Month: June 2011

Markets in everything the culture that is Argentina

Here at the Lujan Zoo near Buenos Aires visitors can ride lions, cuddle bears, stroke tigers and feed cheetahs. Cages are accessible to everyone who paid $50 and signed the paper saying that if you are eaten, the Zoo is not responsible.

Visitors can even pick up the smaller animals and manhandle them at risk to themselves and the creatures. Shockingly there doesn’t appear to be much in the way of safety regulations to protect either humans or animals and Internet blogs are littered with pictures of tourists with the animals.

Even children are allowed to enter the lion’s cage and fondle a range of animals that have the potential to kill or maim them.

The story is here, with photos, and for the pointer I thank Yana.

How the FDA Impedes Innovation

Mike Mandel  has a good piece, significantly published by the Progressive Policy Institute, on the FDA and innovation. MelaFind is a handheld computer vision system, database and expert system that helps dermatologists to identify which skin lesions should be biopsied for melanoma. The device works quite well but the FDA has deemed the device “not approvable” because (quoting Mandel):

  • The device did not do better than the experienced dermatologists in the study (“the FDA review team does not believe this is a clinically significant difference between MelaFind and the examining dermatologist”)
  • The device was tested on lesions identified by experienced dermatologists, not on the broader set of lesions that might be identified by “physicians less experienced than these dermatologists.”
  • The device did not find every melanoma in the sample (“Since the device is not 100% sensitive, if use based on the device’s diagnostic performance reduces the number of biopsies taken, harm could ensue in the form of missed melanomas.”)
  • The device was not demonstrated to make inexperienced physicians the equal of experienced dermatologists (“Currently, formal training is offered to physicians to become board certified dermatologist and thus be able to diagnose clinically atypical lesions. The FDA review team would have to compare this board certification training to that offered by the sponsor to those physicians operating MelaFind to determine if it is found adequate.”

Some of these complaints are legitimate, others not so much. But even if MelaFind is not perfect today nor appropriate in all circumstances it’s exactly the type of innovation that we should encourage. Devices such as MelaFind could not only improve medical care they can reduce costs and make good quality medical care more widely available in developing countries, for example, where experienced dermatologists are in short supply.

Most importantly, innovations get better over time. But if you impede the first generation the second generation may never come into existence and, as Mandel notes, no first-generation device could satisfy the FDA’s conditions. It’s like refusing to give the Wright Brothers a license to fly because their first airplane only flew for 59 seconds.

The signal that is being sent by the FDA impedes all medical innovation.

For more on the FDA see

More on the returns to education

First, apologies to Arnold, I missed his post when traveling and so he does discuss natural experiments, contrary to my previous claim about EconLog bloggers.  That said, I’m not so happy with his analysis.  He’s taking a few of the papers he sees as the weakest and he explains why they are weak.  I would rather he dissects the strongest pieces and compares them to the strongest pieces, using natural experiments, showing very low rates of return to education.  The Joshua Angrist papers (often with Alan Krueger) for instance are quite sophisticated and do not run afoul of Arnold’s objections.  In works such as this (later versions seem to be gated), Angrist and Krueger perform exactly the natural experiment which Arnold requests and they find high (marginal) returns to education.  Or see this piece by Card.

Here is Bryan’s response to my post.  Focus on his #2, which is the crux of the matter:.  He cites the signaling motives for education and concludes: “Here, the evidence Tyler cites is simply irrelevant.”  This is simply not true and indeed these papers are obsessed with distinguishing learning effects from preexisting human capital differences.  That is what these papers are, so to speak.  In that context, “ability bias” in the estimates doesn’t seem to be very large, see for instance the Angrist or Card pieces linked to above.  This paper surveys some of the “adjusting for ability bias” literature; it is considered quite “pessimistic” (allows for a good deal of signaling, in Caplan’s terminology) and still it finds a positive five percent a year real productivity gain from an extra year of schooling.

What’s striking about the work surveyed by Card is how many different methods are used and how consistent their results are.  You can knock down any one of them (“are identical twins really identical?, etc.), but at the end of the day which are the pieces — using natural or field experiments — standing on the other side of the scale?  The Card results are also consistent with theory, namely that models which emphasize signaling imply large unrealized gains from trade; it’s not that hard for an employer to administer an implicit IQ test as Google and Microsoft do all the time.  As a separate (and here undocumented) point, I would argue the Angrist and Card results are consistent with the bulk of results from sociological and anthropological investigations.

There really does seem to be a professional consensus.  Maybe it’s wrong, and/or dominated by biased pro-education specialists, but I’m not seeing very strong arguments against it.  For the time being at least, I don’t see that there is much anywhere else to go with one’s beliefs.  If Arnold or Bryan (or David) suggests a good paper with a natural experiment showing a low marginal ROR for education, I am happy to read the paper and report back and compare it to the preponderance of evidence on the other side.

The real puzzle is how large measured marginal returns to education are consistent with the continuing observed failures of the American educational system.  Why does the low-hanging fruit persist or is it low-hanging at all?  The traditional liberal view is that further educational subsidies are needed, but a possible alternative is that some people simply do not wish to step across to the other side of the divide to a “better life,” at least as defined by middle class values and income statistics.  Or is there some other hypothesis?  Whichever way you cut it, a big improvement in this area does not seem about to happen and arguably we are moving in the opposite direction.  Whatever gains are there “in the data,” we don’t seem able or willing to capture them.

China estimate of the day

Combined with central government debt and other liabilities such as bad bank loans, analysts estimate China’s overall explicit debt load is about 70 per cent of gross domestic product.

But some analysts believe the contingent liabilities of the government are much higher, once debts on the books of state-owned enterprises and other entities implicitly backed by the state are included.

“If you take a very broad view of the Chinese government’s contingent liabilities rather than explicit debt on the books then the number comes to well over 150 per cent of China’s GDP in 2010,” according to Victor Shih, a political economist at Northwestern University in the US. The US has a debt-to-GDP ratio of 93 per cent, while Japan’s ratio is over 225 per cent.

Here is more.

Assorted links

1. There is still some low-hanging fruit.

2. Download many silent films here.

3. It turns out that Randall Dale Adams sued Errol Morris, for telling his life story in The Thin Blue Line (and thereby vindicating him and getting him out of jail).  And is Egalia funded by Swedish educational vouchers?

4. Edward Hugh on Spain.

5. Milton Friedman and the financial crisis.

6. David Henderson writes a critique of TGS.  He doesn’t contest that median income is nearly stagnant and that TFP is dramatically down since 1973; in the latter case, which clearly establishes the core point of the book, rather than admitting the conclusion he shifts the talk to the difficulties of predicting the future (though I stress that TGS will indeed end at some currently unknown point in time).  Both facts are prima facie evidence that innovations are not doing much to improve the standard of living of the typical person, especially compared to some earlier periods of time.  David is simply backwards concerning the argument on land; it’s not that land today is too expensive, it’s that extra land (we still have plenty of it in Nevada or for that matter Virginia) doesn’t have the marginal economic import it used to, most of all because of modern agriculture.  His numbers on land strongly support my point rather than refuting it.   The measured consumer surplus from the internet is small, not large.  The evidence that more education would yield a high return is quite strong, see the earlier post today.  I’ve written about the benefits of deregulation in plenty of other places but in this book I wanted people to focus on technological rather than political issues.

Natural experiments and the return to schooling

Cowen’s First Law: There is a literature on everything.

Responding to queries from Kling and Caplan and Henderson, let us turn the microphone over to Andrew Leigh and Chris Ryan:

How much do returns to education differ across different natural experiment methods? To test this, we estimate the rate of return to schooling in Australia using two different instruments for schooling: month of birth and changes in compulsory schooling laws. With annual pre-tax income as our measure of income, we find that the naıve ordinary least squares (OLS) returns to an additional year of schooling is 13%. The month of birth IV approach gives an 8% rate of return to schooling, while using changes in compulsory schooling laws as an IV produces a 12% rate of return. We then compare our results with a third natural experiment: studies of Australian twins that have been conducted by other researchers. While these studies have tended to estimate a lower return to education than ours, we believe that this is primarily due to the better measurement of income and schooling in our data set. Australian twins studies are consistent with our findings insofar as they find little evidence of ability bias in the OLS rate of return to schooling. Together, the estimates suggest that between one-tenth and two-fifths of the OLS return to schooling is due to ability bias. The rate of return to education in Australia, corrected for ability bias, is around 10%, which is similar to the rate in Britain, Canada, the Netherlands, Norway and the United States.

There are many other papers in this genre, such as by Joshua Angrist, and they yield broadly similar results.  Here is an Esther Duflo paper on Indonesia.  There is an excellent David Card survey on the causal returns to education, from 1999, but more recent results have shown the same.  Card’s conclusion:

Consistent with earlier surveys of the literature, I conclude that the average (or average marginal) return to education is not much below the estimate that emerges from a standard human capital earnings function fit by OLS. Evidence from the latest studies of identical twins suggests a small upward “ability” bias – on the order of 10%. A consistent finding among studies using instrumental variables based on institutional changes in the education system is that the estimated returns to schooling are 20-40% above the corresponding OLS estimates.

That last sentence is because the marginal student is especially in need of education.  The view that education is mostly about signaling is inconsistent with the established consensus on the returns to schooling and yet the writers at EconLog do not respond to this literature or, as far as I can tell, even acknowledge it.

Here is one of my earlier posts on education.  Here is my theory of (some) education.

The culture that is Sweden

Director Lotta Rajalin notes that Egalia places a special emphasis on fostering an environment tolerant of gay, lesbian, bisexual and transgender people. From a bookcase, she pulls out a story about two male giraffes who are sad to be childless — until they come across an abandoned crocodile egg.

That’s a preschool, for children from ages one to six.  The school does everything possible to obliterate traditional gender roles, including a refusal to use the words “him” and “her” (that is, their Swedish equivalents).

…she says that there’s a long waiting list for admission to Egalia, and that only one couple has pulled a child out of the school.

Jukka Korpi, 44, says he and his wife chose Egalia “to give our children all the possibilities based on who they are and not on their gender.”

There is even a markets in everything angle:

To even things out, many preschools have hired “gender pedagogues” to help staff identify language and behavior that risk reinforcing stereotypes.

For the pointer I thank Daniel Lippman.

Don’t apply positive discount rates to human lives

Ben Trachtenberg writes:

This Article presents two new arguments against “discounting” future human lives during cost-benefit analysis, arguing that even absent ethical objections to the disparate treatment of present and future humanity, the economic calculations of cost-benefit analysis itself – if properly calculated – counsel against discounting lives at anything close to current rates. In other words, even if society sets aside all concerns with the discounting of future generations in principle, current discounting of future human lives cannot be justified even on the discounters’ own terms. First, because cost-benefit analysis has thus far ignored evidence of rising health care expenditures, it underestimates the “willingness to pay” for health and safety that future citizens will likely exhibit, thereby undervaluing their lives. Second, cost-benefit analysis ignores the trend of improved material conditions in developed countries. As time advances, residents of rich countries tend to live better and spend more, meaning that a strict economic monetization of future persons values the lives of our expected descendents above those of present citizens. These two factors justify “inflation” of future lives that would offset, perhaps completely, the discount rate used for human life. Until regulators correct their method of discounting the benefits of saving human lives in the future, the United States will continue to suffer the fatal costs of underregulation, and agencies will remain in violation of legal requirements to maximize net benefits.

I don’t agree with the “underregulation” argument (growth matters too, especially with a low discount rate), but there is much to be said for Ben’s argument.  Do note that there are numerous complications in any correct analysis of this problem.