Russian rebound

by  Tyler Cowen in

David Warsh offers a good, balanced piece, with good links, on Russia’s recent economic performance, seven percent growth last year, a bright spot in Europe. A third of Muscovites earn a normal European wage.

I visited Moscow last month, it seemed poorer to me than Mexico City. Even more worrisome, there was a noticeable apathy about politics, only the Mafias seem to care. My wife is Russian, so I had good chances to meet and talk with other Russians, a select group no doubt, but even they had little passion to work for political improvement.

Stay tuned. And don’t ask about the provinces.

When is word of mouth important?

by  Tyler Cowen in

I have found some data on the relative importance of word of mouth for various purchases and choices. The first number in each category is what percent of respondents say they rely on other people, as one of the three best sources of information in a given area. The second number is the percent relying primarily on advertising:

Restaurants: 83, 35 (word of mouth is huge, by the way check out my ethnic dining guide)

Places to visit: 71, 33

Prescription drugs to try: 71, 21 (the prevalence of word of mouth here surprised me, do men really boast to other men about the effectiveness of Viagra? Or do women spread the word?)

Movies to see: 61, 67 (this time I am surprised that advertising is so effective, I guess that is why they spend $30 million marketing the average Hollywood movie)

Videos to rent or buy: 59, 45

Retirement planning: 58, 9

Clothes to buy: 50, 59

Finding a new job: 47, 54 (I am surprised that ads are so potent here)

Computer equipment: 40, 18

Web sites to visit: 37, 12

From the new book The Influentials, by Ed Keller and Jon Berry. The book is about the ten percent of the American population that (supposedly) tells the other ninety percent what to do, I assume that bloggers fall into the former category. The material is a bit fluffy, still unlike many marketing books it does have useful facts and figures. By the way, we are told that word of mouth is important for books too, although there is no single simple figure to cite.

Education Vouchers: The Lessons from Housing

by  Alex Tabarrok in

Tyler is concerned that a voucher system for education might end up looking like our health care market – “a crazy-quilt mix of bad incentives, high costs, and increasing levels of intervention.” But our health care system is not a voucher system – much more relevant is the existing voucher system for housing. Public housing has been a disaster in this country, low quality, dangerous and expensive (to the taxpayer). The Section 8 voucher and similar certificate programs have been far superior on all measures. What would you rather have – an apartment in a public housing project, costing the taxpayer $1000 a month, or a voucher worth $500 a month that you could spend on private housing?

The economic studies on the superiority of vouchers are unanimous. Here is Ed Olsen, one of the country’s leading researchers:

Five major studies have estimated both the cost per unit and the mean market rent of units provided by housing certificates and vouchers and important production programs, namely Public Housing, Section 236, and Section 8 New Construction.1 These studies are based on data from a wide variety of housing markets and for projects built in many different years. Three were multi-million dollar studies conducted for HUD by respected research firms during the Nixon, Ford, Carter, and Reagan administrations. They are unanimous in finding that housing certificates and vouchers provide equally desirable housing at a much lower total cost than any project-based assistance that has been studied, even though all of these studies are biased in favor of project-based assistance to some extent by the omission of certain indirect costs.

As with housing, the market for education would be very competitive so we would not see price rises due to monopoly problems (as Tyler fears might be the case). There has been a big debate about whether private schools result in better outcomes that public schools. Put aside this debate and focus on what is undeniable – private schools have achieved at least as good outcomes as have public schools but at about half the cost (similar to the cost savings of vouchers over public housing). Thus we are starving the most productive sector of the educational market and throwing money at the least productive sector. Prices might rise in a voucher market but only as a rational response to the lower price of quality in private schools.

A response to Charles Murray

by  Tyler Cowen in

An article in today’s Washington Post cites recent research on the heritability of IQ. Here is the bottom line:

“Genes do explain the vast majority of IQ differences among children in wealthier families…But environmental factors – not genetic deficits – explain IQ differences among poor minorities.” The IQ heritability quotient is 0.72 for well-to-do families, but only 0.10 for poor families. The key data involves 623 pairs of twins born to poor black mothers. It seems that genes and environment interact to a greater degree than had previously been thought, perhaps good genes help you only significantly only when you have a certain minimum level of educational opportunity.

The piece will be out in the November issue of Psychological Science, here is the home page of the author, Eric Turkheimer.

What will a voucher buy?

by  Tyler Cowen in

I have often wondered what an educational voucher will buy. How large need vouchers be to give students access to decent education? A recent Cato study, by David Salisbury, attempts to answer this question.

Here is part of the Executive Summary:

“Government figures indicate that the average private elementary school tuition in the United States is less than $3,500 and the average private secondary school tuition is $6,052. Therefore, a voucher amount of $5,000 would give students access to most private schools. Since average per pupil spending for public schools is now $8,830, most states could offer a voucher amount even greater than $5,000 and still realize substantial savings. A survey of private schools in New Orleans; Houston; Denver; Charleston, S.C.; Washington, D.C.; and Philadelphia shows that there are many options available to families with $5,000 to spend on a child’s education. Even more options would be available if all parents were armed with a voucher or tax credit of that amount.”

Salisbury admits that the cost figures do not include all capital outlays or pension liabilities. On the other hand, vouchers could introduce more competition, lowering costs.

I worry about how vouchers themselves will affect prices and costs. Private schools for poor urban students are cheap, in part, because the school knows the parents cannot afford much more. If the first $5000 is free, the price could go up considerably. In addition, if the schools can somehow coordinate on yet higher prices, there will be political pressures to raise the voucher amount.

Mixed public-private systems are not always cheaper than more public systems, in part because private firms are often skilled in extracting resources from the public sector. The American health care system, for instance, has considerably higher administrative costs than does the “single-payer” Canadian system, read here for a recent comparison. I don’t favor national health insurance by any means, but these figures should give pause to voucher advocates.

The research of Harvard professor Caroline Hoxby suggests that increased school competition brings increased school quality. But her work does not clear up the most difficult questions about vouchers. If you imagine the system in place, on a large scale, for lengthy periods of time, and subject to pressures for rent-seeking and regulation, what would it look like? Would it truly serve parent demands for good education, or would it look more like the American system of health care, a crazy-quilt mix of bad incentives, high costs, and increasing levels of intervention?

Game theory in popular culture

by  Tyler Cowen in

This delightful site lists and describes the uses of game theory in film, television, music and other areas of popular culture. The entry for Dr. Strangelove, for instance, reads as follows:

Kubrick’s cold war dark comedy. One five-minute scene explains credible commitment, highlighting the importance of clarity, irreversibility, and public knowledge.

Maybe you already knew that one, but check out the takes on House of Games, Princess Bride, and War Games, all underrated movies, chock full of game theory. See also the site’s treatment of TV shows, the links on music and books are skimpier and less convincing. The book section could be much more complete, the music section is doomed to be short, at least they could have mentioned John Cage’s idea for “aleatory” (random) composition. We do learn that the Greek composer Xenakis once wrote an intentionally game-theoretic piece for two competing orchestras.

Galbraith II

by  Alex Tabarrok in

James K. Galbraith (son of John K.) has a strange review of William Greider’s The Soul of Capitalism in today’s Washington Post. He doesn’t say much about Greider’s book but does offer the following:

More deeply, we may question the book’s premise. Has the United States really solved the scarcity problem? That may have been more true five decades ago when a tract called The Affluent Society first made the case. Then, the United States was the world’s dominant industrial power. Today, our material abundance rests on fragile strands: our military reach, the willingness of the world to export cheap goods to us and to lend us the means to pay for them.

In the past 50 years real GDP per-capita has almost tripled (and this doesn’t account for improvements in the quality of many goods and services) and yet it may have been more true 50 years ago that the scarcity problem was solved?!! This is taking family fealty too far. The explanations for our fragile abundance are not too convincing either. Put aside the fact that the US is less dependent on trade than most other industrial nations. More interesting is that Galbraith thinks that the hundreds of billions of dollars we are spending on military adventures in Iraq, Afghanistan and elsewhere are a net positive for the economy. Why? Later he suggests that the Iraq war is about a “tenacious drive for oil.” Where then is the oil dividend? Has Galbraith filled up at the pump recently? In truth, Empire rarely pays and whatever the political case for war it will never turn a profit.

For the fanatic

by  Tyler Cowen in

A familiar and useful source on American politics is back, the Almanac of American Politics, edited by Michael Barone, see the book’s web page, you get 1800 pages for your $60. It analyzes every American political district exhaustively, and has been accused of having a conservative political bias. The Chicago Tribune tells us that Barone is to politics as Bill James is to baseball. Recommended for researchers and political junkies.

The Cost of a Sibling

by  Tyler Cowen in

Having siblings costs you money over the course of a lifetime, just ask Ohio State sociologist Lisa Keister.

How much? Holding a variety of relevant factors constant, individuals with one sibling have an average net worth of $62,000. If you have another sibling, it drops to $49,000, then to $40,000, then to $24,000. Seven or more siblings, you have on average net worth of $6,000. Keister suggests, consistent with the research of Gary Becker, that parents invest less in each child when they have more children.

Keister herself has three brothers. See this summary of the research.

I am surprised that the effect from one child to two, or from two to three, is so small. And how much stems from a change in parental investments? Some fraction of the parents with more kids did not expect the pregnancies but rather made planning mistakes. If you think that planning/execution capabilities are carried in the genes, you would expect the offspring to be worth less for genetic reasons. So the Becker effect may be weak rather than strong, at least for the first few children.

Keister’s research also argues that much of the black-white wealth gap is due to the lesser willingness of African-Americans to put their money into stocks and mutual funds. It has long been a puzzle to economists (see here for one account) why individuals do not invest more money in the stock market, given that American stocks have outperformed bonds by significant margins over all previous twenty to thirty time horizons. Keister’s research both deepens the puzzle and hints at the relevance of psychology and context for understanding investment decisions.

Our shrinking arms industry?

by  Tyler Cowen in

The Washington Post reports on our shrinking arms industry:

A few numbers tell the story…the aerospace-defense industry workforce shriveled from 1.3 million in 1989 to 689,000 at the end of 2002, roughly the number employed in 1953…Between 2002 and 2008 nearly half of the industry’s workforce…will be eligible for retirement…universities are churning out few replacements.

Overall military spending is up, but only for 2003 has the weapons procurement allocation gone up. Here is a piece on the beginnings of the downward trajectory in some categories of spending.

But I don’t buy the Post’s account as stated. Procurement more generally is up across the agencies and stable within DOD, see this recent GAO report. In fact it appears that “A few numbers” do not tell the story. For the DOD, information technology accounts for 46 percent of the procurement total over the last five years. We are spending to make weapons smarter, not spending less on weapons. Not to mention that ship spending has risen 128 percent, again over the last five years. Aircraft spending is up 42 percent.

In part we simply like the weapons we have, and thus we are building more of them, or upgrading their quality. And since we are investing in information technology, it is hard to argue we are mortgaging our future. If we are underspending in any areas, look toward Iraqi reconstruction and intelligence, two areas where our failures have been obvious.

Endowment effects and trader experience

by  Tyler Cowen in

The Economist has a good write-up on the work of experimental economist John List. As you may know, an endowment effect arises when you value something more, simply because you own it. In the context of laboratory experiments, often people will value a coffee mug more, much more (say five times more), once someone gives them the mug as theirs. In contrast, economic theory suggests that your willingness to pay for the mug should only be slightly less than your willingness to give up the mug for money (willingness to be paid). Here is a piece by recent Nobel Laureate Daniel Kahneman on the same topic.

List had the ingenious idea to see which traders were most subject to this ownership bias. So he took people who traded sporting cards and gave them other sporting memorabilia. The key result is this: the more real world trading experience a person had, the weaker the ownership or endowment effect. Professional dealers hardly seemed to be biased at all. The lesson is simple: asset markets work well when traders have the necessary experience. List also showed that sellers learn how to trade properly, without much of a bias, more rapidly than buyers do, which may explain why neophyte buyers get taken advantage of in stock markets, and why upward-moving bubbles may start. (Researchers have found that other distinctions may matter as well, you may value the mug more if you won it in a tough competition, as opposed to receiving it as a gift.)

Al Roth has a good general site on experimental economics, as does Vernon Smith’s ICES group, who are colleagues of ours at George Mason.