Month: September 2007

Advice for Graduate Students

In a video at Freakonomics Steve Levitt talks about the genesis of the idea for his abortion and crime paper with John Donohue.  The key sentence, "and so I spent the first couple of years of research…".

In a unrelated post he also tells us this, "back in grad school, I had carpal tunnel problems from entering too much data…"

Learn from the master, grasshopper.

Social cooperation

People from northern New Jersey are brought up believing this sort of thing happens frequently:

LOGAN, W.Va., Sept. 11 – A 20-year-old woman was held captive for more
than a week in a mobile home, where she was raped, stabbed and tortured
by at least a half-dozen people, the police said…

[There are further truly gruesome details, which I will spare you, but see the link if you must]

Six people, including a mother and her son and a mother and her daughter, have been charged in the case.

The bottom line?

The Brewster family and their trailer has a history of violent crime, the police said.

Sentences to ponder

Overall, a $1 increase in prescription drug spending is associated with a $2.06 reduction in Medicare spending.

Here is the paper.  I’m all for the view that the Bush Administration has been fiscally irresponsible, but I never thought the prescription drug bill was the ideal target.  If there is one category Medicare should be supporting, it is prescription drugs.

On a related note, Robin Hanson believes that half of all medical care spending is a waste (do read the whole thing).  I’m not sure what mechanism will get rid of the bad half, but Robin’s claim deserves to be taken very seriously.

The virtues of inegalitarian American philanthropy

This fascinating article raises the question of whether charity is worthwhile and how charity — "imposing" the desires of the rich on social priorities and wealth redistribution — fits a theory of social justice.  In particular, why should the charity of the wealthy receive such significant tax breaks or even be seen as morally legitimate?  Henry Farrell adds much more.

I am a fan of the tax break for American philanthropy for several reasons:

1. Organized religion is the biggest beneficiary.  Religious organizations help poor people, help shape a unique and vital American ethos, and encourage people to have more children.  The demographic effects alone probably makes this self-financing. ($40 billion in foregone revenue is one estimate.)

2. The arts receive about five percent of U.S. charitable donations.  I am more than willing to stomach this degree of anti-egalitarianism in the non-profit subsidy, and yes we do get more beauty for it.  Furthermore the alternative of more direct government arts funding would not work out well in the relatively Puritan United States, even if you think it has worked well in Europe.

3. Philanthropy for higher education is a major reason for American strength.  Note that American higher education a) benefits the entire world, and b) is a major reason why we are richer than Western Europe (wasn’t there a recent NBER paper on measuring this effect?)  The tax break is a politically acceptable way to subsidize elite intellectual activities — which benefit virtually everyone — yet without having government control those activities.

4. Allowing and encouraging people to give away their money causes them to work harder.  Demonstration effects spread the power of this subsidy by creating social networks which favor philanthropy.

5. The general proliferation of non-profit institutions makes America a much more innovative and diverse place, intellectually and otherwise.

6. Relying so much on private philanthropy chips away at the dangerous attitude that there are clearly defined social priorities to which everyone must pay the same heed.

But do read the NYT article and Henry’s post for very different perspectives.

I thank a loyal MR reader for the NYT pointer.

The Fed’s Dirty Laundry and Yours

Not content to kill people with CAFE standards the Federal government is now messing up our laundry.  So called "energy-efficiency" standards have severely reduced the cleaning ability of new laundry marchines.  Who says?  Here is Consumer Reports:

Not so long ago you could count on most washers to get your clothes
very clean. Not anymore. Our latest tests found huge performance
differences among machines. Some left our stain-soaked swatches nearly
as dirty as they were before washing
. For best results, you’ll have to
spend $900 or more. (italics added)

What
happened? As of January, the U.S. Department of Energy has required
washers to use 21 percent less energy, a goal we wholeheartedly
support. But our tests have found that traditional top-loaders, those
with the familiar center-post agitators, are having a tough time
wringing out those savings without sacrificing cleaning ability, the
main reason you buy a washer. 

I too support the goal of having washers use 21 percent less energy.  Hell, I support the goal of having washers use no energy at all.  Let’s pass a law.

Energy efficiency sounds so nice.  Who could be against efficiency?  Tradeofs, however, cannot be avoided.  Thus, energy-efficiency really means that the government is going to choose how white your shirts are gonna be.

Ironically, the law could well reduce cleanliness and increase energy use.  If the new washers are as bad as Consumer Reports say they are people will just start to wash everything twice.

Addendum 1: Prominent members of a certain political party often promote the theory that "if we make them build it, the savings will come"
but, as we all know, ignoring tradeoffs is a sure sign of discredited crackpot economics.

Addendum 2: CEI suggests you email some virtual underwear to the Secretary of Energy in protest.   

It is worse than you think

Here is Marty Feldstein, through some vias:

[F]inancing additional government spending by an across the board rise
in all marginal tax rates would make the cost per dollar of government
spending equal to $1.76.

These two facts – that the actual revenue is only 57 percent of
the static gain and that the deadweight loss is 76 cents per dollar of
revenue – should be central to any consideration of tax policy.  And yet
they are not.

What is talked about even less is that most government programs are, for better or worse, irreversible investments.  They don’t fade away very easily, even if they have been proven ineffective or harmful.  Do you really think that the Departments of Energy and Education have to pass a market test every year?  In fact government programs, on average, grow almost automatically.

Do you know the literature on irreversible investment and option value?  Under plausible parameter specifications, you need a benefit-cost ratio of 3 to 1 or more before it makes sense to proceed with the irreversible investment.  Otherwise it is better simply to wait.  That’s not 1.3 to 1, that’s 3 to 1.

The main argument for not waiting is simply that the political process cannot do much useful with any new information that is generated by waiting.  But viewed more broadly, that is hardly an argument for proceeding in the first place.

The bottom line: Cram all those numbers together into your noggin’ and keep them there.

Dogs can, monkeys and wolves can’t

The researchers held two containers, one empty and the other
containing food, in front of chimpanzees and dogs. Then they pointed to
the correct container. The canines understood the gesture immediately,
while the apes, genetically much more closely related to humans, were
often perplexed by the pointing finger.

That’s not all. Many dogs were even capable of interpreting the
researcher’s gaze. When the scientists looked at a container, the dogs
would search inside for food, but when they looked in the direction of
the container but focused on a point above it on the wall, the dogs
were able to understand that this was not meant as a sign.

Puppies seem able to do this before they have been socialized with human beings.

Says one researcher: "The great advantage of dogs is that we can study them in their
natural habitat without any great effort," explains Adám Miklósi.

Here is the full story, hat tip to Mark Thoma.

Inner Economist podcast

By me (who else?), interviewed by the ever-acute Russ Roberts (who else?), get it here

Among other things, I let on which is my favorite art museum and why, and what is wrong with the National Gallery of Art.  And how I have rediscovered my Austrian subjectivist roots.  And which remark in the book I meant as a joke, but everyone took seriously. 

Get the book here.

The future of macroeconomics

Several months ago I noted that a virtual world, Eve Online, had hired a real economist.  Here is his first report.  What makes virtual worlds important for economics is that for the first time ever, macro-economists will be able to do experiments.  I predict that we will see some very interesting experiments in the near future.  In the meantime here is an interesting bit from the report – the laws of supply of demand work in many worlds. 

EVE consists of more than 5000 solar systems in 64 regions. The solar
systems are connected in a complex web allowing for goods to be moved
from one end in the Universe to another. Pilots have to be careful
because in low sec and zero-zero security zones there is always the
danger of being attacked by gangs of pirates looking for easy prey….

EVE is so large it is difficult for anyone to grasp what is going on
in all the regions at any given time. Yet the markets seem to be very
efficient at distributing information resulting in symmetric prices
throughout Empire space (and even further). This is clearly visible in
figure 11 which shows the price for zydrine in three different Empire
regions.

Figure11small

Examining these time series in more detail reveals the price
difference between regions is declining over time and price
fluctuations within regions are also decreasing. This can be seen as
evidence for increased efficiency in arbitrage trading over time
resulting in symmetric prices and an overall more efficient market.

Thanks to Ambrose for the pointer.

Addendum: Be sure to check the comments for insightful details from Mike K., solarjetman and others. 

Cool It, by Bjorn Lomborg

That’s Bjorn Lomborg’s latest book on global warming.  He has good arguments against the exaggerations of others, so this book is worth reading.  I cannot, however, agree with one of his central claims, namely that the most serious economic research favors only mild remedies or sees the problem as only a moderate one.   

I would instead claim the following:

1. Policy recommendations are extremely sensitive to the choice of discount rate, and economists do not agree on this issue.  Furthermore most economists do not even know enough moral philosophy to understand the issues involved (and the philosophers don’t understand enough economics), so there is no coherent consensus one way or the other.

2. The most current economists’ word is from Martin Weitzman; he argues that the very high costs of the worst-case scenarios suggest an insurance-based case for significant worry, more worry than Lomborg suggests.  A Salon review notes:

Harvard’s Weitzman puts the current concerns of many economists
clearly. Based on the findings of the U.N. climate panel, he notes that
with roughly 3 percent probability, "we will [live in] a terra
incognita biosphere within a hundred years whose mass species
extinctions, radical alterations of natural environments, and other
extreme outdoor consequences of a different planet will have been
triggered by a geologically-instantaneous temperature change that is
significantly larger than what separates us now from past ice ages."

3. We spend too much time wondering about what is "most believable" and not enough energy worrying about the expected value of pending losses.  The major critical reviews all nail Lomborg for neglecting this point.  That said, the speed with which the negative reviews of the book move to the extreme cases is itself noteworthy, and it does not exactly correspond to the image presented to the public.

4. Given that the value of risk is context-specific, economists are bad at taking the value of insurance from market data in one setting, and then transplanting that estimate to another setting.

5. The strongest argument against significant action is not from cost-benefit analysis in the narrow sense, but simply that we are not very good at producing international public goods.  Especially when it comes to extended, intertemporal collective action problems directed against small probability events, with unclear periodic feedback, and dealing with the Chinese and the Indians, who feel they have the right to pollute as much as we did, and also with the not-nearly-as-cooperative-as-they-might-sound Europeans (how’s that sentence for a mouthful?). 

This argument sounds immoral and indeed perhaps is immoral — "we’re ruining things for others, yet if we tried to fix things we would ruin the fixing, so let’s do nothing."  Yet I do not think this issue should be disregarded.  If I can’t open up my computer, dissemble it, and then put it back together again, surely my repair plans should take that fact into account.

Here is a Jonathan Adler review of the book.  Here is a very critical Tim Flannery review.  Here are critical remarks from Chris Mooney.  Here is the Salon review.

Remember that line from Dirty Harry?:  "Do you feel lucky, kid?"

The economics of polygamy, continued

(Some) economists, every now and then, look for reasons why polygamy cannot be efficient.  How about this?:

Over the last six years, hundreds of teenage boys have been expelled
or felt compelled to leave the polygamous settlement that straddles
Colorado City, Ariz., and Hildale, Utah.

Disobedience is
usually the reason given for expulsion, but former sect members and
state legal officials say the exodus of males – the expulsion of girls
is rarer – also remedies a huge imbalance in the marriage market.
Members of the sect believe that to reach eternal salvation, men are
supposed to have at least three wives.

Here is the longer article, which has several interesting parts.

It’s monetary policy, not a morality play

Here is my now-on-Sundays NYT column, on the recent subprime crisis.  Excerpt:

Nonetheless, Fed watchers should resist the tendency to put all
events into a simple or a morally plausible narrative. Monetary policy
is a largely technical subject, and its ups and downs don’t usually fit
into the kinds of emotion-laden stories that human beings apply to
daily life. The “us versus them” tag registers in human memory, but
monetary policy is not always or even usually about moral issues. As
Freud famously noted, sometimes a cigar is just a cigar.

Financial
market news, which is by nature unpredictable, suffers from distortion
when it is crammed into the form of a simple story. Unlike most
well-structured narratives, the zigs and zags of daily profit and loss
defy simple categorization in terms of moral precepts.

In the case of subprime mortgages, many investors did not foresee
the risk of collateralized debt securities. In response to this crisis,
the Fed has been trying to keep a steady hand and prevent a credit
crunch. We don’t yet know how well the Fed has succeeded, or how well
it could have done in the first place. And the storm has not yet fully
passed.

Of course, such an account of recent financial history
sounds mundane and offers less human conflict. It’s less like the
stories that people have gossiped about for thousands of years and thus
will have less traction, even if it is a better guide to monetary
policy issues.

Here is commentary from Mark Thoma; he believes I should embrace government bail-outs more, without moralizing against them or citing moral hazard so much. 

I might add that this desire to fit everything into a story lies behind recent blogosphere discussions of supply-side economics.  Many Democrats need a story of the following form: "The Republican Party makes decisions in a systematically worse way — much worse way — than do the Democrats."  (Otherwise they might be led to favor restrictions on state power, because Republican rule has not been pretty.)  While I don’t assign p = 0 to this possibility (e.g., Clinton did govern better than Bush has), I think most of the Democratic bloggers give it a far higher p than it deserves, and they retreat into moral strictures to "be more progressive" when faced with contrary evidence.  So a description like "the Republicans have complex motives, not all of which are noble, and end up making lots of mistakes" doesn’t, for them, sound different enough from the Democrats (whom they know) for comfort.

Fast, fast, fast

I ordered a book from Amazon yesterday morning.  A few hours later I’m sitting at my computer and there is a knock at the door.  I open the door and this girl is standing there and she says "Are you Alex Tabarrok?"  I say yes and she hands me the book.  My jaw just about hits the floor.  I’m totally confused.  The girl runs away laughing.  Only later do I figure it out.  I ordered from Amazon Marketplace.  The seller just happened to live nearby and she brought the book over.  Pretty cool.

Self-negating admissions

And call me naive, but I also think that Mugabe would not have pursued
his policies for this long if he had a better grasp of debt dynamics. 

That’s Dani Rodrik

You all can debate Mugabe if you want, I’m interested in the notion of a self-negating admission.  By writing "…call me naive" Rodrik is showing a level of self-awareness which seems to be signaling he is not naive.  A more direct example of such a construct would be "Call me unwilling to accept outside labels, but…" — the mere act of writing the statement is showing a willingness to accept at least one outside label (namely: unwilling to accept outside labels), which in turn means the writer cannot be unwilling to accept all such labels.

Call me unwilling to use self-negating admissions, but I wonder why writing "Call me naive…" should be more effective than simply writing "I am not naive."  Or for that matter writing "I am naive."  (What is the influence-maximizing claim to make about one’s own naivete?)

Don’t forget Dani Rodrik has a new book coming out: One Economics, Many Recipes.  I don’t agree with all of it, but it is a valuable correction to the hubris of many other writers.