Category: Economics

Artificial heart won’t save lives

An FDA panel announced today that they would support approval of a new artificial heart. NPR and other media suggested that the new heart, which is designed only for temporary use and is not portable, would save lives by extending survival time until a transplant became available. But even if the artificial heart performs exactly as designed and even if it prolongs the lives of those who receive it, it won’t save lives overall.

The mathematics is simple; there are approximately 2200 hearts donated for transplant every year (data here). That means we can save 2200 lives a year and no more. All the artificial heart can do, therefore, is change who gets saved. Some people who previously died will live long enough to receive a transplant but this means there will be one less heart available for someone else on the waiting list. The artificial heart will make the waiting list longer but it will not save lives.

The only way we can truly save lives is to increase the number of organ donors. As readers of Marginal Revolution will know I have suggested financial compensation and organ donor clubs as the only realistic solutions.

Markets even in things you can’t imagine anyone would want

Read about restaurants where you do your own cooking, and no this is not just Korean barbecue. In some places you cook your own steak, at least they still wash the dishes for you.

The same article offers us some sad news:

Last fall, when almost 100,000 of the “surveyors” who contribute to the Zagat dining guides nationwide were asked what “irritates” them the most about dining out, 74% said service; only 6% said food.

And no, it’s not because they’re all dining at Matsuhisa.

That being said, I don’t think poor taste is the only culprit here. Often we blame the person we can see — the waiter — more than the person we can’t see, namely the chef. Economists have long understood the distinction between the seen and the unseen, let us not forget that the fallacy applies to other contexts as well.

Small business outsourcing can favor employment

Global giants aren’t the only companies cutting costs by shifting jobs overseas. Increasingly, small businesses are finding that “offshoring” jobs is a boon to their bottom line – and sometimes gives them room to create new jobs at home.
For example, when Rajeev Thadani wanted to expand Claimpower Inc., his medical-billing service in Fairlawn, N.J., he chose to outsource some of the work to India. But unlike most companies going this route, his business had just five other employees at the time.
Mr. Thadani, who runs the company with his wife, flew to his native Bombay in 2001 and hired four locals to help file insurance claims on behalf of New Jersey doctors. They use a software system that Mr. Thadani, a programmer by trade, developed specifically for the task.
Today, he employs 35 people [in India]…Now he’s taking steps to expand his business nationally, while planning to add staff in the U.S.

From The Wall Street Journal, Tuesday, March 16, Marketplace section.

This is comparative advantage in action, finding a cost advantage to create new and better jobs.

By the way, a new web site, BlameIndiaWatch details the scapegoating of India in the debate over trade and outsourcing. Here is their mission statement:

Blame India Watch is concerned with the increasing anti-Indian/anti-India sentiment among tech workers, as well as media coverage that focuses disproportionately on Indian workers or propagates anti-India(n) sentiment. What began a few years ago as IT grumbling about Indian-specific H-1B “Temporary Guest worker” and L-1 “Intracompany Transfer” workers and immigrants has now morphed into the outsourcing issue, and is now gaining international attention. We aim to highlight this scapegoating, encourage IT workers to put a stop it, and redirect the anger to where it belongs.

My take: I read about one Indian who said something like the following: “Hey, you lectured us for decades during the Cold War and Indian socialism. Aren’t we now doing exactly what you told us to?”

Unemployment in South Africa

More than 40 percent of the South African workforce is without a job and nearly 60 percent of those who are jobless have never worked. The NYTimes is correct that South Africa faces many problems including poorly educated workers, AIDS, and crime. But it is not true that South Africa is doing poorly “despite [it’s] sound economic policies.” In particular, if you read to the 22nd paragraph you find this buried lede:

In other developing countries, legions of unskilled workers have kept down labor costs. But South Africa’s leaders, vowing not to let their nation become the West’s sweatshop, heeded the demands of politically powerful labor unions for new protections and benefits. According to a study conducted in 2000 for the government’s finance department, South Africa’s wages are five times higher than Indonesia’s, even though its workers are only twice as productive.

To the great detriment of its people, South Africa’s leaders have been successful. South Africa is not the West’s sweatshop.

When is it rational to honor sunk costs?

Alex offers up some biography and describes his encounter with sunk costs. He asks the classic question: why honor a cost once it is sunk? Why not just go ahead and do what is best?

Brian at CrookedTimber writes the following, citing a paper by philosopher Thomas Kelly:

The main idea (roughly stated) is that since the value of an action is partially determined by what happens in the future…our current actions can be sometimes justified by the redemptive value they confer on past actions.

What does this mean concretely? Here is one example from Kelly:

One might prefer that, if others have made significant sacrifices in attempting to realize some valuable state of affairs S, then their sacrifices not be in vain. That is, one might prefer that these sacrifices causally contribute to the realization of some valuable state of affairs…Interestingly, one sometimes is in a position to determine, by one’s own actions, whether the past efforts of others will have been in vain. This is true, for example, when it is within one’s power to finish some valuable project in whose service others have labored, but which they are now not in a position to complete. Let us say that when one acts so as to prevent the past efforts of others from having been in vain one redeems those efforts.

In other words, you don’t want to admit that you shouldn’t have started your blog. And how about this?

Gilbert Harman…observes that, so strong is our desire to see our own past efforts play a role in bringing about valuable ends, we will often adopt new ends, carefully tailored, so that our past efforts can be seen as instrumentally valuable means to the achievement of these ends.

Let’s not forget the game-theoretic rationale for honoring sunk costs: You might honor sunk costs so that others do not perceive you as wasteful, or so that others perceive you as constant and reliable. Robert Nozick argued that we follow through on sunk costs as a kind of self-discipline, to prevent ourselves from initiating too many stupid undertakings in the future. If you self-signal that you will follow through on your commitments, you will be more careful in accepting commitments in the first place.

By the way, I have found that women honor sunk costs to a greater degree than do men. Furthermore women often do not like it when men announce that something is “only” a sunk cost.

The bottom line: Once your model of choice is at all complex, no one knows what a sunk cost means any more. So a theoretical scolding of those who honor “sunk costs” is not completely well-defined. That being said, there is still the empirical question of whether most people attach too much weight to previous plans and have a status quo bias. The experimental evidence suggests that we are more rigid than we need to be. The propensity to honor previous commitments may have efficiency properties, but we cannot discard this proclivity when we ought to.

Is overconfidence good for traders?

A little confidence is a good thing. But a lot of confidence may be even better — particularly if you’re a high-powered currency trader playing the international money markets.

Finance professor Carol Osler found that at least some of the wild and unexplained fluctuations in currency markets may simply be due to overconfident money traders. “Overconfidence can help you get ahead, but it can have serious ramifications, too,” says Osler, who teaches at the International Business School at Brandeis University.

Osler and her research colleague, psychologist Thomas Oberlechner of the University of Vienna, interviewed 416 currency market traders. They asked these wheeler-dealers to rate how successful they were as traders on a seven-point scale ranging from “much less successful” than other traders to “much more successful.” They also asked the traders’ bosses to rate the employees’ value to the firm, and then asked the traders to estimate what the exchange rate of five currencies would be in six months and in a year.

The first thing they learned is that — surprise! — most currency traders have outsize egos: Nearly three in four rated themselves as “better than average.” Even most traders working at less prestigious institutions thought they were better than most, Osler and Oberlechner reported in a paper they have presented at two European universities and at Harvard.

The distinct whiff of hubris was confirmed when they compared the traders’ self-evaluations with the supervisors’ ratings. More than half of the traders gave themselves a higher rating than their supervisors did, while few underestimated their value.

The researchers found that this self-confidence had no impact on a company’s bottom line. But it had a dramatic and positive impact on the careers of traders, increasing their chances of becoming a senior trader or chief dealer, when other factors such as age and trading success held constant.

Here is the link. Here is Carol Osler’s home page.

My take: I have mixed feelings about the core result. On one hand, competition is thick and you have to take chances to win special positions in life. This requires a certain amount of hubris. That being said, I worry about selection bias in the results. You only observe the ones who made it. Try asking the bankrupt currency traders, lying in the proverbial gutter, if cockiness was good for them. And let’s not forget about those in jail, or headed there.

Krugman vs the CEA

Paul Krugman goes beyond the bounds of decency and evidence when he accuses the Council of Economic Advisors of corruption. His evidence? The following graph (click to expand):


Krugman writes:

…wishful thinking on this scale is unprecedented. What you see in this chart is the signature of a corrupted policy process, in which political propaganda takes the place of professional analysis.

Now, the CEA has certainly made mistakes and can justifiably be accused of optimism (see Brad DeLong and passim) but Krugman’s chart is highly misleading. Here is the same data but over a slightly longer time-frame.


With this graph it becomes clear that the CEA has in essence been predicting a return to trend. Obviously, the CEA has been wrong, employment has not returned to trend, but that surely tells us more about the peculiar nature of this recession than it does about corruption at the CEA.

Has political progaganda taken the place of professional analysis? Indeed.

The jobless recovery

This week’s Business Week had a useful though non-revelatory feature article on the jobless recovery (note that the paper edition has much more than the link).

The bottom line? Two root causes — productivity gains and fear — appear to be causing our economy’s weak employment performance.

Rapid productivity gains mean that a business can produce the same output with fewer workers. So unless demand is truly booming, why hire more people?

At the same time uncertainties have kept business cautious. Terrorism, corporate scandals, and the bursting of the high-tech bubble all provide extra reasons to wait. Counterintuitively, largely positive changes, such as productivity boosts and their accompanying sectoral shifts, can spur caution as well. Why make your irreversible investment today when you will know more two years’ down the road?

Some research sources suggest that outsourcing has cost the U.S. only 300,000 jobs in three years, though all such figures should be taken with a grain of salt (for instance, when calculating the number, what is the relevant counterfactual?). A Wall Street Journal survey (12 March 2004) found that only sixteen percent of responding economists blamed outsourcing as a significant source of job losses. More importantly, outsourcing creates more jobs than it destroys; let us not forget the positive role of insourcing as well, the U.S. receives massive capital flows from outside.

And who is to blame for the jobless recovery? Paul Krugman finds a not unsurprising culprit:

…should we blame the Bush administration? Yes – because it refuses to learn from experience. Franklin Roosevelt, in his efforts to combat economic woes, was famously willing to try anything until he found something that worked. George Bush, by contrast, seems determined to try the same thing, over and over again.

I hope Krugman does not really mean the Roosevelt point. Recall that the Great Depression was by many measures worse in 1937-8 than in 1932. A willingness to “try anything” is hardly a recipe for economic success.

And while I buy the Krugman line on Bush’s fiscal irresponsibility, we don’t find it priced in the bond market. So why should we think those bad policies are driving the labor market?

Brad DeLong suggests that the tax cut was ill-targeted for the purposes of stimulating aggregate demand. Point granted. That being said, government is better at stimulating nominal rather than real aggregate demand. In times of structural uncertainty, often the latter is more badly needed. So I don’t blame Bush fiscal policy, whatever its flaws, for the jobless nature of recovery.

The Democrats have little to offer in the way of short-run cures. Perhaps assisting the jobless can be defended on distributional grounds, but it can delay reemployment as much as boost it. A new President, whether or not you favor the idea, would increase rather than lower uncertainty, at least at first. Greater fiscal responsibility will pay off in the future (I am all for it), but I don’t see how it will boost employment over the course of, say, two years. Most of the relevant uncertainties are real and structural in nature.

Read this post on why many people are no longer looking for jobs. Reeducation is a significant reason why many people have stopped looking for work. This might someday kick in with higher productivity. But note also that workers fear being locked into jobs that will later brand them as losers. So in times of uncertainty they, like businesses, often will simply prefer to wait.

The bottom line: There is a potential silver lining in the cloud that we call the jobless recovery. Once those people get to work, output could be especially high, provided we don’t mess up in the meantime. That being said, responsible economists all along the political spectrum remain puzzled by the jobless recovery. We can cite and roughly agree on its causes. But at the end of the day, relative to other recoveries, we all remain surprised by the slowness of employment to adjust.

Addendum: Here is Alex on productivity and employment.

Rich nations can conserve water

Efforts to conserve water – from low-flush toilets to more efficient power plants and crop irrigation – are working so well that Americans use less of it than they did 30 years ago, a report issued Thursday by the federal government says.

The flat trend in consumption came even as the USA’s population grew and electricity production, the largest user of water, increased.

The study from the U.S. Geological Survey says consumption is largely unchanged since 1985 and is 25% less than the 1970s, when it peaked.

Here is some more evidence:

The biggest savings have been by industry. And that is a result of water-saving technology driven by energy-saving and environmental protection laws passed in the 1970s. Utilities that once needed huge amounts of water to cool electrical generating plants in “once-through” fashion now conserve water by recirculating it in a closed loop.

The report says the USA consumes 408 billion gallons a day. Homes and most businesses use 11% of that. Nearly half, 48%, goes to power plants. Watering crops takes 34%. The remaining 7% includes mining, livestock and individual domestic wells.

Here is the full story, which also ranks states by water use. Here is the original report. On a global scale, agriculture accounts for 70 percent of water use, which indicates further room for conservation. It is indeed a problem that rich nations use ten time more water per capita than poor ones. But in a time when people are talking seriously of nanotechnology, can cheap desalinization be so far on the horizon? Read here on a recent Israeli effort.

Are bubbles good for economic development?

Fools rush in, but should we mind?

…when it comes to transformative technologies, overoptimistic investors are actually working for the common good–even if they don’t know it. We can be glad that investors financed the construction of thousands of miles of track in the middle of the nineteenth century, despite the fact that most of them dropped a bundle doing it. The same goes for overoptimistic investors who poured money into semiconductors thirty years ago, financed undersea fibre-optic cables in the late nineties, and now are poised to lose their shirts in the coming nanobubble. In the dreams of avarice lie the hopes of progress.

The full story concerns the nanotechnology bubble, by the ever-intelligent James Surowiecki, writing for The New Yorker.

My take: The real story of the invisible hand is that many of the rewards offered by the capitalist system are illusory in value. Ayn Rand had a point that the world rests on the shoulders of the talented few. She forgot that those people often aren’t very rational.

Copyright protection for folklore?

Two days ago I asked whether we should extend copyright protection to folklore. Thank you all for your interesting and informative replies.

Here are some possible answers which I don’t find sufficiently forcing:

1. Folklore has already been produced. TC: Of course you could say the same for a good deal of music. Why treat folklore differently?

2. Most folklore is very old and copyright protection would have expired by now anyway. TC: Folklore is not so old and musty; rather it evolves frequently and changes rapidly. Here is one source on contemporary folklore, here is another. Here is a brief account of contemporary Haitian folklore.

3. Folklore could never have evolved in the first place, had much earlier folklore received copyright protection. TC: This point is true, but you still could have copyright protection against for-profit uses of folklore. Author Edwidge Danticat can publish and copyright a processed version of folklore. Since those books bring in money, the law could stipulate that some royalties go back to the folklore creators.

4. Copyright is an incentive for future production, and we’re not going to have much future folklore anyway. TC: Hard to disprove a claim of this kind, but I don’t believe it. Arguably folklore has never been more vital than in today’s world.

So we are left with the following:

5. With folklore it is harder to define a clear line between copying and independent discovery. Similarly it is hard to draw a clear line between general inspiration and outright borrowing. Borrowing in general is harder to trace, a given derived story could have come from numerous sources. TC: This argument carries real force with me, although how different is music, consider George Harrison.

6. A culture is better off if other cultures can borrow its tales and “memes” without restriction. TC: Copyright holders could always waive their rights if that were beneficial, though admittedly there is an externalities problem for a culture as a whole. And again, you could apply the same argument to music.

7. Folklore is collectively produced, ownership is hard to assign, and there are no relevant corporate entities in most cases. Entrusting copyright ownership to “tribes” will encourage politicization and rent-seeking behavior. TC: Hard to argue here.

8. Folklore rarely offers a final, set, canonical, or well-defined final product. TC: I wonder if digital technologies will move other art forms in this same direction.

All interesting hypotheses. Many of them might be true, I still can’t get past “I don’t trust the courts in these other countries to enforce copyright in folklore, it will just lead to rent-seeking.” See my earlier post, at the first link, for further clarification.

I hope to soon consider other angles on related problems, such as whether there is a right to cultural privacy.

Markets in everything, in the subjunctive…

Here is a new way of organizing peer groups and your Friday evening out:

The ability to track the locations of people has a lot of other applications of course. As the tracking devices become smaller and cheaper expect to see parents putting them in their children both to protect their children from kidnapping and also simply to find out what trouble the kids are getting themselves into.

Another possible interesting application would be to manage affinity groups. Imagine a traveller who is cruising down a road trying to decide which night club to try out. If people registered with an affinity tracking service then a traveller could choose a club or restaurant whose currently present patrons fit some desired demographic profile. One obvious problem with such a service is that just because one person likes a particular type of person doesn’t mean that most who fit a desired profile will like that person in return. Look at celebrities for example. They are loved by all sorts of people who the celebrities would very much like to avoid. So a service would need to develop eligibility criteria that require matching of preferences in both directions before that person driving down the street would get a flashing light on their car LCD pointing them to a particular bar or night club.

That’s from Randall Parker, read his longer discussion, which focuses on GPS monitoring of criminals.

The costs of corruption

More corrupt states have lower credit ratings, even after adjusting for other determinants of creditworthiness. What is the economic impact of a one standard deviation increase in the public corruption index above the national mean? Over half (0.58) of a Moody’s credit rating.

Here is the original research. Here is an earlier MR discussion on which is the most corrupt state.

Hot potatoes

I am delighted that I can now buy irradiated beef at my local supermarket. It’s safer than regular beef but I would buy it just to spite the anti-science hysterics who kept this technology off-the-shelf for decades. Irradiation has recently been approved for Hawaiian sweet potatoes – the expense of the previous technology, methyl bromide fumigation kept these purple spuds out of mainland markets.

Of course, the mainland-based U.S. Sweet Potato Council is worried about competition. Mainland growers produce 1.3 billion pounds annually and Hawaiian output is only 1.8 million pounds leading the Potato Council to a unique argument for protectionism, “Hawaiian production is a mere pittance . . . and therefore, Hawaii should be able to consume every sweet potato they produce and then some.”