Month: April 2014

Assorted links

Tom Sargent Summarizes Economics

After he won the Nobel, Tom Sargent was “interviewed” in an ad for Ally bank in which his response was simply (and correctly), “no.” The joke is even better than I realized because Sargent has a history of giving very short speeches. In 2007 he gave a graduation speech to Berkeley undergraduates summarizing economics in just 335 words.

It’s a damn fine speech.

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts,
and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That
is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their
choices. That is why it is difficult for well meaning outsiders to change
things for better or worse.

7. In the future, you too will respond to incentives. That is why there are
some promises that you’d like to make but can’t. No one will believe those
promises because they know that later it will not be in your interest to
deliver. The lesson here is this: before you make a promise, think about
whether you will want to keep it if and when your circumstances change.
This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is
what national government debts and the U.S. social security system do
(but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or
tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government
transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.

Hat tip to Utopia–you are standing on it via Newmark’s Door.

From the comments

Here is BP, on New Zealand:

New Zealand has a chronic shortage of equity capital, exacerbated by a generous pay-as-you-go state pension and a tax system that favours passive landholding as a wealth accumulation vehicle. The country consequently imports a large amount of capital to meet the savings-investment balance and this requires a high equilibrium rate of interest. As a result the exchange rate is chronically high, the returns to exporting are lower than they should be given the country’s bounty, and the hurdle rate of return on investment on new equity investment is high. (Apart from this, the policy mix is pretty good). Many good innovative businesses emerge only to be bought by American corporations or funds before they get to more than say $100m in value, as there is a paucity of domestic investors.

The British may distribute mortality information to pensioners

British retirees may soon receive a novel kind of financial advice, courtesy of the state: They could be told when they are likely to die.

“People are living a lot longer, so we have to make sure they have up-to-date information,” the pensions minister, Steve Webb, said Thursday in an interview with the BBC.

“There’s no point being all British and coy about it,” he said. Gender, age and “perhaps asking one or two basic questions, like whether you’ve smoked or not,” Mr. Webb said, should be enough to determine how long, on average, someone is likely to live. Having an idea of life expectancy would help retirees with private pensions manage their finances more efficiently, he said.

There is more here.

The Socialization of Medicine

“We understand that we doctors should be and are stewards of the larger society as well as of the patient in our examination room,” said Dr. Lowell E. Schnipper, the chairman of a task force on value in cancer care at the American Society of Clinical Oncology.

In practical terms, new guidelines being developed by the medical groups could result in doctors choosing one drug over another for cost reasons or even deciding that a particular treatment — at the end of life, for example — is too expensive.

More from the NYTimes.

Assorted links

*The Language of Food: A Linguist Reads the Menu*

That is the new and excellent book by Dan Jurafsky, due out this September, and I found it interesting throughout.  Here is just one bit:

In fact, the more Yelp reviewers mention dessert, the more they like the restaurant.  Reviewers who don’t mention a dessert give the restaurants an average review score of 3.6 (out of 5).  But reviewers who mention a dessert in their review give a higher average review score, 3.9 out of 5.  And when people do talk about dessert, the more times they mention dessert in the review, the higher the rating they give to the restaurant.

This positivity of reviews, filled with metaphors of sex and dessert, turns out to be astonishingly strong.

That is another reason not to trust customer-generated restaurant reviews.

And how exactly do Americans conceive of dessert?

Americans usually describe desserts as soft or dripping wet…US commercials emphasize tender, gooey, rich, creamy food, and associate softness and dripping sweetness with sensual hedonism and pleasure.

This association between soft, sticky things and pleasure isn’t a necessary connection.  For example, Strauss found that Korean food commercials emphasize hard, textually stimulating food, using words like wulthung pwulthung hata (solid and bumpy), coalis hata (stinging, stimulating), thok ssota (stinging), and elelhata (spicy to the extent one’s nerves are numbed).

How can you resist a book with sentences such as these?

The pasta and the almond pastry traditions merged in Sicily, resulting in foods with characteristics of both.

Here is a previous MR post on Jurafsky, including a link to his blog, and concerning “Claims about potato chips.”

Why isn’t New Zealand richer and more productive?

Here is a new study from the New Zealand Productivity Commission, and here is the basic puzzle:

Based on its policy settings, the authors estimate that New Zealand’s GDP per capita should be 20% above the OECD average. But it is actually over 20% below average, making New Zealand a clear outlier. The size of the gap indicates an apparent “productivity paradox” that costs more than 40 cents in every dollar of output.

Here is one problem:

The increasing importance of global value chains – where production activities are spread across countries – may have worsened the impact of New Zealand’s geographic isolation on trade in goods.  Because global value chains typically require intensive interaction and just-in-time delivery, they tend to be regionally based. For New Zealand, international transportation costs for goods are about twice as high as in Europe. This reduces access to large markets and the scope for participation in global value chains , where the transfer of advanced technologies now often occurs.

More generally, the “gravity equation” — also known as distance — makes it harder for New Zealand to trade with the rest of the world.

Another big problem has to do with problems of underinvestment in knowledge-based capital:

Most of the rest of New Zealand’s productivity gap…appears to come from an underinvestment in knowledge-based capital. Knowledge-based capital encompasses a wide range of assets including product design, inter-firm networks, R&D and organisational know-how. Knowledge-based capital can be used simultaneously by more and more firms without re-incurring the initial development costs.  This generates increasing returns to scale – an important property that makes ideas and knowledge a key engine of productivity growth.  It can also be difficult to prevent others from using knowledge-based capital, an example of “spillovers” of knowledge and ideas between firms.

While comprehensive data on knowledge-based capital are currently not available, indications are that New Zealand ranks well in software investment and trademarks but very poorly in R&D and, to a lesser extent, patents. Indeed, R&D intensity in New Zealand – particularly business R&D – is among the lowest in the OECD. This not only reduces capacity for frontier innovation but also the ability of firms to absorb new ideas developed elsewhere, constraining technological catch-up.

In part, New Zealand suffers a low return on R&D due to its limited access to large markets, which reduces the likely payoff from the successful commercialisation of new ideas. New Zealand’s economic structure may also play a role. The industries in which New Zealand specialises typically have low R&D intensity. For instance, across countries, R&D in agriculture rarely exceeds 0.5% of value-add.

Here is a good FT summary blog post on the study.

I would have liked more comparison with the time when New Zealand was one of the world’s wealthiest nations per capita, and when, pre-1973, privileged access to British markets for Kiwi lamb and dairy was enough to maintain such high living standards.  And might we be reading a very different piece if the Chinese had a stronger taste for milk?

I recall the Michael Porter report from the 1990s, arguing that New Zealand did not have enough strong economic sectors which could lead to the accretion of cumulative advantages.

Overall, if there is any nation which should be aiming to double or triple its population, it is New Zealand.

Matthew Gentzkow wins the Clark medal

The citation is here:

Matthew Gentzkow has made fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement.

Matt is at the Booth School of Business at the University of Chicago and there is much more at that link.  Here is Matt at scholar.google.com.  Matt’s well-known paper on ideological segregation, with Jesse Shapiro, is here (pdf).  Our class on the economics of the media at MRUniversity.com considers Matt’s work, for instance see this video on ideological segregation.

Here is A Fine Theorem on the Bayesian persuasion paper.

An excellent choice, of course, and hearty congratulations are in order.

From the comments

This is from John B. Chilton:

For those who don’t click through this is what Tyler wrote:

“6. The exchanges will be mostly working by March 2014, but by then the risk pool will be dysfunctional. In the meantime, real net prices will creep up, if only through implicit rationing and restrictions on provider networks. The Obama administration will attempt to address this problem — unsuccessfully — through additional regulation.”

The simple answer to Christian’s query (“I’m curious how you stand now given current enrollment numbers and your previous prediction about a dysfunctional exchange.”) is that it’s not the enrollment numbers that matter, it’s the risk pool.

The jury’s out on the risk pool — lots of opinions out there on whether exchange premiums will go up for 2015.

Here is Ross Douthat on how will we know if Obamacare is working?  It is the best post on this debate so far.  He closes with this:

I’ll lay down this marker for the future: If, in 2023, the uninsured rate is where the C.B.O. currently projects or lower, health inflation’s five-year average is running below the post-World War II norm, and the trend in the age-adjusted mortality rate shows a positive alteration starting right about now, I will write a post (or send out a Singularity-wide transmission, maybe) entitled “I Was Wrong About Obamacare” — or, if he prefers, just “Ezra Klein Was Right.”

Is country music a countercyclical asset?

In tough times, do happy or sad songs top the charts? Do we prefer music that reflects our fears and hardships, or tunes that allow us to temporarily forget our troubles?

Newly published research suggests the answer varies dramatically by genre. Pop fans reflexively gravitate to music that mirrors their emotions, while country devotees go for escapism.

In an analysis of the most popular country songs over six decades, Jason Eastman and Terry Pettijohn II of Coastal Carolina University finds top hits are “lyrically more positive, musically upbeat, and use more happy-sounding major chords during difficult socioeconomic times.”

In contrast, previous research on best-selling pop songs found that, in times of societal stress, those numbers “are longer, slower, more lyrically meaningful, and in more somber-sounding keys.”

There is more here.  And here is the NYT article on how country music has gone totally mainstream.  After all, why not lower your systemic risk?  Is the higher cyclicality of on-country music due to what is possibly a younger demographic profile of listeners, including many students who may not yet be so worried about the state of the labor market?

Markets in everything, positive pregnancy tests

The latest, uh, must-have appears to be positive pregnancy test results.

Women across the country are selling — and buying — them on Craigslist.

One post from Buffalo, New York, sums up the appeal for potential shoppers:

“Wanna get your boyfriend to finally pop the question? Play a trick on Mom, Dad or one of your friends? I really don’t care what you use it for.”

That particular test was going for the reasonable rate of $25 dollars. The tests in Texas seem to be slightly more expensive, at $30 a pop.

There is more here, via Marcela Veselková.