Month: August 2009

Edifying editing

by  Tyler Cowen in

One well-known irate author, after a rejection, wrote me “Who are you to reject my paper?” The answer, which I didn’t send, is “I’m the editor.”

That's from R. Preston McAfee, in a short and excellent piece he wrote on what makes for a good journal editor.

I enjoyed the section which started with this sentence:

There are authors who attempt to annoy the editor.

This part was good too:

Pretty much 100% of kooks are theorists; you won’t meet a, say, physicist or physician with a Great Economic Idea that involved running regressions or doing lab experiments, although occasionally there is a table illustrating a correlation between some economic variable like lawyers or fluoridated water and per capita GDP.

And this:

The essential mystery of editing is why the reports I receive as an editor are so much better than the reports I receive as an author.

For the pointer I thank Chris F. Masse.

Pharmaceutical R&D

by  Alex Tabarrok in

In an over-the-top post Megan McArdle goes all Xena warrior princess on Ezra Klein and Jerry Avorn.  I especially liked this bit: Here's Avorn on why we need not worry that regulating drug prices will reduce innovation:

There are a couple reasons that this is a specious argument. One is that according to their filings with the SEC, the drug companies only spend about 15 cents of every dollar on research and development. That's compared to more than 30 cents in administration and marketing and more than 20 cents on shareholder equity. As an investment in R&D, I think any venture capitalist would say a company spending 15 percent on research is not a robust innovation engine.

and here is McArdle swinging the sword of truth:

This makes about as much sense as saying that Dr. Jerry Avorn cannot be that smart because his brain only weighs about three pounds. Presumably, you can't be really smart–really innovative–unless your brain is at least 30 percent of your body weight!

This is obviously ludicrous–so why would Dr. Avorn say it about an R&D department? Like your brain, the R&D department is part of a complex system that does a lot of important stuff. You can argue that the R&D department is the most important part of a company, not least because it couldn't survive long without it. I think the same thing about my brain–but I'd still be just as dead without my liver. You certainly can't prove anything about my effectiveness as a journalist by pointing out that [my brain] weighs less than my bones. So how big should a "brain" be? Hard to say. But let's look at some companies that are generally recognized as pretty innovative, and their R&D as a percentage of revenue:

Apple:  three cents out of every dollar

Google:  ten cents out of every dollar

Intel:  fifteen cents out of every dollar

Genzyme (innovative biotech startup!):  sixteen cents of every dollar

US Government:  three cents out of every dollar

I can assure Dr. Avorn that any venture capitalist would be happy to invest in these hidebound laggards who haven't had a new idea in centuries. The first few, anyway.

By the way, I liked Jerry Avorn's book Powerful Medicines (see also here) but I thought it was weak on economics, a fact which really shows in this interview (he does make a few good points about comparative effectiveness research). 

Measuring Economic Growth from Outer Space

by  Tyler Cowen in

Here is a clever new idea from Henderson, Storeygard, and Weil:

GDP growth is often measured poorly for countries and rarely measured at all for cities. We propose a readily available proxy: satellite data on lights at night. Our statistical framework uses light growth to supplement existing income growth measures. The framework is applied to countries with the lowest quality income data, resulting in estimates of growth that differ substantially from established estimates. We then consider a longstanding debate: do increases in local agricultural productivity increase city incomes? For African cities, we find that exogenous agricultural productivity shocks (high rainfall years) have substantial effects on local urban economic activity.

Here is the paper. WSJ blogs added:

They also noted how data from night lights can be focused to provide
data on a local level. In Southern Madagascar large deposits of rubies
and sapphires were discovered in late 1998 near the towns of Ilakaka
and Sakaraha, leading to an economic boom. But the data from the
satellites tell the story of where the benefits were felt most deeply.
“Over the next five years there was a sharp growth in the number of
pixels for which light is visible at all, and in the intensity of light
per pixel,” the economists said. “The other town visible in the figure,
Ihosy, shows no such growth. If anything, Ihosy’s light gets smaller
and weaker, as it suffers in the competition across local cities for
population.”

Bryan Caplan, scream this from the rooftops

by  Tyler Cowen in

If you measure people's thoughts, rather than asking them about their feelings, it seems they really enjoy the time they spend with their kids.  Here is an excerpt from BPS Research Digest:

In terms of pleasure, the results confirmed earlier findings,
suggesting that we spend an awful lot of time doing things we don't
find pleasurable, including "work" and "shopping". Out of 18 key
activities, "time with children" and "sex" both came in around
mid-table, far below "outdoor activities" and "watching TV". However,
consideration of the ratings for "reward" (as opposed to pleasure) told
a rather different story, with "work" now the top scorer, and "time
with children" not far behind.

Commuting, however, cannot be saved by a similar move.

High speed trading swimming

by  Alex Tabarrok in

Next year the innovative swimming suits that are causing world records to fall at rapid pace will be banned.  Michael Mandel wonders if this is the beginning of the counterrevolution against technological progress and Tyler argues “essentially on innovation we’re seeing a flipping of the burden of proof and I don’t think it is possible to easily fine-tune that flipping in a way to capture good innovations and rule out bad ones.”  Believe it or not, Mandel really was talking about swimsuits.   Tyler, however, was talking about high speed trading but is there much difference between the two?  I don’t think so.

High-tech swimming suits and trading systems are primarily about distribution not efficiency.  A small increase in speed over one’s rivals has a large effect on who wins the race but no effect on whether the race is won and only a small effect on how quickly the race is won.  We get too much investment in innovations with big influences on distribution and small (or even negative) improvements in efficiency and not enough investment in innovations that improve efficiency without much influencing distribution (i.e. innovations in goods with big positive externalities).

One difference between swimsuits and trading systems is that the former are regulated by FINA, the federation that administers international competition in aquatic sports.  We have some hope that a group like FINA can internalize the major externalities both because it encompasses the primary players in the market and because externalities outside of the market are likely to be small (swimming rules are unlikely to cause non-swimmers many problems.)  Thus, FINAs rules on swimsuits have some claim to efficiency.  Note that we see similar “anti-innovation” rules in many other sports such as car racing.  NASCAR, for example, does not allow stock cars to use fuel injectors even though this innovation is now standard on production cars.

NASDAQ (and the other exchanges) are the logical equivalent to NASCAR and FINA in that they can internalize the externalities among the primary players.  Thus, if the exchanges were to regulate various high-speed trading strategies I wouldn’t have any problems with that.

But would exchange regulation go far enough?  Unfortunately we have learned that the exchanges don’t internalize systemic risk.  Trading rules can cause non-traders many problems.  As a result, I think there is a case to be made for greater regulation than the exchanges would provide.  There is good reason to be skeptical about regulation in general but since this product, “financial innovation,” is primarily about distribution I’m less worried about regulation in finance than in fields where innovation is more closely tied to efficiency.

How to sign your emails

by  Tyler Cowen in

I enjoyed this article, here is an excerpt:

"If you have been writing to someone 'Best' this and 'Best' that, and
you get an e-mail that is a little colder, a little hostile, and they
sign 'Sincerely,' that does mean things aren't so good," Schwalbe says.
" 'Sincerely' is the one that says, 'There's a problem here.' "

And, one may well wonder, does "Cordially" ever mean anything other than "My hostility is only thinly veiled"?

And when, e-mail-wise, is it too early for "Love"? Does "Fondly"
ever belong in business? Is "Cheers" too mock-Brit? Too alcoholic?

Fondly,

Tyler

Further points on high-frequency trading

by  Tyler Cowen in

Here is a good survey of some of the debates, plus Paul Krugman mentions the topic in his column today.  Here's my earlier post but I'd like to add or reiterate a few points:

1. On one hand, critics wish to charge that there is little or no advantage to having prices move more quickly to reflect new information.  On the other hand, some of these same critics charge that short-run volatility of prices — assuming this is in fact the result of HFT (and that is not proven) — creates social costs.  That's not quite a contradiction but it is an odd mix of views about the relevance of the short run.

2. I haven't seen a good estimate, or for that matter a bad estimate, of the social loss involved from investing resources in HFT.  Even if the practice has no gain, I suspect the loss is small.  It's the symbolic nature of the issue which excites people — bailed-out elites doing fancy things with powerful computers in a non-egalitarian manner — rather than the belief that it is a policy priority.  Even if you think HFT is bad, on an actual list of bad policies or practices in our world, would it be in the top million?  Mostly it's a canvas on which to paint complaints about the continuing political and economic power of finance, but we shouldn't let that skew our judgment of the practice itself.

3. There is no argument to date, and probably no argument period, that HFT can lead to financial insolvency or collapse on a major scale.  The cost, if there is one, is that the associated trading strategies bring a temporary collapse of asset prices for some period of time (how long?) or perhaps greater ongoing price volatility, or uncertainty about order execution, in the short run.

When I read that HFT may give markets "a new, currently unknown set of emergent properties" I think buying opportunity.

4. Research by Hans Stoll indicated that program trading was not in fact an instrumental culprit behind Black Monday in 1987, yet media coverage of HFT seems to be indicating that it was.  Many of the HFT debates echo themes from the earlier program trading debates from the late 1980s but in fact program trading did not turn out to be a major problem.  We have been down this path before and it turned out there was much less there than the critics thought at the time.

5. The more I read these debates, the more nervous I get about the idea of a financial products safety commission.  Essentially on innovation we're seeing a flipping of the burden of proof and I don't think it is possible to easily fine-tune that flipping in a way to capture good innovations and rule out bad ones.  We should still follow the rule of regulating practices shown to be harmful or likely to be harmful.

A question about health care history

by  Tyler Cowen in

I've been wondering about a historical question lately and I would appreciate your feedback.

How did the U.S. health care system — in terms of outcomes — compare to other countries before the mid-1960s  Recall that Germany and New Zealand had some version of universal coverage well before WWII and of course many countries adopted universal or near-universal coverage after WWII.  In terms of crude "bang for the buck" comparisons — dollars spent relative to health care outcomes — how did the U.S. compare?  At that time we didn't even have Medicare or Medicaid.

Which vacation model is best?

by  Tyler Cowen in

Marko, a loyal MR reader, asks:

Compare and contrast US vs European vacation model.

How much vacation do we really need?

That is a good question for August.  I think of the European "minimum three weeks in August" model as resulting from lots of collective bargaining, small families, fewer large dependent pets, higher tax rates, and many nearby desirable locales which do not exhaust themselves easily.  Plus you already live near the kids' grandparents, so you either don't need the four-day trip there or you wouldn't consider a full three weeks with them.  Head to Morocco and hire a guide.

Rather than comparing the vacations per se you also can ask whether the preconditions for the European-style vacation are desirable.  Overall I see the European approach to leisure as having higher private returns but lower social returns.  It reflects a very coordinated but less flexible approach to labor allocation and it reflects a weaker obsession with work and children, both of which in my view have larger social benefits.  If there is nowhere fun to go, as for many Americans, or your pets and kids tie you down anyway, you'll maybe have a better time at home.

One ideal is to have an American-style income and tax rate and then some free time in May and September rather than August, combined with a willingness to take longer flights; I have most of this (though I teach in September) and we don't have pets.  It is Yana who leads the charge to go places.

Addendum: Matt Yglesias makes some interesting points.

It’s official

by  Alex Tabarrok

Don Boudreaux, chair of the GMU econ department, comments on this sign of the times:

…Uncle Sam is on the verge of paying the City of Los Angeles $30 million to subsidize a ten-year run of Cirque du Soleil. 

So it's finally come to pass – America has embarked on the same road down which ancient Rome marched to its ruin: Uncle Sam not only subsidizes bread (by subsidizing wheat production) but now also circuses.