Month: January 2009

Markets in everything, hedonic pricing edition parts I and II

Burger King recently introduced a Facebook app called Whopper Sacrifice that allows users to delete ten of their friends in exchange for a Whopper sandwich. Watch the app in action.

Here is much more and thanks to Alex Sheets for the pointer. It also gives you one way of implicitly valuing what Facebook is worth.  For another recent exchange, get this example, courtesy of Damon Richardson:

First-time vendor Pasang Sherpa said when the
Metropolitan Museum of Art auctioned off the sales rights to two of its
corners, he decided to pay an additional $81,701 to sell his hot dogs
near its north-side entrance, the New York Post said Wednesday.

The cost increase, which represents thousands of hot dogs in
Sherpa's world, was acceptable for the vendor despite only being 100
feet away from the site's south entrance.

"That (north) side is more busy," Sherpa said of his new sales
locale at the tourism site that more than 5 million people visit each

Traffic enforcement makes the roads safer

In case you were wondering, Michael Makowsky and Thomas Stratmann report:

Traffic accidents are one of the leading causes of injury and death in the U.S. The role of traffic law enforcement in the reduction of accidents has been studied by relatively few papers and with mixed results that may be due to a simultaneity problem. Traffic law enforcement may reduce accidents, but police are also likely to be stricter in accident-prone areas. We use municipal budgetary shortfalls as an instrumental variable to identify the effect of traffic citations on traffic safety and show that budgetary shortfalls lead to more frequent issuance of tickets to drivers. Using a panel of municipalities in Massachusetts, we show that increases in the number of tickets written reduce motor vehicle accidents and accident related injuries, and that tickets issued to younger drivers have a larger effect in reducing accidents. The findings show that failure to control for endogeneity results in a significant underestimation of the positive impact of law enforcement on traffic safety.

Here is the paper.

What I’ve been reading

1. The Aztec World, by Elizabeth Brumfiel and Gary Feinman.  Long-time MR readers will know Aztec history is a special interest of mine.  This book, a companion volume to the Aztec exhibit from Chicago’s Field Museum, is perhaps the best introduction to the Aztecs to date.

2. The Suspicions of Mr. Whicher: A Shocking Murder and the Undoing of a Great Victorian Detective. This achieved (justified) rave reviews in the UK but it has hardly made a dent in the U.S. market.  It is non-fiction but written in a hybrid form and often feels more like a novel.

3. The Overflowing Brain: Information Overload and the Limits of Working Memory, by Torkel Klingberg.  When push comes to shove, the author fails to establish his major thesis.  Still, this book is way above average for how seriously it treats the actual science behind its argument.  I learned a great deal from it.

4. Somewhere Towards the End, by Diana Athill.  A scary and effective memoir about how Athill, a famous editor, dealt with aging and the end of her sex life.

5. Not John Steinbeck.

Here are predicted hot reads for 2009

Chris Blattman on randomized control trials

As usual, he is wise:

Yes, the randomized evaluation remains the "gold standard" for
important (albeit narrow) questions. Social science, however, has a
much bigger toolbox for a much broader (and often more interesting)
realm of inquiry. If you want to know the effects of small binary
treatments, you are in business. If you find any other question in the
world interesting, you have some more work to do. Dani Rodrik has made
a similar point here.

get me wrong: a large number of my projects are randomized control
trials. They are eminently worth pursuing. But to be honest, uncovering
the causes of effects excites me more than measuring the effects of
causes. An evaluation masters the second, but only hints at the first.
The hardest and most rewarding work is the theoretical and
investigative work that comes with uncovering the underlying rhythms
and rules of human behavior.

…If your goal is to improve the delivery of aid, and truly advance
development, many more skills and knowledge are involved than the
randomized evaluation. See here for
more. But in short: a well-identified causal impact that arrives two
years after the program does not performance management make.

Chris also points us toward a new and excellent blog, Obama in Kenya.

Obama at GMU

President-Elect Obama just spoke at GMU.  I was fortunate to have an invite.  He had a number of good lines including as good a one-line explanation and justification for Keynesian economics as you will find:

Only government can break the cycle that is crippling
our economy, where a lack of spending leads to lost jobs, which leads
to even less spending, where an inability to lend and borrow stops
growth and leads to even less credit.

He emphasized that jobs would be created in the private sector and saved in the public sector.  Nicely put.

His goal is "not to create a slew of new government programs, but a foundation for long-term economic growth."  Very good.

In terms of long-term investment, I was pleased to see him mention the smart grid in particular, an idea I pushed as recently as today.

Overall, my view is that the Obama fiscal stimulus plan is evolving in a sensible direction.  As promised, he is a pragmatist who is listening to a wide variety of well-qualified, centrist economists.

A substantial fraction of the fiscal stimulus is tax cuts, a substantial fraction is preventing state and local funding from plummeting, a modest but reasonable fraction is on maintenance and improvements of old infrastructure (projects that are mostly already on the books), and a modest (but increasing over time) fraction is on longer term projects which are likely to pay off in future returns.

At present, I see very little in the way of Keynesian pyramid building.  Nor do I see an attempt to grab the revolutionary moment by the horns and push the U.S. in a new direction.  Thus, thankfully, No New Deal. There is plenty of uncertainty in the economy but it’s not regime uncertainty.

Addendum:  Do note that I am
evaluating Obama relative to what we can expect given the situation and
our current politics and also relative to say the New Deal.

The Show So Far

MR has many new readers, especially since the financial crisis, so I thought I would offer this brief guide to what we are all about.  Plus one of the readers, under "requests," asked for a foundation statement for this blog.  Here, in six easy steps, is "The Show So Far":

1. Luring Alex to lunch.

2. A "public choice" and indeed Straussian reading of Star Wars.

3. Alex ponders immortality and it changes his life.

4. When to say "I Love You".

5. The economics of relativity.

6. Alex explains the difference between Tyler and Alex.

For this New Year I remain thankful to have what I consider the very best readers in the world.

The Smart Grid and the Fiscal Stimulus

Earlier I pointed out that a) regulatory problems have prevented investment in the smart grid and b) subsidies to wind power in some states have driven prices to negative levels (yes, people are being paid to consume power).  These two problems are closely related.

The states control whether transmission lines get built but states with a lot of wind energy don’t have an incentive to build transmission lines to move the power out.  In effect, states with a lot of wind energy are preventing exports which lowers their own internal price of electricity but raises everyone else’s price and reduces the use of wind power. 

A new article in Technology Review makes the point. 

One effect of these regulatory moves was that companies had less incentive to invest in the grid than in new power plants, and no one had a clear responsibility for expanding the transmission infrastructure. At the same time, the more open market meant that producers began trying to sell power to regions farther away, placing new burdens on existing connections between networks. The result has been a national transmission shortage….

[Many states have a lot of wind potential]…But the existing transmission system doesn’t have the capacity to get that much electricity to the parts of the country that need it. In many of the states in the [wind] region, there’s no particular urgency to move things along, since each has all the power it needs. So most of the applications for grid connections are simply waiting in line, some stymied by the lack of infrastructure and others by bureaucratic and regulatory delays.

Hat tip to Andrew Samwick who writes:

The federal government is the entity that can resolve that failure, by taking the lead and making those expansions itself.  It can recoup its costs by levying a fee on subsequent power consumed through the grid.  I hope the fact that we need this investment isn’t a reason for it to be excluded from plans for fiscal stimulus.

Cass Sunstein to head OIRA

Mr. Obama also was poised to name Cass R. Sunstein,
an American legal scholar, to an existing White House post as the
administrator of the Office of Information and Regulatory Affairs. A
transition official said late Wednesday that Mr. Sunstein would oversee
government regulations and devise new approaches for government

Here is the article.  Here is Wikipedia on Sunstein; he is the co-author of Nudge and a very well-known law and economics scholar.  He is now married to Samantha Power and he once had a pet Rhodesian Ridgeback.  I have had many interactions with Cass Sunstein and he has been unfailing intelligent and gracious.

If you wish (and you are warned), here is a left-wing critique of Cass Sunstein.

Department of !

“We expect that discussion around entitlements will be a part, a
central part” of efforts to curb federal spending, Mr. Obama said at a
news conference. By February, he said, “we will have more to say about
how we’re going to approach entitlement spending.”

I am no expert at reading the political tea leaves, but given the political costs involved, it is unlikely he said this as a mere feint.

Fly by the minute

Taking a cue from the cellphone industry, an upstart South African
airline is selling flights by the minute and allowing customers to buy
tickets and book flights via text message.

Airtime Airlines takes to
the sky later this month, offering three flights a day from its base in
Durban to Johannesburg, Cape Town and Port Elizabeth. Passengers
purchase minutes much like they would for a prepaid cell phone and
redeem them for a ticket. Fees are assessed according to the length of
the flight – say, 75 minutes for the run from Durban to Johannesburg –
and could save as much as half of what competing airlines charge.

Here is the article.  It’s not yet clear whether they have managed to lease planes, but here is another part of the business plan:

The cost for Airtime minutes can fluctuate, presumably according to
promotions and market factors, so topping off
becomes an exercise comparable to fuel hedging. Buy a big block of
minutes when you think they’re at their cheapest and you look smart,
unless the price drops again the next day. Then again, it might go up.
The price recently rose from 3 Rand to 5 Rand, meaning the cost of a
round-trip flight from Durban to Cape Town climbed from about 750 Rand
($81) to 1,250 Rand (about $134). Still that’s cheaper than the $200 it
would cost on South African Airlines.

But can you sell minutes short?  I thank Christopher Balding for the pointer.

The new iTunes pricing

Instead, the majority of songs will drop to 69 cents beginning in
April, while the biggest hits and newest songs will go for $1.29.
Others that are moderately popular will remain at 99 cents.

DRM will change too, here is much more information.  This is first a way to raise prices, yet without the consumer seeing nothing in return.  But it’s also a sign of the maturing of the market.  The most popular songs will be less of a loss leader for the hardware.  Relaxation of DRM suggests that Apple fears long-run competition from less regulated sources, including CD burning from friends.  Most of all this is a sign that the music business continues to experience economic troubles.  You could call it the "do anything to increase revenue now" strategy.  For 30 cents a song you can make your entire current collection DRM-free.

By the way, on DRM and related issues, I recommend the new James Boyle book Public Domain.  The book is free and on-line here.  You can buy it from Amazon here.

Cancer and Statistical Illusion

The cover of this month’s Wired promises "The Truth About Cancer" but the article inside is a tissue of misleading statistics and faulty logic.  The article begins with fancy graphics telling us "If we find cancer early, 90 percent survive" but "If we find cancer late, 10 percent survive." And this:

Find the disease early "and the odds of survival approach 90 percent…This reality would seem to make a plain case for shifting resources toward patients with a 90 percent, rather than a 10 or 20 percent, chance of survival."

Thus, the opening block of text commands, "Scientists should stop trying to cure cancer and start focusing on finding it early.  It’s the smart way to cheat death." 

The fallacy in all of this is painfully easy to spot.  If we measure survival, which these studies do, with a 5 or 10 year survival rate then obviously people whose cancers are detected early will survival longer than people whose cancers are detected late.

The key question is whether people who are treated early survive longer than people whose cancers are detected early but who are not treated.  In Thomas Goetz’s long article there is not a single piece of evidence which demonstrates that this is true.  Indeed, quite the opposite.  About 9 pages into the article, after the jump, we find this about CT scans for lung cancer:

As with the Action Project, these studies found that, yes, CT scans detected a huge number of early cancers–10 times as many as they would expect to find without scanning. In that regard, the scans did their job as a screening test. And as expected, the number of surgeries based on those diagnoses jumped. But when Bach looked at the resulting mortality rates, he found essentially no difference between those who received a CT scan and those who had not. Despite the additional surgeries, just as many people were dying as before.

Nowhere does the author mentions that this finding invalidates just about everything he has told us in the first eight pages.

Addendum 1 : Do note that I have nothing against early detection and I am not claiming that it never works.  My problem is with misleading statistical analysis.

Addendum 2: Careful readers will note that this is an almost perfect example of the economicitis fallacy that I blogged about late last year.