Category: Economics

Directed Innovation in the Artificial Limb Industry

A. A. Marks advertising card, showing a customer holding and wearing his artificial legs, late 1800s Courtesy Warshaw Collection, Archives Center, National Museum of American History. http://www.civilwarmed.org/prosthetics/

Innovation responds to both demand and supply. New scientific discoveries can arise exogenously and lower the cost of some types of innovation. Innovation, however, also responds to demand. The patenting of new energy devices increases as the price of oil increases. Similarly, new pharmaceuticals to treat diseases of old age increase as the number of elderly increase.

Similarly, the Civil War and World War I created a boom in the demand for artificial limbs and that in turn created a boom in innovation that led to better artificial limbs. The demand for new prosthetics was in some cases personal, as MacRae writes:

…the person who launched the era of modern prosthetics was also the first documented amputee of the Civil War–Confederate soldier James Edward Hanger. Hanger, who lost his leg above the knee to a cannon ball, was first fitted with a wooden peg leg by Yankee surgeons. Unhappy with the cumbersome appendage, Hanger eventually designed and built a new, lightweight leg from whittled barrel staves. Hanger’s innovative leg had hinges at the knee and foot, which helped him to sit more comfortably and to walk with a more natural gait. Hangar won the contract to make limbs for Confederate veterans. The company he founded–Hanger, Inc.–remains a key player in prosthetics and orthotics today.

In a highly original paper, Jeffrey Clemens and Parker Rogers document the increase in patents during the war eras but they also show that the type of innovation not just the quantity also responded to economic incentives.

In the Civil War era, the quantity of limbs demanded increased but the government was quite stingy in paying for artificial limbs. As a result, innovators focused on process innovations that enabled the production of more limbs at lower cost. In contrast, WWI payments were more generous and the government emphasized reintegrated soldiers into society which made appearance a more dominant feature in limb patenting.

More generally, Clemens and Rogers show how the type of procurement contracts directs not just the quantity but the form of innovation. The lessons are relevant for modern health care costs. Many people, for example, have wondered why innovation tends to lower costs in most fields but raise costs in health care. Clemens and Rogers point to the nature of procurement contracts as a possible important influence.

Coronavirus markets in everything

Government officials across Hubei province, the epicenter of the coronavirus outbreak, are desperate to find ways to stop the spread of the infection.

In Hubei’s Fangxian County, officials are trying a different approach — paying sick people.

According to an official Fangxian County notice, anyone who is sick and reports themselves to a hospital can expect to be paid.

Patients who have a fever and turn themselves in will receive 1,000 yuan ($142).

But officials and other interested parties are also being offered cash incentives if they catch anyone with a fever. For each person with a fever who is reported by an official or citizen, there is a reward of 500 yuan ($71).

The notice said that the offer is only valid from today until February 18.

Here is the link (nothing extra there, except a noisy video and you have to scroll down a lot).  Via Neville.

Coronavirus multilateral insurance markets in everything

As financial markets fretted over the spread of a coronavirus outbreak in China this week, one security was in the firing line more directly than any other. Holders of the World Bank’s pandemic bond will lose principal if the disease spreads by a sufficient amount, writes Jasper Cox.

The World Bank’s pandemic bond, issued in 2017, provides funding for the development bank’s Pandemic Emergency Financing Facility (PEF) if an outbreak of one of six viruses meets certain conditions.

Here is the link (gated), here is a more detailed John Dizard FT story:

The event triggers were calculated on a complex formula based on deaths in the country of origin, a smaller number of deaths in neighbouring countries, and a relatively rapid increase in infection and mortality. Interest charges were assumed by rich-country donors including Germany and Japan. The riskier bonds pay 11.5 per cent over Libor, since they required only 250 deaths to reach the trigger. Not bad, considering the “expected loss” for the tranche was only 7.74 per cent. The less risky tranche required 2,500 deaths, so only paid 6.9 per cent over Libor, compared with an expected loss of 3.57 per cent.

Here is a pre-coronavirus discussion of the bonds, mostly with reference to Ebola.

Pollution in India and the World

I spoke on the negative effects of air pollution on health and GDP at Brookings India in Delhi. The talk was covered by Indian media. The Print had a good overview:

The long-held belief that pollution is the cost a country has to pay for development is no longer true as bad air quality has a measurable detrimental impact on human productivity that could in turn reduce GDP, Canadian-American economist Alex Tabarrok said.

…“There is this old story that pollution is bad, but it increases GDP… When the United States and Japan were developing, they were polluted. So India and China also have to go through that stage of pollution — so that they get rich, and then they can afford to reduce pollution,” Tabarrok said.

“I want to say that that story is wrong. What I want to argue is that a lot of the new research indicates that we may be in a situation where we could be both healthier and wealthier at the same time by reducing pollution,” he said.

…At the seminar, Tabarrok pointed out that expecting people to make sacrifices for the sake of future generations is not a politically fruitful way to deal with pollution.

Citing the issue of crop burning in India, he said farmers are not going to be inclined to change their behaviour if they are told to stop stubble burning for the sake of Delhi residents.

“However, if these farmers are made aware of how the crop burning harms them and their families and affects their soil quality, they are more likely to participate in mitigation measures,” he said.

I was pretty tough on government policy as Business Today India reported:

More than half of India’s population lives in highly polluted areas. Research by Greenstone et al (2015) proves that 660 million people live in areas that exceed the Indian Ambient Air Quality Standard (NAAQS) for fine particulate pollution. In this context, having measures such as banning e-cigarettes and having odd-even days for vehicles to solve the problem of air pollution seems ridiculous, says Alex Tabarrok, Professor of Economics at the George Mason University and Research Fellow with the Mercatus Centre. “These are not appropriate solutions to the scale and the dimensions of the problem,” he says.

Is (productive) big business taking over services?

From today’s WSJ, by Chang-Tai Hsieh and Esteban Rossi-Hansberg:

If you live in a midsize American city, you’ve probably noticed that an increasing share of local services are provided by chain establishments such as the Cheesecake Factory and Wegmans. Why? It’s because the industrial revolution that transformed U.S. manufacturing more than a century ago is finally reaching many local services, which had long resisted standardization.

…Locals sometimes lament when a new chain in town bears down on a mom-and-pop shop. But in the past four decades industries in which top firms have grown in share have created many more jobs than ones where market share is dispersed among small peers. Companies that have taken advantage of the industrial revolution in services grow by expanding into smaller cities or exurbs, and provide competition to previously dominant local monopolists. This brings jobs, as well as cheaper and higher quality services from groceries to health care, to areas that need them most.

In contrast, employment has shrunk in sectors still dominated by small independent operators, such as plumbing and electrical wiring. Over the past four decades, the growth of the top 10% of firms in local services in a given year has accounted for 80% of the cumulative wage and employment growth in the U.S.

Might this also someday mean that services will become easier to export?  I am also happy to recommend the authors’ underlying piece The Industrial Revolution in Services.

DIY Pancreas?

People suffering from diabetes have turned to sophisticated do-it-yourself technologies. Here’s the abstract to an excellent article on these developments by Crabtree, McLay and Wilmot:

Diabetes technology has been advancing rapidly over recent years. While some of this is driven by medical technology companies, a lot of the driving force for these developments comes from people living with diabetes (#WeAreNotWaiting) who have developed their own ‘do-it-yourself’ artificial pancreas systems (DIY APS) using continuous glucose monitoring, insulin pumps and smartphone technology to run algorithms shared freely with the intent of improving quality of life and glycaemic control. Existing evidence, although observational, seems promising but more robust data are required to establish the safety and outcomes. This is unregulated technology and the off-label use of interstitial glucose monitors and insulin pumps can be disconcerting for people living with diabetes, health care professionals, organisations, and diabetes technology companies alike.

Here we discuss the principles of DIY APS, the outcomes observed so far and the feedback from users, and debate the ethical issues which arise before looking to the future and newer technologies on the horizon.

Hat tip: Dennis Sheehan.

An anonymous reader on talent misallocation and bureaucratization

Building upon my recent Bloomberg column on old people getting the interesting jobs, a reader writes the following on his blog:

I do not think that the main explanation for this is the increasing age requirements for America’s best jobs. Instead, I contend that this sorting is an efficient response to the standardization of entry-level jobs and bureaucratization of hierarchies . Most firms are not well-equipped to efficiently utilize the top tier of smart, talented but raw new employees. Sending them off to consulting firms is a rational response from the point of view of both the young employees as well as the companies.

(Since the number of startup founders and scientists is relatively small, the real cost of this talent allocation is to Fortune 500 companies. I will therefore focus on large companies. I will also just focus on consulting, though I believe the arguments apply equally to law, finance, and perhaps big tech.)

Most corporate entry-level programs do not offer much stratification between the smart, highly motivated individual and the more average performer. Fifty years ago a bright, ambitious new college graduate had no choice but to pay one’s dues by starting at the bottom like everyone else and then work one’s way to the top–albeit at a faster rate than today. Today that same graduate can select into the fast track via consulting.

Moreover, this is an equilibrium that–at least in the short- to medium-term–makes sense for all players. The ambitious young graduate receives a wage premium in exchange for higher productivity. The consulting firm gets to hire the smart people it needs to build its pyramid. And even the Fortune 500 company gets to gain from the intelligence of the new graduate when it hires the consulting firm; arguably this company is a loser on net compared to fifty years ago (when it received access to the talent but did not have to pay the consulting firm to act as a middleman), but the equilibrium is still tenable.

My own experience at GE and a top management consulting firm is a good example of this in action. I joined GE through one of its leadership development programs but found my peers to be less talented and hard-working than I had hoped. Unsurprisingly, I also found the roles to be uninspiring and poor uses of my time. After less than two years, I left to join a top consulting firm. I was challenged from day one and at times was not sure if I would make it. My bosses asked much more of me, but they also better resourced me. My productivity was an order of magnitude higher than at GE, and I was accordingly paid nearly twice as much.

For further evidence, consider that 90% of US companies have predefined pay bands based on experience. Given one’s experience level, it is difficult to make considerably more than one’s peers in the first few years (which is the purpose of pay bands). Contrast that with consulting: an average graduate with an engineering degree (the highest earning of all degrees) earns $69k but a new associate at McKinsey earns $105k. The disparity only widens for lower-earning degrees.

One counterargument is that the sorting done by consulting firms is based mostly on the prestige of one’s university education (whether undergraduate or graduate). Obviously all the smart people did not go to the Ivy League, and besides, don’t those schools screen for a narrow type of excellence anyways?

Yes, this is certainly true. However, I think it is also true that most people who can gain admission into one of these schools and pass the rigorous battery of consulting interviews are, by most reasonable measures, smart. Their willingness to self-select into consulting indicates their work ethic. It is far from a perfect screen, but it is a relatively effective one given how easy it is to utilize.

Thus, it is rational (at least in this narrow sense) for young people to self-select into consulting…

There is a bit more at the link.

The Zoning Straight-Jacket

In a new paper, Robert Ellickson makes a simple but important point: local land-use zoning freezes land use into place preventing land from moving from low-value to high-value uses even over many decades.

Recall the neighborhood where you spent your childhood. For most Americans, it would have been a neighborhood of detached single-family houses.My thesis in this Article is simple: if you were to visit that same neighborhood decades from now, it would remain virtually unchanged. One reason is economic: structures typically are built to last. But a second reason, and my focus here, is the impact of law. The politics of local zoning, a form of public land use regulation that has become ubiquitous in the United States during the past century, almost invariably works to freeze land uses in a neighborhood of houses.

…The zoning strait-jacket binds a large majority of urban land in the United States. Los Angeles and Chicago, two of the nation’s densest central cities, permit the building of only a detached house on, respectively, 75% and 79% of the areas they zone for residential use. In suburban areas, the percentage typically is far higher. In a companion study of zoning practices of thirty-seven suburbs in Silicon Valley, Greater New Haven, and Greater Austin, I found that, in the aggregate, these municipalities had set aside 91% of their residentially zoned land (71% of their total land area) exclusively for detached houses.

…Absent overly strict regulation, suppliers of goods in a market economy are able to adapt to changes in supply and demand conditions. The freezing of land uses in a broad swath of urban America prevents housing developers from responding to changes in consumer tastes about where and how to live.

I’m in India and they have similar problem, except in India it’s agricultural land that is frozen in place and made difficult to transform to new uses (in the process depriving farmers of the true value of one of their only assets and creating opportunities for regulatory arbitrage that politically-connected special interests exploit by buying at the farm price, obtaining approvals to convert that other cannot obtain and then selling at the much higher post-conversion price.)

Freezing agricultural land in place seems backward because ubanization is clearly India’s future but it’s no less backward than what has happened in the United States. In both cases, an important right in the land bundle was expropriated and collectivized and the market process of creative destruction impeded.

What is the best way to tax food?

We analyze how a sales tax levied on all food products impacts the consumption of healthy food, unhealthy food, and obesity. The sales tax can stimulate the consumption of healthy meals by lowering the time costs of food preparation. Moreover, the sales tax lowers obesity under more general conditions than a tax on unhealthy food (fat tax) and a subsidy on healthy food (thin subsidy). We calibrate the model using recent consumption and time use data from the US. The thin subsidy is counterproductive and increases weight. While both the sales tax and the fat tax mitigate obesity, the former imposes a lower excess burden on consumers.

It seems that if you try to tax fat directly, individuals can readily substitutes into other foodstuffs that are bad for them, or bad for their weight.  If you place a sales tax on food in general, individuals substitute into eating more at home, and there the food is healthier in the first place and furthermore the time-intensiveness of production will limit the number of dishes prepared and thus quantity and in turn obesity.

Here is the article by Zarko Kalamov, via the excellent Kevin Lewis.

The private school experiment in Liberia

In 2016, the Liberian government delegated management of 93 randomly selected public schools to private providers. Providers received US$50 per pupil, on top of US$50 per pupil annual expenditure in control schools. After one academic year, students in out-sourced schools scored 0.18 σ higher in English and mathematics. We do not find heterogeneity in learning gains or enrollment by student characteristics, but there is significant heterogeneity across providers. While outsourcing appears to be a cost-effective way to use new resources to improve test scores, some providers engaged in unforeseen and potentially harmful behavior, complicating any assessment of welfare gains.

That is by Mauricio Romero, Justin Sandefur, and Wayne Aaron Sandholtz in the new AER.  The gains are real, and not the result of student selection.  That said costs are higher with the private contracting.  Better partner selection would have improved the program greatly, though the authors note that some of the most promising partners ex ante ended up being the biggest troublemakers ex post.  Some of the schools, for instance, allowed a possibly unacceptable degree of sexual abuse of the students.  There is perhaps potential for dynamic reoptimization of permissible partners to yield very real gains, though this may or may not be supported by the available political economy incentives.

The authors suggest, by the way, that outsourcing or contracting out to the private sector often does better when quality is relatively simple, such as with water services, food distribution, and simple forms of primary health care, such as immunization.  In their view, for advanced health care and prisons, contracting is less effective, due to the vaguer nature of product quality.

This is in any case a very important paper, likely to be one of the best and most significant of the year.

Is it harder to become a top economist?

Mathis Lohaus writes to me:

Thanks for doing the Conversations. I greatly enjoyed Acemoglu, Duflo, and Banerjee in short succession after the Christmas break. Your question about “top-5 journals” and the bits about graduate training reminded of something I’ve had on my mind for a while now:

For the average PhD student, how hard is it to become a tenured economist — compared to 10, 20, 30, 40 … years ago? (And how about someone in the top 10% of talent/grit?)

Publication requirements have clearly become tougher in absolute terms. But how difficult is it to write a few “very good” papers in the first place? On twitter, people will sometimes say things like “oh, it must have been nice to get tenure back in 1997 based on 1 top article, which in turn was based on a simple regression with n = 60”. I wonder if that criticism is fair, because I imagine the learning curve for quantitative methods must have been challenging. And what about the formal models etc.? Surely those were always hard. (I vaguely remember a photo showing difficult comp exam questions…)

More broadly, early career scholars now have tons of data and inspiring research at their fingertips all the time. Also, nepotism and discrimination might be less powerful than in earlier decades…? On the other hand, you have to take into account that many more PhDs are awarded than ever before. I suspect that alone is a huge factor, but perhaps less acute if we focus only on people who “really, really want to stay in academia”.

A different way to ask the question: When would have been the best point in time to try to become an econ professor (in the USA)?

I would love to hear about your thoughts, and/or input from MR readers.

I always enjoy questions that somewhat answer themselves.  I would add these points:

1. The skills of networking and finding new data sets are increasingly important, all-important you might say, at least for those in the top tier of ability/effort.

2. Fundraising matters more too, because the project might cost a lot, RCTs being the extreme case here.

3. Managing your research team matters much more, and the average size of research team for influential work is much larger.  Once upon a time, three authors on a paper was considered slightly weird (the claim was one of them virtually always did nothing), now four is quite normal and the background research support is much higher as well.

Recently I was speaking to someone on the job market, wondering if he should be an academic.  I said: “In the old days you spent a higher percentage of your time doing economics.  Nowadays, you spend a higher percentage of your time managing a research team doing economics.  You hardly do economics at all.  So if you are mainly going to be a manager, why not manage for the higher rather than the lower salary?”

That was tongue in cheek of course.

On the bright side, learning today through the internet is so much easier.  For instance, I find YouTube a good way to learn/refresh on new ideas in econometrics, easier than just trying to crack the final published paper.

What else?

The economist as scapegoat

Russ Roberts defends Milton Friedman (and many others, implicitly), excerpt:

What about spending for public schools? Has that been reduced in this allegedly draconian neoliberal era?

In 1960, per pupil expenditure for elementary and high school students was just under $4000. In 1980, when the neoliberal ideology allegedly began its ascendance, it was a little less than $8000. The latest numbers from 2015–2016 are just under $15,000. All numbers are corrected for inflation (in 2017–2018 dollars). So under this time of alleged cutbacks and resource starvation, per pupil expenditures rose dramatically.

What about transportation infrastructure? Total spending is up in real terms. What about as a percentage of GDP? There has been a decline since 1962 as a percentage of GDP but the numbers are basically flat since 1980…

What about investment in non-defense research and development, and health? Up dramatically since 1980 in real terms.

There is much more at the link, including excellent visuals.

Graduate student fellowships at George Mason/Mercatus

The Mercatus Center at George Mason University is currently accepting applications for our graduate student programs for the 2020-2021 academic year, including several graduate student fellowships for students in any discipline and from any university. The application deadline is March 15, 2020.

Adam Smith Fellowship

The Adam Smith Fellowship is a one-year, competitive program for doctoral students interested in political economy and is co-sponsored with Liberty Fund, Inc. Fellowships are awarded to students attending PhD programs from any university and in any discipline, including economics, philosophy, political science, and sociology.

Frédéric Bastiat Fellowship

The Frédéric Bastiat Fellowship is a one-year, competitive program for graduate students interested in applying political economy to pressing public policy issues. Fellowships are awarded to students attending master’s, juris doctoral, and doctoral programs at any university and in any discipline, including economics, law, political science, and public policy.

Oskar Morgenstern Fellowship

The Oskar Morgenstern Fellowship is a one-year, competitive fellowship program awarded to doctoral students with training in quantitative methods who interested in applying these methods to issues in political economy. Fellowships are awarded to students attending PhD programs from any university and in any discipline, including economics, political science, and sociology.

Here is the overall fellowships page.