Category: Economics

Here is a result I do not believe

Consider this hypothesis: In the past, such as the nineteenth century, resources were far less mobile. So corrupt officials had to keep their ill-gotten gains at home. This (supposedly) helped the growth prospects of those economies:

In the relatively closed economies of the 19th century, the gains from corruption remained inside the country and became part of the economy’s productive capital. In contrast, in today’s open economies, corrupt agents smuggle stolen money abroad depleting their country’s stock of capital.

Here is a link to the paper. Here is a recent and slightly misleading summary from The New Scientist.

My take: This can’t be right. Most corrupt agents hold and want money, they do not keep capital goods under their pillow. Let’s say that those agents simply burned the money. This would not destroy any real capital for the economy; co-blogger Alex and I used to call this the “Junker fallacy” (recall the mistaken old view that early Germany did not grow because the Junkers bought land instead of investing in capital). So sending money abroad should not be the fundamental problem. Furthermore the distorting effects of corruption are more important than any so-called loss of capital.

The authors do have an interesting empirical result, namely that corruption damages wealth more when the economy is open. But even if this relationship is causal, we have to look for another mechanism. My best intuitive shot is the following: if the economy is open, international investors will, sooner or later, punish it for the corruption, a’ la Indonesia or Argentina.

Movies and capitalism

I continue to be amazed at the high-quality specialized blogs out there. The latest: a new blog about how capitalism is portrayed in the movies, courtesy of Larry Ribstein, legal scholar.

From the blog, here is a list of movies that portray business and private enterprise in a favorable or semi-favorable fashion:

Mr. Deeds Goes to Town (1936)
It’s a Wonderful Life (1946)
The Bad and the Beautiful (1952)
Executive Suite
Charley Varrick (1973)
Heaven Can Wait (1978)
Tucker: The Man and His Dream (1988)
Do the Right Thing (1989)
You’ve Got Mail (1998)
Cast Away (2000)

Thanks to ProfessorBainbridge.com for the pointer.

Addendum: David Hecht points out that “Sabrina” and “Working Girl” are missing from this list. And I haven’t seen “You’ve Got Mail,” but I recall that the previews villainized book superstores.

Second addendum: Here is a very useful discussion of “You’ve Got Mail,” from ProfessorBainbridge.com.

Why Botswana?

From 1965 to 1995, Botswana was the fastest growing country in the world. During this 30 year stretch, Botswana’s average rate of growth was 7.7% per year. Relative to other nations, Botswana rose from the third poorest nation in 1965 to an “Upper Middle Income” nation.

Of course the rest of Africa has not nearly done so well. The account of Acemoglu, Johnson, and Robinson, later published in Dana Rodrik’s In Search of Prosperity: Analytic Narratives on Economic Growth, suggests the following (summary taken from Beaulier):

1. Botswana possessed relatively inclusive pre-colonial institutions, placing constraints on political elites.

2. The effect of British colonialism on Botswana was minimal, and did not destroy inclusive pre-colonial institutions.

3. Following independence, maintaining and strengthening the institution of private property was in the economic interests of the elite.

4. Botswana is rich in diamonds. This resource wealth created enough rents that no group wanted to challenge the status quo at the expense of “rocking the boat.”

5. Botswana’s success was reinforced by a number of critical decisions made by
the post-independence leaders, particularly Presidents Khama and Masire.

Scott Beaulier, a graduate student at GMU, attempts to amend this view. He argues that British colonial policy was not so beneficient toward market institutions and rule of law. Most of all, “Botswana’s success was the result of good post-colonial policy choices.”

In other words, countries are not trapped by their past. I don’t know enough history to judge this research, but I do know that topics such as Botswana, or Mauritius (another success story), are underexplored by economists.

Addendum: Abiola Lapite refers me to his interesting blog post, he suggests that the relative ethnic homogeneity of Botswana is a critical factor.

An insight on the Kyoto treaty

Sidelight: Why does Germany favor the Kyoto Treaty? Not so much for greenhouse reasons but so that Berlin can shut down the country’s subsidized, politically powerful coal-mining industry. German leaders have wanted for decades to cut subsidies for coal production–even the presumably pro-labor current government wants this–because coal mined in Germany costs more than twice the world price, mainly owing to featherbedded work rules. Every move to reign in the German coal industry has been greeted by public howls. But if Berlin could blame a coal shut-down on an international obligation, and polls show the Kyoto accord is very popular among Germans, the equation would change.

From Gregg Easterbrook, thanks to Michael Green for the pointer.

Look Out for the Big, Messy Countries

Over the next 50 years, Brazil, Russia, India and China – the BRICs economies – could become a much larger force in the world economy. We map out GDP growth, income per capita and currency movements in the BRICs economies until 2050.

The results are startling. If things go right, in less than 40 years, the BRICs economies together could be larger than the G6 in US dollar terms. By 2025 they could account for over half the size of the G6. Of the current G6, only the US and Japan may be among the six largest economies in US dollar terms in 2050.

The list of the world’s ten largest economies may look quite different in 2050. The largest economies in the world (by GDP) may no longer be the richest (by income per capita), making strategic choices for firms more complex.

We are also told that India has the greatest long-term potential for growth over the next thirty to fifty years.

From Goldman-Sachs, click here to get the whole study.

My take: These numbers are very speculative. Don’t assign them any predictive weight, but the article does outline one possible scenario. Don’t forget, circa 1960 or so, many economists were picking Ceylon (Sri Lanka) and the Philippines as the next big winners.

Thanks to Bart Oosterveld for the pointer to the piece.

Dollars for Donors

The shortage of human organs for transplant grows worse every year. Better immuno-suppressive drugs and surgical techniques have raised the demand at the same time that better emergency medicine, reduced crime and safer roads have reduced organ supply. As a result, the waiting list for organ transplants is now 82,000 and rising and more than 6000 people will die this year while waiting for a transplant.

The economics of the shortage are so obvious that one popular textbook, Pindyck and Rubinfeld’s Microeconomics, uses the organ shortage to explain the effect of price controls more generally!

Perhaps because the shortage is growing, opposition to financial compensation for cadaveric donation (compensation for live donors is a distinct issue) appears to be lessening. The AMA, the American Society of Transplant Surgeons and the United Network for Organ Sharing have agreed that tests of the idea would be desirable. (A group of clerics, doctors, economists (I am a member) and others has formed to lobby for the idea – see our letter to Congress.) Currently, even tests are illegal but Representative James Greenwood (R, Pa.) has introduced a bill (H.R. 2856) that would create an exception.

Aside from the obvious benefits of saving lives, financial compensation for organ donation would likely save money. Here is a back-of-the-envelope calculation. There are some 285,000 people on dialysis in the US. Transplants are cheaper than dialysis by something like $10-$25,000 per year. About a quarter of those on dialysis are on the waiting list but perhaps as many as half could benefit from a transplant (fewer people are put on the list because of the shortage.) Let’s take the lower numbers. Assume that a quarter of the patients on dialysis could benefit from a transplant and that cost savings are $10,000 a year for five years. Then ending the shortage would save 3.5 billion dollars. Note again that this is a lower estimate. How much would it cost to end the shortage? No one knows for certain but I think a $5000 gift to the estates of organ donors would increase supply enough to greatly alleviate the shortage – that would involve doubling the supply to 12,000 for a paltry cost of $60 million. If this is not enough – raise the gift – anyway you cut it, the savings from dialysis exceed the costs of compensating donors by a large margin.

We should in fact count the value of the lives saved. If we can save 6000 lives and value each life at 3 million dollars (a lower value than what the US government typically uses in its calculations) then that is a further gain of 18 billion dollars.

A Tragedy of the Commons?
Economics provides another way of looking at the crisis. Currently we have organ socialism – anyone who needs an organ is allowed access to the organ pool regardless of whether or not they contributed to the upkeep. As with other resources owned in common we get over-exploitation and under-investment. Consider, instead a “no-give, no-take policy” – only those who have previously signed their organ donor cards are allowed access to the pool. Not only is this more moral than the current policy it creates an incentive to sign your organ donor card. Signing your card becomes the ticket to joining a club – the club of people who have agreed to share their organs should they no longer need them. Equivalently signing your organ donor card becomes analogous to buying insurance. I discuss the idea further in Entrepreneurial Economics.

An organ club has in fact been started – I am not just an adviser, I’m also a member! You can join too at www.lifesharers.com.

New Nobel Prize

I hear it is Robert Engle and Clive Granger, not yet on the major news outlets, more to follow later today.

Addendum: Here is the press release from Stockholm. Here is a short article on cointegration, Granger’s most important contribution. Here is an introduction to ARCH models, a technique pioneered by Engle. Here is Engle’s home page, and Clive Granger’s home page.

My take: Very good picks, economists use their contributions all the time, note that their work is of less interest to the general public than is usually the case.

A New Proposal for Cleaner Air

Most auto emissions come from the dirtiest ten percent of the cars on the road. Why should we ignore this fact? Daniel Klein suggests using infra-red beams to measure the quality of auto exhaust from particular cars, as they drive by the sensors. Identify the minority of gross polluters by photographing their license plates, and then get them off the road, force them to fix their cars, or tax them. Note that your annual or bi-annual auto emissions test is easy to fake or prepare for. Under Klein’s scheme the government measures the quality of auto exhaust, and lets the car owner invest in a better result however he or she wishes to do. My main worry concerns privacy issues, but perhaps privacy is headed out the window in any case. To read about related essays on economic policy and technology, from the same book, see my previous post on electricity.

Getting off the grid

In a few short months we have had major blackouts in New York City, England, Italy, and Scandinavia, see Lynne Kiesling’s blog for a running analysis of energy and electricity events. In each case critics have charged that ill-conceived deregulations have led to underinvestments in power grids.

To what extent could we avoid these problems by decentralizing electricity supply altogether? Why not just pull off the grid and have your own generator? How practical will this be in the future? More than ten percent of the American power supply is already produced this way.

These are exactly the kind of engineering questions that I have little sense of. But I have just read the most detailed case for decentralization to date. The authors argue:

Dispersed [electricity] generation has long been economically viable, with technology making it even more so. Natural monopoly is a myth.

The authors also give numerous details about how current regulations hinder such a decentralized market solution.

One of the authors, Alvin Lowi, is an engineer with numerous patents to his name and forty years experience. The article is in a Cato book edited by Fred Foldvary and Daniel Klein, The Half-Life of Policy Rationales, or click here for the Amazon.com link. Here is the Cato press release about the book, which looks about how new technologies can make government interventions unnecessary. Again, I cannot evaluate the arguments, but this is definitely an advance in the debate.

Where are all the new drugs?

The NYTimes reports that “introductions of new drugs plummeted last year to 17 from a high of 53 in 1996, despite a near doubling in annual research spending, to $32 billion.” The Times blames lost lab productivity from mergers. Based on close second-hand experience – my wife is a microbiologist who worked at a pharmaceutical firm as it underwent a merger – I can attest to the fact that mergers create havoc. Reaping the potential economies of scale and scope that drive the merger requires that product lines be discontinued and new lines of hierarchy established. But the power struggles involved in the transition are dissipative and disheartening. It’s not uncommon for some research programs to be canceled and then started again as new coalitons form. The uncertainty alone is draining. The best of the researchers have no stomach for this ordeal and jump ship.

The Times gets a number of things wrong, however. It can take a dozen or more years to research, develop and get a new drug approved so it makes no sense to compare this year’s research spending with this year’s output. The fact that research spending is up even though current output is down is a positive signal of potentially better things to come.

The Times also misses the fact the FDA was approving drugs faster in the late 1990’s than for many decades previously. The FDA got burned, however, as Pulitzer prize-winning critics accused it of endangering the public. Sadly, the FDA learned its lesson and slowed down. (See here for more on FDA incentives and why the Pulitzer prize committee did us all a disservice.)

Finally, the Times says nothing about why the mergers are taking place. One reason is the rising cost of pharmaceutical research. It now costs $900 million dollars to bring the average new drug to market. Firms are merging in order to better control these costs and diversify their risks. FDA reform could lower these costs.

The new Stiglitz book

Last night I read my newly-arrived copy of Joseph Stiglitz’s The Roaring Nineties: A New History of the World’s Most Prosperous Decade. As you might expect from Stiglitz, it is well-written and smart.

His key theme is that, although the nineties were a wonderful time economically, they also brought some dangerous trends. Most of all, the capital market ruled resource allocation, and economic policy, like never before. We misallocated resources on a tremendous scale, such as with the telecommunications boom and bust. Stiglitz also argues against the deregulation of the nineties, as too little was done to reign in corporate abuses, such as Enron. He also believes that the Clinton administration was too obsessed with balancing the budget.

My hesitations about this book are simple: We are never given much of a recipe for how things could have been better. Stiglitz opposes the repeal of Glass-Steagall, and the Clinton telecommunications reforms. To be sure, these policies were problematic in some regards, but they did not drive the excesses of the 90s. To what extent can government policy limit a dot.com or fiber optic boom? To what extent can government policy, as opposed to intra-firm institutional reforms, limit corporate conflicts of interest? We do not get much of an inkling on these critical issues.

Occasionally Stiglitz gets specific, but his examples do not help his case: “Would the bubble have been averted if only we had only supported better accounting of executive stock options? We will never know the answer.” But the answer is almost certainly “no,” most commentators regard the option accounting issue as a red herring, here is one treatment of many.

It is OK to write a pure critique, rather than a recipe for change, but the book promises “a coherent and convincing alternative.” That is precisely what we do not get. The final chapter “Toward a New Democratic Idealism” also does not move beyond the vague. It is not enough to say we had too much deregulation and forgot our concern with social justice.

Stiglitz also expresses concern that the Clinton administration pushed “market fundamentalism” on the poorer countries of the world, while rejecting it at home. I cannot agree here. Even if you take the Stiglitzian worldview as correct and given, the quality of government in the developed countries is much higher than in the developing world. Admittedly the quality of the market is often higher as well, but why promote a regulatory regime that will bring corruption and privilege? Most poorer countries simply cannot count on good and honest regulation, and they don’t have Joe Stiglitz as the main economic advisor to their Presidents.

Muzak

It’s not surprising that background music can have a significant effect on how people shop (fast versus slow has the expected effect on shopping and dining time, for example). I am amazed, however, that the style of music can affect what people buy. British researcher Adrian North (includes many abstracts of North’s music research) and colleagues split up a wine shelf into French and German wines. On alternate days they played French and German music.

When the tape deck wafted French accordion tunes down the aisle, shoppers bought a total of 40 French wines and only eight German wines. On days when the pounding beat of a German oompah band greeted shoppers, they bought only 12 French wines but 22 bottles of German wine.

The economic importance of glass

Without glass:

…there can be no light switch, for there is no glass for the light bulb…There are no contact lenses or spectacles to help us.
There is no clear mirror in the bathroom to shave by, no bottles of ointment or glass for our toothbrush. There is no television in the living room, for with no screen it cannot exist. When we look out of the windows we see no cars, buses, trains or aeroplanes, for without windscreens none of them can operate (and they almost certainly have not been developed anyway). The shops in town have no window displays…
…There would almost certainly be no electricity, since its first generation depended on gas or steam turbines, which required glass for their development…Our fields would produce less than one twentieth of their current yield without the fertilisers discovered by chemists using glass tools…Telescopes, microscopes and spectacles let us see the distant and the near in ways which the human eye unaided cannot do.

From The Glass Bathyscaphe, by Alan Macfarlane and Gerry Martin (these links on the authors are more interesting than usual), a distinguished historian and an industrial expert on glass, note that Martin is also Macfarlane’s patron.

The authors examine twenty critical experiments that changed our world, chosen at random, fifteen of them could not have been performed without glass. For largely accidental reasons, glass manufacture was rising in the West while it was declining in China, Japan, and the Islamic world. Better use of glass, and better science, led to a spiral of technological improvements that enabled the rise of modern science and the Industrial Revolution. Here is a short summary article by Macfarlane.

The authors offer an on-line essay on glass in India. Here are some film clips on the importance of glass in history. Here are press reviews of the book. The authors are properly subtle and qualify their thesis in the required ways, the book is also well-written and entertaining, recommended reading.

Organ trafficking

I learned the following today:

1. Most sales of body organs involve kidneys.

2. Patients who receive a kidney from a living donor have a much better chance of surviving.

3. In the developing world the going rate for a kidney is between $1000 and $2000.

4. In the Philippines there is essentially a free market in bodily organs. The “grey market” is growing rapidly in many countries.

5. Two different studies suggest that kidney sellers do not benefit in the long run. Most sellers pay off debts with the money, and end up back in debt, their acts of desperation do not succeed. Many end up with long-run health problems, or can no longer perform heavy labor.

From this week’s New York Review of Books (electronic subscription required), “The Organ Market,” by Sheila and David Rothman. The authors are involved with an “organ watch” movement, which seeks to stop organ sales abuses.

My take: I can believe the “behavioral irrationality” argument that most kidney sellers do not benefit very much, if at all. But the Rothman piece never tries to estimate how many lives are saved by the practice. Furthermore, many of the selling “victims” might have performed some other desperate act instead. So the organ selling idea, although repugnant to many people, in my mind remains in the running as a serious policy proposal.

There is a moral hazard problem, namely hospitals and doctors may take kidneys from people when they shouldn’t. Or a hospital or doctor may let a patient die, to harvest the kidneys. Are more lives lost through the moral hazard problem than are saved through the kidney sales? I doubt it. Do the kidney buyers benefit more than the kidney sellers lose? Probably.

Utilitarian calculations are not the only value at stake here, but so far they point toward allowing organ sales. The best argument against is to cite the likelihood of accompanying rights violations, which are real, and claim that such a factor outweighs the utilitarian benefits of the practice.

Addendum: On point number two, the authors write: “patients who receive an organ from a living donor have far better prospects than those who receive an organ from a cadaver.” Co-blogger Alex sends me the following link, which shows a correlation of about ten percentage points more of survival, if you receive an organ from a living donor, the causal relationship may be weaker, given the differing ages of various recipients. Alex wonders if allowing kidney demanders to “buy from the dead” would reduce the problems of sale from the living. This is a good point, but I am not sure it eliminates the basic problem. First, sales from the dead may not displace sales from the living; I cannot determine whether the Philippines (not to mention other locales) restricts sales from the dead but it is not obvious that such differential restrictions exist. Second, many of the buyers are relatively wealthy. If a “live kidney” raises the chance of survival by only a single percentage point, they may still pay for that, which would continue to prop up the market in kidneys from the living. Kidney middlemen may find it easier, and more profitable, to buy from the living for a thousand or two, rather than pursue cadavers, where the quality of the kidney is presumably harder to determine.