Buffett’s Big Bet
Warren Buffett recently bet an ambitious hedge fund operator $1 million that
they won’t beat the returns of S&P 500 after their extremely hefty fees are
accounted for. Buffett claims investors will do as well with a no-load index
fund over the ten years of the bet. He has long been critical of the performance
claims of hedge funds, and his bet is intended to put his money where his mouth
is.
Details here. Of course, my money is with Buffett. Even if he doesn’t win the bet he is correct about the advantages of index funds. The academic research on this topic is voluminous and the lesson is straightforward – mutual fund managers don’t beat the market on average. Note that this doesn’t mean the market is perfectly efficient but it does mean that *you* are unlikely to beat the market. For more see my earlier post and also one of Tyler’s.
The Wisdom of Whores
She explained, as if to an enthusiastic but slightly dim child, that a waria who is hanging around on a street corner to be interviewed by a research team is a waria who is not with a client. ‘You are talking to all the dogs, obviously’.
Not something I learned in the lecture halls of London…but Ines is quite right. Our sample is biased towards the ‘dogs,’ who get picked up less than the cuter girls. So the study results underestimate the true number of clients per seller…
Ines’s comments…prodded us into changing the sampling strategy…now we work with the powers-that-be (the mami, the pimps, the brothel owners) to arrange off-hours time for data collection. The principle….is that you are not cutting into people’s work time, so there is less chance of talking only to the remnant sex workers who can’t get a client.
Kudos to Krugman
In the long run we are all the Grateful Dead.
That’s Paul Krugman summarizing the economics of digital information. Damn, I wish I had written that.
Markets in Everything: Pay to Stay
A small number of California jails have begun to offer pay to stay programs. These programs allow inmates in for minor crimes to "upgrade" to a private or public jail with better facilities. Evidently the fees are profitable to the jails. Take a look at how Santa Ana county advertises it’s hotel jail.
The Santa Ana Jail is pleased to host a full range of alternatives to
traditional incarceration. Our offerings include weekends in jail,
non-linear jail sentences, and a variety of work release options. Our
philosophy is designed to allow our clients (!, AT) to serve their obligations
to the court in a manner that respects them as human beings and permits
them to continue to provide for themselves and their families….
- Programs that include 2-day or 3-day weekends with minimal impact on
the client’s professional life. Work on Saturday and Sunday? No
problem… - Programs that permit jail sentences to be served in multiple parts.
Perfect for clients that live out of the area or clients with frequent
business travel. - Programs that permit the client to leave jail for work everyday. We
have helped everyone from 9 to 5 business people to oil-rig workers, so
no work schedule is out of the question.
The Santa Ana Jail is the
most modern and comfortable facility in the region. Our housing areas
are a world away from cement and steel bars….Most clients can be approved immediately, over the phone. We can also provide same-day acceptance letters for the court.
I have mixed feelings about these programs. On the one hand, someone has to pay for the jails and who better than the inmates? And note that to make an inmate-pays program effective you have to give them an incentive to pay.
But on the other hand the profit-maximizing strategy for a monopolist with different quality levels of service is pretty scary in this context. A profit maximizer will reduce the quality level of the lowest class service – perhaps even spending money (!) to make the quality level lower – in order to push people to pay for the higher quality. (For more on the theory, see Hal Varian’s elegant explanation.)
On the other hand (I know, I know, three hands) California’s prison system is already so overcrowded, violent and dysfunctional that one federal judge referred to medical care in the CA system as "outright depravity," thus we may already be close to the lowest quality level. See this classic MR post for an expert’s take on the incentives of private and public prisons.
More on pay-to-stay at a Michigan Law Review Symposium. Hat tip to Timothy Taylor at the Journal of Economic Perspectives.
Norman Borlaug on the Food Crisis
Here is Norman Borlaug, father of the green revolution, from about a decade ago but highly relevant today:
Yields can still be increased by 50-100% in much of the Indian sub-Continent,
Latin America, the former USSR and Eastern Europe, and by 100-200% in much of
sub-Saharan Africa, providing political stability is maintained, bureaucracies
that destroys entrepreneurial initiative are reigned in, and their researchers
and extension workers devote more energy to putting science and technology to
work at the farm level….I now say that the world has the technology – either available or
well-advanced in the research pipeline – to feed a population of 10 billion
people. The more pertinent question today is whether farmers and ranchers will
be permitted to use this new technology. Extremists in the environmental
movement from the rich nations seem to be doing everything they can to stop
scientific progress in its tracks. Small, but vociferous and highly effective
and well-funded, anti-science and technology groups are slowing the application
of new technology, whether it be developed from biotechnology or more
conventional methods of agricultural science. I am particularly alarmed by those
who seek to deny small-scale farmers of the Third World -and especially those in
sub-Saharan Africa – access to the improved seeds, fertilizers, and crop
protection chemicals that have allowed the affluent nations the luxury of
plentiful and inexpensive foodstuffs which, in turn, has accelerated their
economic development.
And here is an awesome graph showing how much land has been saved by improved agricultural productivity in the United States. 
The Economics of Sawdust
I was in Vermont over the weekend and talking to a dairy farmer about the rising price of milk. I was surprised when she said that higher sawdust prices was one of the causes. Sawdust? Sawdust, it turns out, is used for bedding the cows and the price of dust has doubled in the past year. I surmise that the downturn in housing construction has meant a reduced demand for lumber and thus less sawdust.
The connection between the housing market and the milk market is an interesting example of the dense connectedness of markets, "general equilibrium" in the language of economics.
The economics of sawdust also reminds us that the capitalist production system minimizes waste – entrepreneurs search out ways to extract the most value from every input and from every output. Thus even sawdust, as trivial a waste product as one could imagine, is turned into an input into milk production as well as into particle board, fuel nuggets, mulch and other useful products.
Addendum: The WSJ has more on sawdust.
The Singularity is Near
Department of No Clue
Christopher Hayes writing in The Nation.
The vast majority of interest groups in
Washington, from the Sierra Club to the AFL-CIO to Planned Parenthood,
are pursuing what Edsall calls "substantive reform"–attempting to push
legislation and enact policies that will provide public goods, protect
citizens from harm and redistribute benefits, rights and privileges away
from the powerful and toward middle-class citizens and disenfranchised
minorities.
And if you believe that, might I mention that if you act quickly I have some land in Florida just ripe for development.
The Education Transformation of China
University education in China is skyrocketing. In 1996 China had less than 1 million freshmen, in 2006 there were over 5 million freshmen. The freshman class is continuing to grow and university graduates, of course, are just 4 years behind. About half of the entering students are in a hard science or engineering program. As a result, China today produces 3 times more engineers than the United States and will quickly overtake the U.S. in total graduates.
Many people worry about what the Chinese education explosion means for
the United States but I am optimistic. First, as China and other countries grow wealthy the
incentive to invest in R&D is increasing. If China and India were as wealthy as the U.S. the market for cancer drugs, for example, would be eight times larger than it is today – and a larger market means more new drugs for everyone.
Second, the growth in Chinese education is
increasing the supply of new ideas and that too is a benefit to people around the world.
Surprisingly, China’s education system is being
transformed to a
considerable degree by private forces. As late as 1999 the Chinese government
paid for most university education but from 2001 onwards tuition and
fees account for more than half of total educational expenditures.
I have drawn much of the data in this post from a fascinating new paper, The Higher Educational Transformation of China and its Global Implications by Li, Whalley, Zhang and Zhao. The paper has much else of interest.
I will be traveling to China to give a talk at Yunnan University in late June and will report on the transformation as it looks on the ground.
Oil for Blood
In order to give blood donors a break from gas prices, the Red Cross [in Greensboro, NC. AT] is entering
all volunteer blood donors, who give blood between June 1, 2008 and June 30,
2008, into a drawing for one of two $750 gas cards.
So You Think You Can be President? Revisited.
Last year, I argued that instead of debates presidentidal candidates should have to compete in a series of games. The problem with debates is that most of the time voters don’t know what a good answer is. Thus…
…what we need is a way of conveying information to uninformed,
unsophisticated voters in a way that is entertaining yet produces
information about politicians that is correlated with real skills.
I suggested a game show, So You Think You Can be President?, which with different segments would test the candidates ability to solve real problems.
The idea seems to be catching on, as this piece in the NYTimes illustrates. Frankly, the segments I suggested plus the many excellent comments from MR readers were quite a bit better than those in the Times but it’s good to see that the idea is going mainstream.
Electing Judges
The NYTimes has a good piece today on judicial elections, pointing out how odd American practice is compared to the rest of the world.
Contrast th[e] distinctively American method of selecting judges
with the path to the bench of Jean-Marc Baissus, a judge on the
Tribunal de Grand Instance, a district court, in Toulouse, France. He
still recalls the four-day written test he had to pass in 1984 to enter
the 27-month training program at the École Nationale de la
Magistrature, the elite academy in Bordeaux that trains judges in
France.“It gives you nightmares for years afterwards,” Judge
Baissus said of the test, which is open to people who already have a
law degree, and the oral examinations that followed it. In some years,
as few as 5 percent of the applicants survive.
My work on judicial elections shows that elected judges serve their constituents (see also Judge and Jury). In particular, when the defendant is an out-of-state corporation awards are much higher in states that use partisan elections to select their judges than in other states. As one judge put it bluntly:
As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone’s else money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me."
Richard Neely (1988), West Virginia Supreme Court of Appeals.
Americans Driving Less
11 billion fewer miles were driven this March compared to last March.
Hat tip to Calculated Risk.
Print Your Own
Taken to the Cleaners, Again
A tariff on imports of coat hangers from China is raising dry cleaning costs. The Aplia Econ blog runs the numbers:
Advocates of trade restrictions often argue that protection will save
jobs. Since we can observe price and cost increases associated with
trade restrictions, we can estimate how much it costs to save each job
in a protected industry. According to the NPR story, there are roughly
30,000 dry cleaners in the U.S., and on average, each pays an
additional $4,000 per year due to the hanger tariff. This indicates an
average annual cost of 30,000 firms x $4,000 per firm = $120 million.
According to the U.S. International Trade Commission’s report,
U.S. employment in wire hanger manufacturing was 564 workers in 2004
and fell to 236 workers by 2006. Let’s assume that employment in this
sector would have fallen to zero in the absence of the tariff, and that
with the tariff, employment will recover to 2004 levels. In other
words, assume the tariff "saves" 564 jobs. Dividing the cost of the
tariff to U.S. dry cleaners ($120 million year) by the number of jobs
saved (564 jobs) indicates that each job saved costs about $212,765 per
year. Keep in mind that the typical full-time worker in this sector
earns about $30,000 per year. Even if we assume that industry
employment doubles, the cost of the tariff is still roughly $120,000
per job.