The Millennium Challenge Account progresses

by  Tyler Cowen in

Some facts:

1. The U.S. is engaged in a major restructuring of its foreign aid programs, bypassing the multilateral institutions. For better or worse, this is one of the most innovative ideas of the Bush administration.

2. The Millennium Challenge Account represents a yearly foreign aid increase of about nine percent. By 2008 this could amount to a total of $5 billion a year.

3. For this year to come, perhaps no more than fifteen nations will win awards. All but five countries in Latin America are ineligible for the awards, largely because they are now too wealthy

4. Countries such as Senegal and Ghana, which are poor but respect (some) basic civil liberties, are leading contenders for funds.

5. We are told that grants will be handed out in accordance with a variety of indices, many of them non-governmental, such as the corruption index of Transparency International, the rule of law index of the World Bank Institute, and the Heritage Foundation index on trade policy and freedom.

6. The U.S. will not try to dictate how the money is spent, but rather leave this decision in the hands of the receiving government. This, plus the use of the indices, represents the real innovation of the policy. In essence we are giving bonuses to countries with good policies.

Here is a recent New York Times story on the policy initiative. Here is a previous MR post on the topic.

What’s the bottom line? One scenario is that the Bush people are serious about sticking to the chosen indices. In that case we are funding the marginal, otherwise-not-worth-doing Senegalese project. Third world countries typically need stronger states (as opposed to bigger states per se), it is an open question how much outright cash gifts will further this end, without further mechanisms for accountability. Another scenario involves a deepening of our fiscal crisis, and the use of the fund to prop up current efforts in Iraq and Afghanistan, or perhaps anti-AIDS efforts. In this case we have created another bureaucratic instrument to finance aid efforts that are already in place.

Stay tuned…

The rise of barter clubs

by  Tyler Cowen in

Here is an update on the current surge in barter clubs:

“I live my life on barter,” says [Dale] the spunky, 5-foot-3-inch consummate deal-maker, who is part of a growing network of people working and playing in a largely cashless universe.

Dale, 57, runs Barter Advantage, one of hundreds of exchanges around the country that have emerged in recent years that take the age-old concept of barter – neighbors swapping chickens for a hog, for instance -to new, sophisticated, IRS-approved heights.

Instead of simple swapping, the exchanges offer what’s called round-robin trading, allowing members to barter their products and services for credits that they can later spend on whatever they want – from travel to office supplies to dental work – as long as it’s offered within the network.

Here is a previous post on the benefits and limits of barter clubs. Here is a previous post on the enhanced liquidity of gift certificates.

Thanks to Paul Jeanne for the pointer.

Addendum: Here’s a way to barter your books and music, thanks for Daniel Akst for the tip.

What ten books should an undergraduate read?

by  Tyler Cowen in

Here is what university presidents think:

1. The Bible
2. The Odyssey
3. The Republic
4. Democracy in America
5. The Iliad
6. Hamlet
7. (tie) Wealth of Nations, The Koran, The Prince
10. (tie) Federalist Papers, Don Quixote, On Liberty, Invisible Man, King Lear, War and Peace, Moby Dick, The Lexus and the Olive Tree

I admire Tom Friedman’s writings but he is in some pretty exalted company.

I would nix The Koran, which few non-Muslims get much out of, nix The Prince, which few non-Straussians understand, and downgrade Invisible Man and Lexus, both of which are too trendy. Smith is a worthy representative of economics but I would like to see some science on the list, not a classic but rather a book that undergraduates can understand. When it comes to the category of “most cited authors” (see the link, which offers other interesting measures as well), Stephen Hawking makes an appearance at eighth, just behind Dostoyevsky, Dickens, and Aristotle.

The greatest irony?: Two university presidents cited What Color is Your Parachute?

Thanks to www.politicaltheory.info for the pointer.

Measuring Adam Smith’s sympathy

by  Tyler Cowen in

The ability to appreciate other people’s agony is achieved by the same parts of the brain that we use to experience pain for ourselves.

In other words, Adam Smith, a crazed bachelor writing in remote Scotland, and with no real means of making empirical measurements, nailed it. Some people’s introspection is better than others, here is Smith on sympathy. Read the full story about the recent work in neuroscience, here is another account. Here is a page for the researcher, Tania Singer.

Can’t these guys take a joke???

by  Tyler Cowen in

Remember this story?

A 23-year-old student with no knowledge of economics bluffed his way into a trip to China to teach a prestigious course on the subject at Beijing University.

Matthew Richardson, in his fourth year at Oxford University, only gave up after nine hours of lectures, when he ran out of material from pages ripped out of an A-level text book.

It now seems the economist imposter is getting in trouble. His teachers, his dean, and his hosts are upset, BBC uses the word “furious” to describe the Chinese. How much less angry would they be, had they caught the guy up front? Even the interpreter was no more than suspicious. His college might discipline him for being absent during term (huh?), in this age of corporate scandals perhaps they should award him an MBA instead.

Thanks again to Ken Hirsch for the original pointer and the follow-up.

Q&A with Matthew Rabin

by  Tyler Cowen in

Matt is a MacArthur fellow and one of America’s brightest economists. He is best known for exploring the idea that human choices are not fully rational. I also like his argument that if you exercise too much moral suasion against a person, rather than heeding your opinion the person will simply stop listening. Read an interview with Matt here. At the bottom of the interview you will find links to his working papers. Thanks to www.2blowhards.com for the pointer.

The next artistic explosion?

by  Tyler Cowen in

According to the Entertainment Software Association, 50 percent of Americans over the age of six play computer games, and the industry had $11.4 billion in sales in 2003, more than the film industry. Last year, 63 percent of U.S. parents said they planned to buy a video game.

So will computer games be the breeding grounds for our next artistic renaissance? I’ve yet to see the evidence. Many people are negative on the aesthetic prospects:

Some in the industry, however, are not so sure that games will ever mature. They fear games could be a dead end like comic books – valuable as a social phenomenon, but outside a select few titles like Art Spiegelman’s “Maus,” not worth a great deal of individual study. “I seldom play computer games, because it’s such a depressing experience,” said Chris Crawford, a game designer who is building a program to create interactive stories. “I end up shaking my head in dismay at how stuck the designers are in a rut.”

Here is the full story, including a discussion of how academics are hoping to raise aesthetic standards in the area. Get this:

The field has its own research group (the Digital Games Research Association) and peer-reviewed online critical journal, Game Studies, where one writer, discussing the horror and splatter-fest PlayStation game “Silent Hill,” wrote that it “favors syntagmatic causality over descriptive explication. Its distinct chain of puzzle solving and conditional progression enable it to instigate and maintain pace and tension, and so fuel its unnerving visions of death and possession.”

Imagine if Motown or be-bop jazz had been studied in these terms, in their heydays. If that is our best hope, I am skeptical too.

The best case scenario is that game designers are breeding aesthetic wonders in their highly commercial and competitive environment, and outsiders such as myself simply don’t know it yet. The worst case scenario is that computer games unbundle “fun” and “the aesthetic,” and sell us the former at the expense of the latter. Mozart gives us both beauty and entertainment, but in a world with very low fixed costs, perhaps these two qualities will be sold separately from now on. Perhaps computer games, and books such as The Da Vinci Code, can damage the arts by hindering entertainment from cross-subsidizing beauty.

I’ll bet on the best case scenario, since I think enough people prefer indivisible cultural goods that bundle many different qualities, including aesthetic quality. But I’m still waiting to see the payoff.

Addendum: Here is a review of an < href="http://www.gameforms.com/features/misc/bang/">art exhibit of video games, thanks to Hei Lun Chan for the pointer.

Medicaid and the High Price of Pharmaceuticals

by  Alex Tabarrok in

The price that Medicaid pays for pharmaceuticals is based upon the price in the private market. When Medicaid prescriptions are only a small portion of the total market this works reasonably well at avoiding the twin problems of monopsony (Medicaid pushing prices so low that R&D incentives are curtailed, as has happened in the vaccine market) and monopoly (pharmaceutical firms jacking prices up above fair market value).

But in some areas, Medicaid accounts for a large fraction of the market. The Medicaid share for HIV drugs, for example, is more than 50% and in antipsychotics the Medicaid share is more than 75%! (I have cribbed from this paper by Mark Duggan.) In this situation it makes sense for pharmaceutical companies to raise prices – they lose customers in the private market but this is more than made up for by the increase in prices that they can charge to Medicaid. As a result, average prices for HIV and antipsychotic drugs are higher than for any other drug categories.

The Medicaid pricing formula can create a vicious spiral. Medicaid pricing causes prices to rise which pushes more people into Medicaid thereby shrinking the private market and increasing the incentive to raise prices yet further. To add insult to injury, high pharmaceutical prices are then said to demonstrate why we need more government involvement.

Why have so many Americans left the work force?

by  Tyler Cowen in

Since 2001 nearly two million Americans, between the ages of 25 and 54, have left the workforce. This is why the unemployment rate has been falling, but the number of people with jobs is not showing comparable improvement.

Why leave the work force? A recent (Tuesday, February 17, “More Americans are Leaving the Work Force”) Wall Street Journal article suggests several answers:

1. More people are taking early retirement. Interestingly, workers over 55 are reentering the work force, the only group to show significant net increase. So these early retirements must be early indeed, or could involve a temporary willingness to live off severance pay.

2. Educated black women are leaving the work force in greater numbers. Some are losing their jobs. Others are returning to school for an advanced degree. In any case this group shows one of the largest participation declines, from 82.3% in 1998 to 76.3% in 2003.

3. Many people, especially women, are leaving for labor force for reasons of disability. Between 1999 and 2003 applicatons for federal disability insurance benefits rose from 1.2 million to 1.9 million. It is unlikely that more people are being injured. Employers are less willing to offer flex-time or part-time work during hard times, which causee disability claims to increase. See Alex’s post Paying for Disability for more.

4. White collar employees, hit by downsizing, are returning for additional education. The new trend is for college graduates to return to community colleges for retraining.

The bottom line: I don’t doubt any of these hypotheses or estimates. But I still don’t understand why the number of employed Americans is recovering so slowly. On the bright side, parts of #1, #2, and #4 will later kick in as productivity benefits, or reflect a lesser need to work.

Markets in everything, continued

by  Tyler Cowen in

How about this?

ParkingTicket.com [is] the first Internet company to help drivers contest parking tickets online…”It’s such a unique concept — fighting tickets for you,” says Austin, for whom the service was a godsend, given that she averages 5 to 10 parking tickets a year. “Some of these tickets are unfounded and you start getting a little mad every time you write a check to the city.”

On the ParkingTicket.com Web site, clients who get tickets in the District, New York or San Francisco are guided through 30 to 50 questions about the circumstances of their tickets — whether the meter was broken, what the parking sign said, did they have a medical emergency, etc. They transfer details from the ticket to a look-alike online version. Then they key in their credit-card data to pay for the service — if the ticket is dismissed. No dismissal, no charge.

ParkingTicket.com’s computers analyze the data in search of grounds for dismissal. If there are none, clients get an e-mail recommending that they pay the ticket promptly. It’s free advice. But if the computer finds a loophole, technicality or error, or a compelling reason to contest, the client is e-mailed a customized dismissal-request letter, with instructions on what proof to attach and where to mail it.

Because her car was disabled, Austin’s ticket was dismissed. ParkingTicket.com charged her half of what the ticket would’ve cost her — $25. Case closed.

The District of Columbia takes in more than $100 million in parking tickets each year, a major source of city revenue. The head of ParkingTicket.com claims that seventy to eighty percent of those tickets should be dismissed for technical or legal reasons.

Here is a previous installment of Markets in Everything, try this one too.

Outsourcing medical experimentation

by  Tyler Cowen in

India is emerging as a new proving ground for pharmaceutical trials. Clinical trials in India typically cost 50% to 60% less than in the United States. The Indian population is genetically diverse, labor costs are much lower, the number of people is large, many Indian hospitals keep good records, and many diseases are prevalent in India. Furthermore many Indians are “drug naive,” meaning that they are not taking other drugs that could influence trial results. The Indian government, however, will not allow testing for basic drug safety, out of fear that Indian nationals would be viewed as “guinea pigs” for the West.

The bottom line: Medical outsourcing will lower drug development costs and save lives.

The full story is from Thursday’s Wall Street Journal, “India Emerges as New Drug Proving Ground,” Marketplace section. Here is an earlier MR post on medical outsourcing.

Econometrics Text

by  Alex Tabarrok in

I am teaching econometrics this semester and using a new book, James Stock and Mark Watson’s Introduction to Econometrics. It’s a very good textbook.

Stock and Watson use a “robust” estimator of standard errors right from the beginning. This means that they can dump an entire chapter on hetereoskedasticity and methods of “correcting” for hetereoskedasticity (these rarely worked in any case.)

They do not waste time discussing the difference between the t-distribution and the normal-distribution. Instead, they assume reasonably large datasets from the get-go and base their theorems on large-sample theory.

The book is not cluttered with examples. Stock and Watson use a handful of applications that they return to again and again as they introduce new problems and new techniques – thus simple regression is introduced with the goal of estimating the affect of the student-to-teacher ratio on test scores. The problem of omitted variable bias is then introduced and the solution of multiple regression then discussed. Later the same example is used to discuss fixed effects and so forth.

Finally, they have a good chapter on evaluating research designs for internal and external validity. In other words, they discuss how to tell the difference between a good study and garbage – really the most important asset for any reader of statistical work.

Two regrets. I would have liked an early chapter on exploratory data analysis. I would have loved a chapter on regression discontinuity design.