Facts about Orkney

Sorry, no links in this post, but I am sticking to the local sources that sound credible:

1. The richest man in Orkney is (was?) a fisherman. His large net turned out to violate EU regulations, so he received $20 million from the British government to stop fishing. He is now building a house that overlooks the entire town of Stromness from above. The townspeople are not happy.

2. One-third of the employment in Orkney stems from an NHS hospital on the main island. Waiting times are significantly lower here than elsewhere in Britain and the service is correspondingly better.

3. Much of the labor force switches jobs over the course of the year. They serve tourists for three months in the summer, and pick up odd jobs the rest of the year. Work is easy to come by, careers are almost impossible to develop.

4. There have been only two murders in Orkney in the last two hundred years. One happened about two hundred years ago. The other is about ten years old; a waiter was shot and killed in Kirkwall’s Indian restaurant. Neither crime has been solved yet.

5. Orcadians eat pickled herring in oatmeal, smoked fish with scrambled eggs, and fried haddock with chips. For dessert they have Orkney fudge or Orkney ice cream. Haggis is nowhere to be found.

Here is a a tourist introduction to Orkney. Here is historical information. The islands are among the most beautiful spots in Europe and remain largely unspoilt, go if you can.

Markets in Everything – country edition

Kansas City radio station Mix 93.3 FM, which threatened its listeners to play Billy Ray Cyrus’s “Achy Breaky Heart” continuously until the station had met their goal of $20,000 to contribute to the travel expenses of Courtney McCool’s (U.S. Olympic Gymnast) family.

The station started with $6,000 and raised $14,000 in a little under four and a half hours, during which they played the song 48 times in a row.

I am surprised it took that long.

Thanks to jaded economist Craig Depken.

Econ Journal Watch II

The second issue of Econ Journal Watch is now out. EJW is fast becoming one of my favorite journals (I am an advisor but cannot claim responsibility for the excellent content). Lots of good stuff including:

Economics in Practice: Stephen Ziliak and Deirdre McCloskey examine all the American Economic Review articles from the 1990s, and present systematic evidence of the abuse of statistical significance.

William Davis uses survey evidence to argue that a large portion of professional economists falsify their preferences about economics.

Daniel Klein establishes that Journal of Development Economics authors and editors have extensive ties to the World Bank, the IMF, the UN etc., and asks how such ties affect the character of the field.

Government Sues to Raise Drug Prices

The headline in the NYTimes read “Schering Case Demonstrates Manipulation of Drug Prices.” The article continued:

A $345.5 million settlement by Schering-Plough yesterday to resolve a government Medicaid investigation provides a detailed glimpse into how drug companies can manipulate prices to overcharge state and federal programs.

Government officials have taken a keen interest in how drug makers price and market their drugs in recent years, and the settlement is the latest in a series reached with large drug makers over accusations that they have overcharged Medicaid. Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7 million to settle similar allegations.

Now you probably think this article is about how drug firms acted collusively in order to raise prices, right? Nope, read carefully and you will see that intense competition from Allegra caused Schering to reduce the price of Claritin. Great! Not according to the Feds. The price reductions violated Medicare’s Most Favored Customer clause which requires pharmaceutical manufacturers to give Medicare the lowest price they offer any other customer.

Most Favored Customer/Nation clauses are routinely analyzed in game theory texts as ways for firms to tacitly collude to raise prices. The idea is simple – it’s easier to commit not to compete if lowering price for one customer means lowering prices for all customers. Indeed, this is precisely why the antitrust authorities often sue to prevent firms from using MFC clauses. The evidence supports the theory, after the MFC clause was introduced pharmaceutical prices rose.

The US Attorney may think that “we’re fighting to keep the costs of health care down for everyone,” but in truth by reducing competitive pressures to lower prices they are helping the pharmaceutical firms to maintain a cartel.

Addendum: Put it this way, now that the government has successfully sued the firms for reducing prices do you think a) the firms will now cut the price to Medicare to match the rebates or b) stop giving rebates?

Has urban architecture declined?

Strolling the streets of Edinburgh, it is hard not to be struck by the beauty and general consistency of the older buildings. It is hard to find post World War II examples where a wealthy Western region has done something comparable. Suburbs have sprung up around the United States, but few of them have architecturally notable exteriors on a consistent basis. There are so many new suburban developments, cannot just one of them be lovely and aesthetically challenging?

What might have gone wrong? I can think of a few possible explanations:

1. Architecture has suffered from the “cost disease.” In this context, a rising general level of wages makes quality handwork more expensive in relative terms. In other words, they don’t handweave many carpets in Silicon Valley. There may be something here, but then why don’t the poorer countries of the world become architectural leaders? And I see home interiors as improving significantly over time.

2. In older times governments at various levels were less democratic. Competition for status within an oligarchy may have upped the incentive to produce beautiful exteriors. This mechanism clearly operated in Renaissance Florence.

3. Perhaps consumers and lenders were less well informed in times past. A nice exterior was a good way to signal the quality and long-term commitment of a business enterprise. Just look what happened to the quality of bank architecture in this country once the FDIC was instituted.

4. Perhaps we idealize times past. The so-called “Royal Mile” is today a leading tourist sight in Edinburgh. In the eighteenth century it was considered “a dark, narrow canyon or rickety buildings, some stacked ten or even twelve stories high, thronging with people, vehicles, animals, and refuse…Sanitation was nonexistent.” (That is from Arthur Herman’s notable book on Scotland.) We may be co-authors in the beauty of the past more than most people realize.

5. Perhaps contemporary suburban developments will be seen as beautiful by future generations. I’ll bet against this one, but we will see.

I am hardly suggesting that architecture is declining in every regard. I love the lights of the Ginza district in Tokyo. And our best stand-alone buildings are no less wonderful than those from times past. But I still wonder why urban architecture no longer yields consistently beautiful urban regions. Anyone who has walked around the major European cities, or even glanced at the Chrysler building, surely has asked the same question. Why is the quality of exteriors declining relative to interiors? Given that nice exteriors are a public good, why were they ever so nice in the first place?

Osama by November?

There’s nothing like an election to concentrate the mind, or so says The New Republic.

This spring, the administration significantly increased its pressure on Pakistan to kill or capture Osama bin Laden, his deputy, Ayman Al Zawahiri, or the Taliban’s Mullah Mohammed Omar, all of whom are believed to be hiding in the lawless tribal areas of Pakistan. A succession of high-level American officials–from outgoing CIA Director George Tenet to Secretary of State Colin Powell to Assistant Secretary of State Christina Rocca to State Department counterterrorism chief Cofer Black to a top CIA South Asia official–have visited Pakistan in recent months to urge General Pervez Musharraf’s government to do more in the war on terrorism….

This public pressure would be appropriate, even laudable, had it not been accompanied by an unseemly private insistence that the Pakistanis deliver these high-value targets (HVTs) before Americans go to the polls in November….The New Republic has learned that Pakistani security officials have been told they must produce HVTs by the election. According to one source in Pakistan’s powerful Inter-Services Intelligence (ISI), “The Pakistani government is really desperate and wants to flush out bin Laden and his associates after the latest pressures from the U.S. administration to deliver before the [upcoming] U.S. elections.”

Dumb Delta

E-Loan offers customers a choice of processing their loan paperwork in 12 days using all-domestic workers or 10 days by bringing on some workers in India, 85 percent choose the quicker turnaround.

Delta is now considering something “similar,” charging a fee to have calls handled by U.S. agents. What genius came up with this? You don’t need to be a behavioral economist to predict that framing the deal this way just won’t fly. Instead, offer your customers a new option; lower prices if they choose to use overseas agents. Or, as Gary Leff suggests, offer the customers shorter wait times. “All our US agents are busy right now, would you like to be directed to an overseas agent for immediate service?”

How did Scotland grow so quickly?

Scotland had been an economic backwater at the time of the 1707 union with England. By 1770 at least the Scottish cities were among the most developed and intellectually advanced parts of Europe. How could this happen?

Arthur Herman supplies at least one piece of the puzzle:

…the fact that Scotland was very much the junior partner in this union also turned out to be an advantage. The new Parliament largely ignored Scotland; outbursts such as the malt riots and the threat of Jacobitism apart, the government in London paid little attention to what was happening north of the border. Scots ended up with the best of both worlds: peace and order from a strong administrative state, but freedom to develop and innovate without undue interference from those who controlled it. Over the next century, Scots would learn to rely on their own resources and ingenuity far more than their southern neighbors would…

A strong government that leaves well enough alone: this was the dual, seemingly contradictory, nature of the British state as it became part of life in post-union Scotland. Scots became used to these dualities, and learned to accept them as basic reality, just as the Union itself involved a fundamental duality: “a ship of state with a double-bottomed hull,” as Jonathan Swift put it. They also learned to think in a new way as a result of the Union: in terms of the long term.

Many economic development problems today stem from a similar conundrum. Ideally we would like a state that is both strong and not too large. Most parts of the world are unable to institute this duality; of course Hong Kong was a notable exception. I am not in general an imperialist, but the most successful instances of imperialism are likely to be highly successful indeed.

Monkey see, monkey do

Chimpanzees yawn in response to seeing other chimps yawn, reveals a new study. The discovery bolsters the idea that chimps are able to understand their own and others’ state of mind.

There is more:

In research on people, those subjects that perform contagious yawning also recognise images of their own faces and are better at inferring what other people are thinking from their faces. What is more, brain imaging studies have shown that people watching others yawning have more activity in parts of the brain associated with self-information processing.

“Our data suggest that contagious yawning is a by-product of the ability to conceive of yourself and to use your experience to make inferences about comparable experiences and mental states in others,” Gallup told New Scientist.

Here is the full story. And did you know that some monkeys (and some people) yawn to show annoyance?

Addendum: Read Clay Shirky on the same evidence. Note that monkeys also can recognize unfairness.

Universal domain in Scotland

TC to Glasgow cabbie: “What kinds of food do they eat up in the Northern Highlands?”

Cabbie: “Fish n’ chips, haggis, burgers…they’ve got everything.”

The scenery, of course, is lovely up here. The Orkney islands, my current location, have a distinctive feel, in some ways more akin to Norway than to Scotland.

The biggest surprise? So far we have experienced no more than fifteen minutes of rain.

The Movie Review Index Fund

Index funds are one of the most important practical spin-offs of academic economics. If fund managers are unable, on average, to beat the market index, why not just buy-and-hold the market index, saving transactions costs? Millions of people have profited from this insight.

If you like movies, an analogous tool is available at movies.go.com. Instead of posting a review of a new movie, movies.com tabulates ALL the reviews of ALL the new movies, and archives them forever. I have used this tool for a couple years, and find that – unlike individual reviewers – this “index fund” of reviewers is amazingly informative. For example, based on today’s post, I’m going to try to talk my wife out of seeing The Village and into seeing The Manchurian Candidate. (Aside: If you haven’t seen the original, you must!)

Good as this index fund is, I do have three caveats:

1. Comedies are systematically under-rated. If half of a comedy’s reviews are positive or mixed, it is probably worth seeing.

2. If any review contains the words “measured pacing,” the movie is probably over-rated. I’d only go if the reviews are 80% positive.

3. Contrary to popular stereotypes, action movies are not graded more harshly. Lots of action movies get great reviews. The Bourne Supremacy, for instance, got 11 positive, 0 mixed, 1 negative.

Gratitude Journals and Loewenstein’s Challenge

Background: George Loewenstein is one of the leading figures in Economics and Psychology.

While walking in Pittsburgh one afternoon, Loewenstein tells me that he doesn’t see how anybody could study happiness and not find himself leaning left politically; the data make it all too clear that boosting the living standards of those already comfortable, such as through lower taxes, does little to improve their levels of well-being, whereas raising the living standards of the impoverished makes an enormous difference. (full story)

Of course, you don’t need Loewenstein to make this point. You could just listen to my favorite song by Johnny Cash, featured in the so-good-it-hurts soundtrack for Kill Bill, Volume 2:

How many times have
You heard someone say
If I had his money
I could do things my way

But little they know
That it’s so hard to find
One rich man in ten
With a satisfied mind

Money can’t buy back
Your youth when you’re old
Or a friend when you’re lonely
Or a love that’s grown cold

The wealthiest person
Is a pauper at times
Compared to the man
With a satisfied mind

The answer to Loewenstein’s challenge can be found in the growing psychological literature on gratitude. Several interesting experiments (like this one) ask subjects to keep a “gratitude journal.” Main idea: Every day, write down things you are grateful for. Depending on the experiment, control groups either do nothing, or keep an “ingratitude” diary, or write down a random childhood memory. The main finding is that keeping a gratitude journal makes people happier than the other treatments.

So what? Almost all redistributive rhetoric urges people to dwell on the negative – you or other people aren’t getting what is due. This in turn makes people want to “do something” about the problem. And you can rest assured that no matter how much redistribution there is, egalitarians will never say “OK, life’s fair now. We’re done complaining.” No, what they foster is literally a lifestyle of ingratitude – a recipe for unhappiness.

If we really want to make people happier, we would do almost the opposite. Tell people to be grateful for what the market gives them, and try to emulate more successful people instead of envying them. Children hear this all the time, and it is damn good advice. Adults should practice what they preach.

Paul Krugman, Guilty Pleasure

There are lots of good reasons to be annoyed with Paul Krugman. (Like here, here, and here). But as a cock-eyed optimist, I’m very happy to have him around. Think about it: The world’s most famous left-wing economist:

1. Blames European unemployment on labor market regulations that hold wages above the market-clearing level. (The Accidental Theorist, Part 1)

2. Publicly and articulately advocates free trade without hemming or hawing. (Pop Internationalism)

3. Identifies anti-globalization activists as the enemies of the world’s poor. (The Accidental Theorist, Part 3)

4. Titles an essay “In Praise of Cheap Labor: Bad Jobs at Bad Wages Are Better than No Jobs at All” (The Accidental Theorist, Part 3)

5. Points out that if you oppose Big Government, you should favor cutting Social Security, Medicare, and other popular programs. (“The Lost Fig Leaf”) Sure, he’s hoping to scare us away from libertarian rhetoric, but there’s no use running away from the truth.

Yes, he’s been slipping. And it’s tiring to hear an economist so much more successful than me prattling about equality! I don’t begrudge you your publications, Paul, why can’t you let Bill Gates, Monty Burns, and Scrooge McDuck count their billions in peace?

Still, I can’t imagine Paul Samuelson doing any of the above, much less Galbraith. At least in economics, the intellectual climate hasn’t been as good as it is now for a century.