Month: September 2015

Wednesday assorted links

1. Ineffective boycott of the month.  And ineffective call for ban of the month.

2. Robert Shiller ate cat food as a kind of field research.  Gives a whole new meaning to “An Economist Gets Lunch…”  And “I, chicken sandwich,” a three-minute video.

3. Debt in South Korea.

4. Countries scaled to the size of their stock markets.

5. Mitochondria talk to each other.  The Barbie that talks back to you.

6. “Tortoises are underrated escape artists.

My conversation with Luigi Zingales

The transcript is here, with a podcast version, and there is also a YouTube version at the link, with cleaned-up audio compared to any earlier link you may have come across.  Luigi was wonderful, and also fantastically witty.  The topics included Italy, Donald Trump, Antonio Gramsci, Google and conglomeration, Luchino Visconti, Starbucks, and the surprisingly high productivity of Italian cafés.

Here is one excerpt:

I don’t understand why in the United States the only thing that is really noncompetitive is sports. In Europe, the only thing that is really competitive is sports.

And another:

COWEN: …Angela Merkel, overrated or underrated?

ZINGALES: I think she’s probably underrated. I’m impressed by her ability to, number one, run Europe for the interest of Germans in a very effective way.

The longest bit from me is where I compare and contrast Luigi with Gramsci, another theorist of hegemony, and try to sum up Luigi’s work; you can find that on the video or in the transcript.

And again from Luigi there is this:

…when I arrived in this country 27 years ago, you were not really drinking coffee. You were drinking a dark thing that tastes like I don’t say what because we’re online. The culture of coffee did not exist here.

The culture of coffee and a café where you seat and drink, et cetera, what Starbucks is, is an Italian or at most French culture. Why were you unable to export this? This is my little explanation. By the way, the only country in the world where Starbucks has not arrived is Italy.

Luigi then considers when Italian coffee is better tasting and better run at the artisan level, yet without the same possibilities for corporate expansion.  I liked this sentence from Luigi:

The extreme agency problems of Italy make it difficult to scale firms.

And finally:

One thing I can predict fairly confidently is that we are not going to pay the debt.

This is also a worthwhile observation:

When you’re down to one or two kids, the chance that one is an idiot is pretty large.

His favorite film is Visconti’s The Leopard, a good pick.  And he was the public choice scholar who forecast the rise of Donald Trump, as we discuss in the chat.  Self-recommending.

What Was Gary Becker’s Biggest Mistake?

The econometrician Henri Theil once said “models are to be used but not to be believed.” I use the rational actor model for thinking about marginal changes but Gary Becker really believed the model. Once, at a dinner with Becker, I remarked that extreme punishment could lead to so much poverty and hatred that it could create blowback. Becker was having none of it. For every example that I raised of blowback, he responded with a demand for yet more punishment. We got into a heated argument. Jim Buchanan and Bryan Caplan approached from the other end of the table and joined in. BeckerIt was a memorable evening.

Becker isn’t here to defend himself on the particulars of that evening but you can see the idea in his great paper, Crime and Punishment: An Economic Approach. In a famous section he argues that an optimal punishment system would combine a low probability of being punished with a high level of punishment if caught:

If the supply of offenses depended only on pf—offenders were risk neutral — a reduction in p “compensated” by an equal percentage increase in f would leave unchanged pf… increased probability of conviction obviously absorbs public and private resources in the form of more policemen, judges, juries, and so forth. Consequently, a “compensated” reduction in this probability obviously reduces expenditures on combating crime, and, since the expected punishment is unchanged, there is no “obvious” offsetting increase in either the amount of damages or the cost of punishments. The result can easily be continuous political pressure to keep police and other expenditures relatively low and to compensate by meting out strong punishments to those convicted.

We have now tried that experiment and it didn’t work. Beginning in the 1980s we dramatically increased the punishment for crime in the United States but we did so more by increasing sentence length than by increasing the probability of being punished. In theory, this should have reduced crime, reduced the costs of crime control and led to fewer people in prison. In practice, crime rose and then fell mostly for reasons other than imprisonment. Most spectacularly, the experiment with greater punishment led to more spending on crime control and many more people in prison.

Why did the experiment fail? Longer sentences didn’t reduce crime as much as expected because criminals aren’t good at thinking about the future; criminal types have problems forecasting and they have difficulty regulating their emotions and controlling their impulses. In the heat of the moment, the threat of future punishment vanishes from the calculus of decision. Thus, rather than deterring (much) crime, longer sentences simply filled the prisons. As if that weren’t bad enough, by exposing more people to criminal peers and by making it increasingly difficult for felons to reintegrate into civil society, longer sentences increased recidivism.

Instead of thinking about criminals as rational actors, we should think about criminals as children. In this light, consider the “Becker approach” to parenting. Punishing children is costly so to reduce that cost, ignore a child’s bad behavior most of the time but when it’s most convenient give the kid a really good spanking or put them in time out for a very long time. Of course, this approach leads to disaster–indeed, it’s precisely this approach that leads to criminality in later life.

So what is the recommended parenting approach? I don’t want to get into a debate over spanking, timeouts, and reasoning but one thing all recommendations have in common is that the consequences for inappropriate behavior should be be quick, clear, and consistent. Quick responses help not just because children have “high discount rates” (better thought of as difficulty integrating their future selves into a consistent whole but “high discount rates” will do as short hand) but even more importantly because a quick response helps children to understand the relationship between behavior and consequence. Prior to Becker there was Becaaria and in Beccarian theory, people must learn to associate crime with punishment. When responses aren’t quick, children, just like scientists, have difficulty learning cause and effect. Quick is thus one way of lowering cognitive demands and making consequences clear.

Animals can learn via conditioning but people can do much better. If you punish the child who steals cookies you get less cookie stealing but what about donuts or cake? The child who understands the why of punishment can forecast consequences in novel circumstances. Thus, consequences can also be made clear with explanation and reasoning. Finally, consistent punishment, like quick punishment, improves learning and understanding by reducing cognitive load.

Quick, clear and consistent also works in controlling crime. It’s not a coincidence that the same approach works for parenting and crime control because the problems are largely the same. Moreover, in both domains quick, clear and consistent punishment need not be severe.

In the economic theory, crime is in a criminal’s interest. Both conservatives and liberals accepted this premise. Conservatives argued that we needed more punishment to raise the cost so high that crime was no longer in a criminal’s interest. Liberals argued that we needed more jobs to raise the opportunity cost so high that crime was no longer in a criminal’s interest. But is crime always done out of interest? The rational actor model fits burglary, pick-pocketing and insider trading but lots of crime–including vandalism, arson, bar fights and many assaults–aren’t motivated by economic gain and perhaps not by any rational interest.

Here’s a simple test for whether crime is in a person’s rational interest. In the economic theory if you give people more time to think carefully about their actions you will on average get no change in crime (sometimes careful thinking will cause people to do less crime but sometimes it will cause them to do more). In the criminal as poorly-socialized-child theory, in contrast, crime is often not in a person’s interest but instead is a spur of the moment mistake. Thus, even a small opportunity to reflect and consider will result in less crime. As one counselor at a juvenile detention center put it:

20 percent of our residents are criminals, they just need to be locked up. But the other 80 percent, I always tell them – if I could give them back just ten minutes of their lives, most of them wouldn’t be here.

ThinkingProblemsCognitive behavioral therapy teaches people how to act in those 10 minutes–CBT is not quite as simple as teaching people to count to ten before lashing out but it’s similar in spirit, basically teaching people to think before acting and to revise some of their assumptions to be more appropriate to the situation. Randomized controlled trials and meta-studies demonstrate that CBT can dramatically reduce crime.

Cognitive behavioral therapy runs the risk of being labeled a soft, liberal approach but it can also be thought of as remedial parenting which should improve understanding and appreciation among conservatives. More generally, it’s important that crime policy not be forced into a single dimension running from liberal to conservative, soft to tough. Policing and prisons, for example, are often lumped together and placed on this single, soft to tough dimension when in fact the two policies are different. I favor more police on the street to make punishment more quick, clear, and consistent. I would be much happier with more police on the street, however, if that policy was combined with an end to the “war on drugs”, shorter sentences, and an end to brutal post-prison policies that exclude millions of citizens from voting, housing, and jobs.

Let’s give Becker and the rational choice theory its due. When Becker first wrote many criminologists were flat out denying that punishment deterred. As late as 1994, for example, the noted criminologist David Bayley could write:

The police do not prevent crime. This is one of the best kept secrets of modern life. Experts know it, the police know it, but the public does not know it. Yet the police pretend that they are society’s best defense against crime. This is a myth

Inspired by Becker, a large, credible, empirical literature–including my own work on police (and prisons)–has demonstrated that this is no myth, the police deter. Score one for rational choice theory. It’s a far cry, however, from police deter to twenty years in prison deters twice as much as ten years in prison. The rational choice theory was pushed beyond its limits and in so doing not only was punishment pushed too far we also lost sight of alternative policies that could reduce crime without the social disruption and injustice caused by mass incarceration.

Jeremy Corbyn on Twitter

Thanks Hugo Chavez for showing that the poor matter and wealth can be shared. He made massive contributions to Venezuela & a very wide world

link here, from 2013, and

I believe that homeo-meds works for some ppl and that it compliments ‘convential’ meds. they both come from organic matter…

link here, from 2010.  The spelling and grammar could be improved, too.

The pointers are from Marc Andreessen.

A short history of Chinese corruption

By William H. Overholt, here is one wee bit:

Hu Jintao and Wen Jiabao reversed much of this. With the population weary of market-oriented reforms, having seen over 50 million SOE jobs evaporate, market reforms ceased or receded. To cope with the global financial crisis, they poured money into the only institutions that could create rapid increases of production: big SOEs. The government and party bureaucracies nearly doubled. SOEs revived their pre-eminence. The 1990s campaign to increase competition dissipated. Senior military officers reverted to managing lucrative side businesses. Some top leaders and their families began making huge fortunes. The scale of graft became astronomic.

That is one way of thinking about why one should be worried about the economy of China.  That is via Bill Bishop.  The longer version of the piece, starting on p.22 here is interesting throughout.

Refugee markets in everything

The annual report in 2013 from a multibillion-dollar London private-equity firm that counts a French pastry baker and a Dutch shoemaker among its holdings touted a new opportunity with “promising organic and acquisitive growth potential.”

That investment was the management of refugee camps.

“The margins are very low,” said Willy Koch, the retired founder of the Swiss company, ORS Service AG, which runs a camp in Austria that overflowed this summer with migrants who crossed from the Balkans and Hungary. “One of the keys is, certainly, volume.”

The WSJ story is here, or maybe here.  And here is a related business:

In Sweden, the government paid a language-analysis firm $900,000 last year to verify asylum-seekers’ claims of where they were from.

Look for more stories along these lines.  Hat tip goes to Hugo Lindgren.

Tuesday assorted links

1. Markets in everything: “installed in Czech bar…

2. Job openings at record high.  And new job openings for social science and economics at Arizona State.  And a new job opening at Stanford.

3. Chess-playing computer with an entirely new method of learning, and more here.  It is International Master strength (for now).

4. Why Haitian coffee is hard to find.

5. Why do birds fall in love?

6. Raise rates by an eighth of a percentage point?  Ha-ha.  And Scott Sumner is optimistic about Chinese retail.

At what percent is the Chinese economy growing?

Saabira Chaudhuri writes:

Now, after decades of robust growth, beer volumes in China are slumping and turning a profit is set to get even tougher.

Beer consumption, which had grown at more than 6% a year on average over the past decade, was flat last year, according to data from U.K. beer-research firm Plato Logic. Beer executives blame the drop on a range of temporary factors like the economic slowdown and two unusually cool summers.

But analysts worry the slump could be longer-term as China’s population ages and per capita consumption declines. Deutsche Bank predicts beer volumes in China could fall by as much as 2.6% a year.

Some of this decline stems from competition from other drinks, but you would think China is poor enough that millions would still be “climbing into” the beer market.  And how quickly can those other drinks be gaining in popularity?  For further background, here is Christopher Balding on Chinese retail sales:

If we look at the year to date YOY sales of the top 50 retail enterprises, total retail sales grows by 0.9%.  In fact, only one category grows by more than 3%, jewelry which grew at only 4.2%.

A simple hypothesis is that Chinese economic output is also growing at about 0.9%.

Did the London Tube strike improve social welfare?

Due to status quo bias, maybe so:

New analysis of the London tube strike in February 2014 finds that it enabled a sizeable fraction of commuters to find better routes to work, and actually produced a net economic benefit.

Analysis of the London tube in February 2014 has found that despite the inconvenience to tens of thousands of people, the strike actually produced a net economic benefit, due to the number of people who found more efficient ways to get to work.

The researchers, from the University of Cambridge and the University of Oxford, examined 20 days’ worth of anonymised Oyster card data, containing more than 200 million data points, in order to see how individual tube journeys changed during the strike. Since this particular strike only resulted in a partial closure of the tube network and not all were affected by the strike, a direct comparison was possible. The data enabled the researchers to see whether people chose to go back to their normal commute once the strike was over, or if they found a more efficient route and decided to switch.

The researchers found that of the regular commuters affected by the strike, either because certain stations were closed or because travel times were considerably different, a significant fraction – about one in 20 – decided to stick with their new route once the strike was over.

The original paper, by Rauch, Larcom, and Williams, is here, and for the pointer I thank Samir Varma.

Max Beauvoir, RIP

The man who was arguably Haiti’s religious leader has passed away.  His story is fascinating:

Max Beauvoir was a middle-aged businessman with little interest in the occult. The son of a doctor and a scientist himself, he boasted degrees from schools in New York and Paris and a burgeoning career as a biochemist in the U.S. He was not the kind of man who went about seeking spiritual encounters.

So no one was more shocked than he was when his nonagenarian grandfather, lying on his deathbed in Haiti surrounded by more than a dozen descendants, lifted a single, unsteady finger and pointed it at Beauvoir.

”Grandfather turned to me and said, ‘You will carry on the tradition,’” Beauvoir recalled in 1983, 10 years after the moment that changed his life. “It was not the sort of thing you could refuse.”

“The tradition” was voodoo…

By the way, when people refer to “voodoo economics” it is a sign of how selective a lot of our political correctness still is.  Would anyone dream of criticizing a political candidate for his or her “[fill in the blank with some other historically persecuted religion] economics”?

And on the substance of the matter, voodoo is arguably less prone to “free lunch thinking” than say, many Protestant forms of Christianity.  It’s just an easier target because most people don’t know much about it and they see like-minded others taking a poke at it.  The believers and practitioners of the religion seem remarkably distant, but they are not.  They are real people, and they take their beliefs seriously.  Why should we turn the name of their religion into an insulting epithet?

It’s worth reflecting on this usage any time you wonder how some of the “other people out there” still can say racist things.

Monday assorted links

1. David Frum says there is no great stagnation, #watermelons.

2. Will Houston become America’s third largest city?

3. Scott Sumner on Chile and China.  His point about Chinese land is a very good one, but I think it would be hard to privatize Chilean copper and then tax the mines at the proper rate, given the resulting power of the owners.

4. Timothy Snyder on the Holocaust.

5. How much do Kiwis care about inflation?

Japan Liberalizes Regenerative Medicine

Japan is liberalizing its approval process for regenerative medicine:

…Regenerative medicines in Japan can now get conditional marketing approval based on results from mid-stage, or Phase II, human trials that demonstrate safety and probable efficacy. Once lagging behind the United States and the European Union on approval times, there is now an approximately three-year trajectory for approvals, according to Frost’s Kumar. That compares with seven to 10 years before.

…Around the world, companies have also faced setbacks while pushing such treatments. In the U.S., Geron Corp., which started the first nation-approved trial of human embryonic stem cells, ended the program in 2011, citing research costs and regulatory complexities.

…While scientists globally have worked for years in this field, treatments have been slow to come to market. But there is hope in Japan that without the political red tape, promising therapies will emerge faster and there will be speedier rewards.

Japan is liberalizing because with their aging population treatments for diseases like Alzheimer’s and Parkinson’s disease are in high demand. Under the new system, a firm with a gene or regenerative therapy (e.g. stem cells) can get conditional approval with a small trial. Conditional approval means that the firm will be able to sell its procedure while continuing to gather data on efficacy for a period of up to seven years. At the end of the seven year period, the firm must either apply for final marketing approval or withdraw the product. The system is thus similar to what Bart Madden proposed for pharmaceuticals in Free to Choose Medicine.

Due to its size and lack of price controls, the US pharmaceutical market is the most lucrative pharmaceutical market in the world. Unfortunately, this also means that the US FDA has an outsize influence on total world investment. The Japanese market is large enough, however, that a liberalized approval process if combined with a liberalized payment model could increase total world R&D.

Breakthroughs made in Japan will be available for the entire world so we should all applaud this important liberalization.

Hat tip: Michael Mandel.

Ten years after enrollment

At Bennington College in Vermont, over 48 percent of former students were earning less than $25,000 per year. A quarter were earning less than $10,600 per year. At Bard College in Annandale-on-Hudson, the median annual earnings were only $35,700. Results at the University of New Mexico were almost exactly the same.

There is more here from Kevin Carey.  There is the well-known debate between human capital and signaling theories, but sometimes education is neither…

Have age gaps in romance become more feasible? More desirable?

My simple model is that the world is segregating along the dimension of IQ more than before.  (Or is that IQ/conscientiousness?  Some other bundle?  Probably so.)  That includes more IQ-based segregation across firms, across cities, across marriages, and so on.  You see this in the productivity data, namely that top firms are doing pretty well on the cutting edge, and most other firms are lagging behind, with a greater innovation diffusion gap than before.  Most of the rise in inequality has been across firms, rather than within firms.

This increasing segregation is happening because it is a privately efficient way to run O-Ring production, although you might dispute whether it is also socially efficient, given the drain of talent from the middle and the bottom end.

The more there is segregation by IQ, the more likely you will find feasible and indeed desirable mixing across many other variables.  Including age.  Color of hair too.  Length of fingernails.  And so on.

For a conversation related to this point, I thank B.