Sea of Noise

Thu, 11 Oct 2007

Place Your 2007 Nobel Prize in Economics Bets!

If I were a betting man, I think I'd go with Bhagwati to show in 2007.

Or maybe that's just wishful thinking. Wouldn't it be nice if the current crop of US presidential candidates had to stop and pay attention to Bhagwati for a couple of minutes?

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Thu, 16 Nov 2006

Milton Friedman, RIP

Although I never met him, I am sad to report that Milton Friedman died today.

Friedman was not just a winner of the Nobel Prize in Economics, he was one of the most influential economists of the 20th century. Perhaps only John Maynard Keynes had as large an impact on the world at large. He made substantial technical contributions, of course; but he also articulated the relationship between capitalism and liberty, and did so in a way that the lay reader could understand.

Rest in peace, "Uncle Milton".

[/economics] permanent link

Fri, 09 Dec 2005

Moral Hazard in the Market for Health Care

Austan Goolsbee has an excellent discussion of moral hazard problems in the health care market in yesterday's Slate.

The moral hazard problem that everyone talks about is patients' incentives to purchase too much care when their costs are subsidized. But Goolsbee summarizes recent research by Mark Duggan and Fiona Scott Morton suggesting that consolidation among pharmaceutical companies has led to higher drug prices:

They found that drug makers gamed the government procurement rules that forbid companies from billing Medicaid more for a drug than they bill private consumers. When private-sector demand for a drug is small compared with the demand of Medicaid patients (as is the case, for example, with antipsychotics), drug companies massively inflate the price of the drug for private buyers. Sure, they lose some business from that part of the market. But they more than make up for that loss by being able to bill the government at a vastly higher price for the Medicaid patients. Similarly, as the Wall Street Journal reported last week, some drug makers are donating money to charities that help patients make their co-pays for expensive drugs. The donations help ensure that the patients will be able to keep taking the drugs--and also keep the official prices high when the bill goes out to insurance companies.

Don't miss this article!

The paper appears to be forthcoming in the Quarterly Journal of Economics. An NBER working paper is also available.

[via Marginal Revolution]

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Sun, 23 Jan 2005

Summers Misunderstood

Ginger Stampley commented yesterday on the latest brouhaha over some remarks by Lawrence Summers. The man does have a special talent for making perfectly valid points in politically unwise ways; but, regardless how unwise or even incorrect his remarks may (or may not) have been, Stampley's criticism is directed at a straw man:

Regardless of a body's position on sexually-based differences in brain chemistry and what that means for intelligence, it's pretty easy to understand that the people who are competing for top-tier jobs are all at the very front end of the bell curve anyway. If the question is about why some of those top-tier people aren't getting jobs at the same rate as others, it's almost certainly not their intelligence or ability that makes it so.

But, from what I can gather about Summers' informal remarks, that is not, in fact, the question he was answering. Summers' comments were rather about the ratio of women to men observed among those who are successful, i.e. the success rate for all women vs. that for all men, not the success rates of "top-tier" women vs. those of "top-tier" men. If the proportion of women who are in the "top tier" is less than that of men—an obvious possible meaning of "innate differences"—then in what many would regard as a fair and efficient allocation of "top-tier" positions we would observe a lower proportion of women than in the population at large.

The confusion here is analogous to that in the Federal Reserve study of lending to minorities concisely summarized by Gary Becker in his 1993 Business Week column ("The Evidence Against Banks Doesn't Prove Bias" in the April 13 issue). In that case, the study pointed to a differential in the rate at which minority applicants were granted loans as evidence of discrimination. Becker pointed out that one would, in that case, expect the rate of default to differ for the two groups; but it did not. Likewise, here the claim to be examined is not whether women and men achieve "top-tier" positions in the sciences at the same rate, but whether those who do achieve these positions succeed equally at the margin.

At any rate, Stampley goes on to say that this entire question is irrelevant. What's important, she says is "figuring out how to find women and minorities who fit the profile and how to encourage them to get degrees and compete for jobs" because "what we want is more women and minorities in top-tier science and mathematics positions".

Do we? I don't know about you, but I can't answer that question without first knowing the answer to the question Stampley finds irrelevant: what do "sexually-based differences in brain chemistry" mean for intelligence? Because what I think is important is figuring out how to find qualified people and get them in the positions where they can be most effective.

I suspect that, were we to do that, we'd see more women in "top-tier" positions than we do now. But nothing I've seen so far convinces me that we'd see an equal number of women and men. At least, not if "top-tier" means "best at math". (If it meant something else, like "best at managing teams of mathematicians", we might see more women than men! But that's a question for another day, I suppose...)

At any rate, I expect we'll be seeing more misdirected criticsims like this. And that's a shame, because it's an interesting question worth answering. It's also a shame that Summers apparently can't say so himself.

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Sat, 24 Jul 2004

The Agency Costs of Overvalued Equity

Joi Ito took some interesting notes on Michael Jensen's Brainstorms 2004 presentation "The Agency Costs of Overvalued Equity".

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McDonald's Franchisee Outsources

My hat is off to the McDonald's franchisee who outsourced his order taking to a remote call center. Now that's college thinking!

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Mon, 12 Jul 2004

Of Information Cascades and Intelligence Failures

Julian Sanchez suggests that research on information cascades may provide insight into recent intelligence failures:

There may be a special problem with "accountability" in intelligence work: If you're wrong when the majority gets it wrong, you're unlikely to get singled out, but if you dissent from an accurate consensus, the mistake is much more likely to get noticed. One way to break cascades, then, is to leave analysts feeling free to draw conclusions that run against the grain on the basis of the specific information they're studying, even if it seems to them that on balance their info is an aberration. Another is to share raw data, yes, and independent conclusions based on that data at the end of the process, but to insulate analysts from the previous conclusions of their peers while they're deciding how to interpret new pieces of intelligence.

[/economics] permanent link

Fri, 18 Jun 2004

Hedging For the Venture Investor

Wharton reports on a forthcoming paper by Bill Hillard and Charles Baden-Fuller entitled "Should a Venture Capital Fund Act More Like a 'Venture Hedge Fund'?" The authors suggest that venture investors can increase their rate of return by taking short positions that relate to their venture portfolio:

Typically, successful venture capital-backed companies act as disruptive forces in their industries. The freshly-conceived products or services they promise to bring to the market threaten the entrenched position of an established competitor, causing any publicly-traded rival's stock price to decline. In that situation, a put option . . . acquired on the competitor's stock would be a tool to capture profits that are in addition to those obtained from sales of the new product or service, the two authors say.

[/economics/finance] permanent link

Wed, 16 Jun 2004

Problems With PayPal

This account of problems with PayPal starts out with transactions involving the sale of a "virtual currency" like those described in "Game Theories". [via xauenmurph]

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Wed, 09 Jun 2004

Ronald Reagan: The Great Taxer?

In a week filled with partisan comments alternately making Ronald Reagan out to have been a great saint and the Devil incarnate, Paul Krugman offers a balanced view of Reagan's tax policy.

Krugman, however, does understate the case:

We're also sure to hear that Mr. Reagan presided over an unmatched economic boom. Again, not true: the economy grew slightly faster under President Clinton, and, according to Congressional Budget Office estimates, the after-tax income of a typical family, adjusted for inflation, rose more than twice as much from 1992 to 2000 as it did from 1980 to 1988.

(Let's leave aside the question of what constitutes a "typical family". Krugman doesn't tell us, but it seems like a term of art sufficiently imprecise to obscure sleight of hand.)

Both presidents are sometimes underappreciated for the economic gains made during their respective presidencies. (And that's about the nicest thing I'll have to say about Clinton this year, so enjoy it while you can!) Total Federal government outlays shrank as a percentage of GDP under both presidents. But it seems only fair to point out that Reagan accomplished this impressive economic growth while simultaneously rebuilding our military strength and prosecuting the Cold War; Clinton, on the other hand, was the beneficiary of the so-called "peace dividend" that resulted from Reagan's success, enabling him to shrink national defense outlays as both a percentage of GDP and relative to total outlays. [Source: Statistical Abstract of the US] Clinton also benefitted, some of us would argue, from the structural changes and changes in thinking about the role of government in the economy brought about in no small part because of Reagan.

True, the national debt did also increase during President Reagan's watch. He was not, it seems, omnipotent or infallible. But to have accomplished such impressive economic gains while also making the hard choices required at a pivotal point in history--that no other president in recent memory can claim.

[/economics] permanent link

Sun, 06 Jun 2004

No, Really, The Job of the Future

You probably thought I was kidding when I said that prostitute is the job of the future. But consider the possibilities for disintermediation... Of course, as any fan of the TV series Firefly can tell you, it well be "companion", not "prostitute".

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Thu, 03 Jun 2004

The Economics of Faking Orgasm

Steven Landsburg gives us "The Economics of Faking Orgasm: No, really", which draws attention to Hugo Mialon's dissertation research (in particular, "The Economics of Ecstasy").

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The Economics of Connectivity

Kevin Werbach writes at WirelessUnleashed about the economics of spectrum allocation:

Governments engaging in spectrum allocation like to calculate the economic returns of their actions. Auctioning licenses to the highest bidder generates an immediate financial windfall for the government, and sets the "value" of the spectrum concretely. But what's the value of spectrum dedicated to unlicensed uses? No one pays for a license, and most of the money spent to use the capacity is divided among large numbers of end-users. The value of the market increases over time as usage expands, but there is no single revenue number (like TV ad spending) to point to.

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Tue, 01 Jun 2004

Game Theories

This month at The Walrus, Collision Detection's Clive Thompson writes about the work of Edward Castronova on the economics of virtual worlds.

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Mon, 31 May 2004

The Wisdom of Crowds

Another new book on my must-read list is The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations by James Surowiecki, which is reviewed this month in The Christian Science Monitor. Its theme echoes that of classic economic works such as Hayek's ">The Use of Knowledge in Society" or Smith's The Wealth of Nations. [via Disinformation]

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Fri, 28 May 2004

Wharton Reviews Bhagwati's Latest

In Defense of Gloabalization, the new one from international trade expert Jagdish Bhagwati, is high on my reading list. Knowledge@Wharton has this review.

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Prostitute: Job of the Future

A recent analysis by the Dallas Fed tells us that

The United States will continue to move up the hierarchy of human talents as it becomes more productive. Fewer jobs at relatively lower pay will be available for those who offer employers only muscle power, manual dexterity or formulaic intelligence. Americans who want to prepare for the better jobs of the future will concentrate on developing their creativity, imagination, people skills and emotional intelligence.

prompting EconLog to ask, "If you had an 18-year old child, what career choice would you recommend?"

Meanwhile, Reason reports that the Czech Republic may legalize prostitution.

You do the math.

[/economics] permanent link

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