Ben Muse’s economics blog continues to rise in my estimation. He reports on a recent study showing that child labor and trade are negatively correlated. The statistical result is the following: as a country’s measure of openness to trade increases by 1%, a measure of child labor is decreasing by 0.7%. Here is an earlier MR post on child labor.

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?”

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.

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.

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.

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.