite things German: J.S. Bach

One reader requested "My Favorite Things German" for weeks (possible, but yikes), instead he’ll get selected tidbits, today is J.S. Bach.

1. Organ music: I favor the Trio Sonatas, most of all by Christopher Herrick.  After that, buy any collection by Herrick or Peter Hurford.

2. Brandenburg Concerti: I don’t like most recordings of these; they either sound like sewing machines or they are whiny.  But both Felix Prohaska or Otto Klemperer are supremely musical with these pieces.

3. Keyboard music: Go for piano not harpischord.  For Well-Tempered Klavier get the dreamy Samuel Feinberg or Richter, for the English Suite in A Minor get Glenn Gould, for the Partitas get Glenn Gould, for the Goldbergs get both Gould recordings.  Best of all is the Art of the Fugue, for piano, by Grigory Sokolov.

4. B Minor Mass: Gardiner or Herreweghe.

5. St. Matthew’s Passion: Klemperer (the best voices), Suzuki (all-Japanese, and fantastic), or Herreweghe.

6. Solo Violin music: Get the second Nathan Milstein set, the stereo recording.  Perlman’s version is technically perfect but doesn’t sound like a real violin.

7. Solo Cello Suites: Rostropovich is romantic, Starker is analytical, and Navarra is underrated.

That, in my view, is the truly essential Bach.  I’ve never developed the same love for his Cantatas, too many of them were churned out or recycled.  They were better to buy on LP, when you could get one excellent cantata on each side.  Most of the available CD cantata collections contain a fair amount of chaff.

#33 out of 50.

French health care

Many people (Jon Chait also) argue that France has the best health care system in the world.

As of 2003, the average income of a French physician was estimated at $55,000; in the U.S. the comparable number was $194,000.

A visit to a GP’s office (half of the doctors in France are GPs) had a reimbursement capped at 20 Euros, again circa 2003.  It is not hard to pay ten times that amount in the U.S.

Did I mention that health care is a labor-intensive industry?

This is the major reason why French health care is cheaper than U.S. health care.  France also spends less per unit on other inputs, such as prescription drugs.

Note that France still spends more than all or most other European systems, namely about 11 percent of gdp. 

When comparing health care outcomes, France only does slightly better than many Mediterranean countries with obviously non-enviable health care systems.  It is not obvious that France does better on health care outcomes than Japan, again a country with non-enviable health care institutions.  In other words, France spends lots of money making people feel good about their health care processes, with only very marginal measured health care results.  The United States also spends money on customer comfort, albeit in a more expensive and less egalitarian way.

It is easy to argue that the French system is better than that of the United States.  But a defender of the French system must, in reality, fight "a war on two fronts," to paraphrase Derek Parfit.  The French system does not, by the standards which have been erected in the debate, appear noticeably better than many other cheaper systems around the world.  It does spend more money producing "customer satisfaction" and papering over some of the obvious inhumanities of the cheaper systems.  That’s why it is easy to hold up as a model.

The disconnect arises because single-payer defenders wish to use international data to compare health care systems — France > U.S. — while pushing under the table the more radical (apparent) implications of that data, namely that France is spending far too much as well.

If we are going to be umm…transitive here, let’s have the debate where it belongs: expensive health care with marginal impact on measured health outcomes vs. saving lots of money and giving people much less in the way of health care services.  I do think there is a good case for the latter, though looking toward the future I would myself prefer the former. 

I might add I do favor taking action to lower doctors’ wages in the United States.  Letting in a greater number of qualified foreign doctors is step number one.  But if we’re going to criticize the U.S. system for its costliness, let’s put the blame where it belongs.