David Gerard

Author: David Gerard

Cut Spending or Raise Taxes?

The Economist is taking a look at the unpleasantness that is the U.S. fiscal situation, and it finds most Americans ready to cut government spending.  In fact, when asked whether to cut spending or raise taxes, we chose cutting spending by a 62% to 5% margin (with the other 33% unwilling to commit).

Unfortunately, people don’t want to cut spending on things that we actually spend money on.  Check out this comparison from my favorite political science blog, The Monkey Cage:

What is clear from the graphic is that the vast majority of Americans are eager to slash all of that foreign aid we shell out.  The problem is, we don’t actually spend much on foreign aid.  Many are also willing to gut environmental protection spending, but that doesn’t seem like a very big target, either (though government spending isn’t the same as spending on environmental compliance; then again, spending on compliance doesn’t add to the public debt).

Perhaps we will just inflate the debt away instead.

Make or Buy, Homework Grading Edition

Q: When are we going to get our tests back?

A: When I get them back from Bangalore.

The Chronicle of Higher Education has an interesting piece about outsourcing of homework grading to markers in India via the firm, Virtual-TA.  No, papers aren’t physically sent to India to be graded, but rather the transaction is done electronically.

Is that ethical?

Well, the story profiles Lori Whisenant, the director of business law and ethics studies at the University of Houston.  So the ethics professor thinks it’s ethical. Or maybe that’s just how they roll down in Texas?

That dimension aside, we spend a lot of time talking about the outsourcing/insourcing decision in Economics 450, and one of the main drivers for doing something yourself is the specificity, not necessarily the complexity, of the task.  And this comes out in the article a little bit:

Critics of outsourced grading, however, say the lack of a personal relationship is a problem.

“An outside grader has no insight into how classroom discussion may have played into what a student wrote in their paper…  Are they able to say, ‘Oh, I understand where that came from’ or ‘I understand why they thought that, because Mary said that in class’?”

On the other hand, it would be difficult to argue that the Virtual-TA is playing favorites.

The whole story reminds me of the opening of Ed Leamer’s classic review of Thomas Friedman’s The World is Flat:

When the Journal of Economic Literature asked me to write a review of The World is Flat, by Thomas Friedman, I responded with enthusiasm, knowing it wouldn’t take much effort on my part. As soon as I received a copy of the book, I shipped it overnight by UPS to India to have the work done. I was promised a one-day turn-around for a fee of $100. Here is what I received by e-mail the next day: “This book is truly marvelous. It will surely change the course of human history.” That struck me as possibly accurate but a bit too short and too generic to make the JEL happy, and I decided, with great disappointment, to do the work myself.

It was only a matter of time.

More on Financial Reform and Start Ups

Craig Pirrong at the Organizations & Markets blog weighs in on the quizzical financial constraints placed on start ups under proposed financial reform legislation.

Here’s Pirrong:

The most fascinating question is the political economy one: whose interest is served by this provision? The most likely explanation is that incumbents — including, no doubt, one-time startups — having made theirs prefer to make it harder for others to displace them.  They liked creative destruction on the way up, but the idea of being swept away in some future gale is far less appealing. So hobble potential future competitors, future creative destroyers, by increasing the costs startups incur to raise capital. This pernicious provision also gives advantages to big investors, venture capitalists, and existing companies who would face less competition in supplying capital to potential startups.

I’m not sure I buy that — who is this group of now-successful former start ups banding together to create barriers to entry?   On the other hand, I don’t have a better explanation.

Anyone?

Proposed Financial Reform Does Not Tout the Start Up

Thomas Friedman might tout the start up, but proposed financial regulation does not.   According to Robert Litan from Kaufmann, there are provisions in the legislation making its way through Congress that would slow down start ups.

Under existing law, startup companies can raise money easily and quickly from “accredited investors” — individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be “accredited.”

Ouch.

So why are these provisions in the bill?   Again, according to Litan:

It is difficult to know why these provisions are in a much larger bill whose primary aim is to address the fundamental causes of the recent financial crisis…  There is no evidence that angel investment in startup companies played any role whatsoever in events leading up to the financial crisis.

Thomas Friedman Touts the Start Up

A few months ago in this space, we pointed you to a speech by Robert Litan of the Kaufmann Foundation on the importance of start ups in job creation.  The remarkable conclusion was this:

Since 1980 until the recession, all net new jobs—net meaning gross jobs minus layoffs — have been created by firms under five years old.

Not to be outdone by the Lawrence Economics Blog, New York Times columnist Thomas Friedman trots out the same data in his column this past Saturday.   Friedman argues that the U.S. needs to foster innovation, promote start ups, and relax its, um, restrictive immigration policies.

Battle Rap Explained

Duke University Political Economist and some-time Libertarian gubernatorial candidate, Michael Munger, explains the Keynes v. Hayek battle rap for those of us who don’t quite get it.

Munger is also a frequent guest on Russ Roberts’s EconTalk podcast, an excellent resource for inquisitive minds.  (However, I am not sure how accurate the subject lines are there, as I was listening to the discussion of franchising and pretty soon I’m not sure what they were talking about).

Of course, Munger is probably most famous for his role as the limo driver in the Keynes v. Hayek video.

A Pigou and a Smile?

Would a tax on the sugary, em, I mean the corn syrupy sweet taste of soft drinks reduce consumption?  And would that in turn cause young people to drink less and possibly curb the tide of childhood obesity?  An article in Health Affairs suggests the tax would have to be pretty darn steep to do much good:

[T]here was no significant relationship between differential soda taxes and overall soda consumption for the whole population. This means that, within the limitations of our analysis, increasing the differential tax on soda doesn’t affect total soda consumption. We found a significant relationship between differential soda taxes and BMI change from third to fifth grades. But this finding does not hold up under different statistical analysis, and the effect may be attributable to children who are already at risk for being overweight.

The tax rates for the study ran up to $0.07 on the dollar, with an average of about $0.04.   The calculations suggest that it would take more than double the highest rate, about $0.18, to have substantial impacts. In other words, if you want to change people’s behavior in this case, a small tax isn’t going to do the trick.

What is the rationale for government intervention here? Is this a Pigouvian tax — that is, do soft drinks cause obesity and does obesity cause impose “external” costs on the rest of the population?   Or is it a “protect the children from their parents” rationale?

Let me know what you decide!

Coming to Briggs Second?!?

From NPR last year.   I haven’t heard how this is going…

The Economist reports that it has purchased real estate and is opening an amusement park called “Econoland.” It will combine a theme park with the joys of macroeconomics. Among the attractions: the currency high-roller, and fiscal fantasyland. The magazine says the park opens April 1.

I wonder if they have the Keynes v. Hayek video in 3d?

Lawrence I&E Continues its Ascension

Ripped from the headlines. A big congratulations to Prof. Galambos.  Here’s the story:

A $23,000 grant will support Lawrence University’s growing innovation and entrepreneurship program, a university-wide initiative launched in 2008 that engages students, faculty and alumni.

The two-year grant from the National Collegiate Inventors & Innovators Alliance will target the program’s flagship course “In Pursuit of Innovation.”  Cross-taught through Lawrence’s economics and physics departments, the course incorporates the use of guest experts from various fields, intertwines innovation with entrepreneurship and employs a project-driven, hands-on component designed to develop a learning community eager to pursue innovative and entrepreneurial ventures.

Since its launch, 41 students have taken the “Innovation” course.  Operating in three-person teams and in conjunction with the FabLab, a prototyping facility at Fox Valley Technical College, students have worked on projects ranging from the development of a multi-directional split-field camera and an ergonomic student desk to a hand sanitizing system for hospitals and schools and a personal identification system that allows health records to be retrieved automatically in the event of an accident.

“From its inception, our course has focused on diverse teams creating innovative products or processes, leading to functioning prototypes,” said Adam Galambos, assistant professor of economics and one of the program’s originators, along with John Brandenberger, professor emeritus of physics and Marty Finkler, professor of economics.  “This grant will enable us to take the Innovation course to a whole new level with student ‘E-teams,’ which will translate ideas into new products or services that benefit society.

“With its long-standing commitment to the liberal arts and sciences, Lawrence is the ideal setting for a program that inspires students and faculty to create innovative new ventures that combine ideas from diverse backgrounds, fields and perspectives,” Galambos added. Continue reading Lawrence I&E Continues its Ascension

Paying for “Quality”, SAT Scores Version

What accounts for the differences in prices of yogurt?  Well, there’s different size cups, different ingredients, different quality ingredients, some have nuts, brand name recognition, seems like a lot of things could drive price differences.

What accounts for differences in prices of female eggs on college campuses?  SAT scores.

“Holding all else equal, an increase of one hundred SAT points in the score of a typical incoming student increased the compensation offered to oocyte donors at that college or university by $2,350,” Levine reports. When the ad was placed for a specific couple, the premium was higher: $3,130 per 100 SAT points. And when an egg donor agency placed the ad on behalf of the couple, the bonus per 100 points rose to $5,780.

Here’s the report.

First Economics TeaBA of the New Term

Welcome back to campus.   With the new term comes an all new and improved Economics TeaBA.   This term promises to offer more beverages, more insight, more excitement than all of the prior terms of economics TeaBA combined.

For those of you who are new to this, the economics faculty and students began meeting Mondays for cookies and discussion last term.  The faculty turnout has been outstanding, including all of the regular faculty and emeritus professor Corry Azzi, and we have had occasional visitors from mathematics and other disciplines.   Generally, it is a time for informal discussion, but we will occasionally have a formal presentation or another matter to discuss.  It certainly lets you know where you can find at least one of us if you need some help.

Things (like the water and coffee) get heated up every Monday at 4:15 in Briggs 217.

See you there.

The Sage, Part 1

Before I catalog my notes on the last section of the book, The Sage,  I’d like to simply point out some excellent resources that have helped me to put Schumpeter’s work in context.   Indeed, that is one of the main challenges for economists today, I think, is what was genuinely important about Schumpeter’s work and what wasn’t.

Certainly, McCraw is a strong partisan of Capitalism, Socialism, and Democracy as being the seminal piece.   Before you tuck that away as Gospel, you might wan to check out Robert Solow’s review of the book for the New Republic.   Solow is a central figure in economic growth and development over the past half century (help me out here, Professor Finkler) and also took courses with Schumpeter at Harvard.   He wasn’t so impressed with Schumpeter’s entrepreneur, and consequently the famous Solow growth model doesn’t draw heavily on these ideas.   What could have been?

Another interesting perspective on the emergence and persistence of managerial capitalism is Deidre McCloskey’s piece, “Creative Destruction versus The New Industrial State,” comparing Schumpeter to John Kenneth Galbraith;  Schumpeter being the face of Harvard economics for the first half of the century and Galbraith for the second.  McCloskey is an important thinker and a brilliant writer, and her piece is excellent.

Then, of course, there is the Keynes versus Schumpeter rivalry.   This being a pro-Schumpeter crowd, let’s start with management uber-guru Peter Drucker’s thoughts.   Certainly, this territory is covered in the text.

I’ll post more on The Sage as we move toward our meeting date.

The Adult

This is a continuing live blog for the Innovation & Entrepreneurship Reading Group‘s discussion of Thomas McCraw’s Prophet of Innovation.  You can see previous entries by clicking on the “Schumpeter Live Blog” tag below.

The second section of the book covers Schumpeter’s life between 1925 and 1940, following the death of his beloved mother and his beloved wife, who died in childbirth of his son, who also died.  McCraw emphasizes that this had a rather profound impact on Schumpeter as he straddled time between Bonn and Harvard, all the while repaying the massive debts he accumulated during his vaunt into the private sector. The capstone of this section is that he, indeed, settled into Harvard permanently and reluctantly married for a third time.  These events set the stage for the final act of his life as The Sage, as McCraw puts it.

Given the tragedy in his life and his need to pay off his massive debts, it is not surprising that this was not the most productive period for his scholarship.  Two pieces jumped out at me as worth discussing — “Social Classes in an Ethnically Homogeneous Environment” and “The Instability of Capitalism.”  Continue reading The Adult

The Nobel-ist Triumph?

The economics Nobel selection committee evidently isn’t the only body impressed with Oliver Williamson’s Transaction Cost Economics (TCE). Personally, I have always liked transaction cost economics because I found the construct consistent with my own intuition.  Put succinctly, watch out because someone might be looking to screw you over.

Evidently, the students in my Economics 450, Economics of the Firm course, share my enthusiasm.

Here is a full accounting of their written responses from this term’s course evaluations:

Q:  What was the best topic in this course?
TCE

TCE

TCE! Williamson changed my life :-)

INNOVATION and ENTREPRENEURSHIP.

I love Williamson’s TCE forever and ever. I also really liked talking about McDonalds. I dont think the Innovation and Econ was particulary central to the class but I really enjoy it too!

TCE

L’Enfant Terrible

Welcome to the Innovation & Entrpreneurship Reading Group’s Live Blog of Thomas McCraw’s Prophet of Innovation: Joseph Schumpeter and Creative Destruction.  The theme of the book is Schumpeter’s emphasis on capitalism as a process of creative destruction.  That is, entrepreneurship and innovation creates value and is the engine of the capitalist economy, but those that win at the game (successful entrepreneurs) leave a “gale of creative destruction” in their paths.  Hence, he sees capitalism as a positive-sum game, but not necessarily as making everyone better off.   Just ask any horse and buggy dealer.

The first chunk of the book, L’Enfant Terrible, covers the first 42 years of Schumpter’s life.  During that time, he had him traveling from Austria to England to Cairo to the United States, serving as a lawyer, a minister of finance, a businessman, and a scholar.   In the scholarship realm, depending on whom you believe, he wrote what was perhaps his defining work — The Theory of Economic Development.*

David Hounshell provides some context for this early work and Schumpeter’s entrepreneur, mark 1.

The entrepreneur is the innovator in Schumpeter’s conception. His original word for the entrepreneur was der Unternehmer, literally undertaker—not in the sense of mortician but from the French verb, entreprendre, to undertake. Schumpeter identifies the entrepreneur as the person who makes new combinations and carries them out. Entrepreneurs are change agents; they create the basis for economic growth.

Continue reading L’Enfant Terrible

I&E Reading Group, Prophet of Innovation

I’m sure that I am not the only member of the I&E Reading Group plodding through Thomas McCraw’s enthralling Prophet of Innovation this week.  I will also start in on the “live blog,” as promised.

The book is a linear progression through both his life and his thinking about economics.  One of the clear messages, and, indeed, a clear message of virtually any history of thought book, is that the thinker is shaped by his or her environment (see, for example, The Worldly Philosophers and New Ideas from Dead Economists).   McCraw certainly paints Schumpeter (a.k.a., Jozsi, Schum, Schumy, Schump, Go-Go) as a product of his environment.   From his mother’s social climbing (Chapter 2 Summary:  Jozsi was something of a mama’s boy) to the horror and devastation of World War I to his spectacular failure as an investment banker, each of these experiences is linked to Schumpeter’s intellectual and professional trajectories.

McCraw divides this world up into three parts: L’Enfant Terrible,  The Adult, and The Sage.  By the time he’s 40, he’s already “played many parts — boy genius, Austrian aristocrat, English gentleman, Cairo attorney, Viennese economist, university professor, minister of finance, investment banker, socialite, and free-spirited Casanova” (124). Not to mention, triumphant swordsman in a duel with an uncooperative librarian (I’m looking at you, Mr. Gilbert).  That’s quite a whirlwind.  Not incidentally, he had also written some defining pieces, including The Theory of Economic Development and “The Crisis of the Tax State,” which made him almost world famous.

So, this week and next, I will be “live blogging” the book.  Rather than recounting the fascinating details of Schumpeter’s life in the “live” blog, I am simply going to offer up some thoughts and topics for discussion that I have carved out and that other members of the group have provided me.   I will likely have my first post up later tonight.

You can get a listing of our progress by clicking on the tag “live blog” below.   I hope it’s helpful.

A Significant Discussion about Statistics

Tom Siegfried at Science News has a rather lengthy and useful post about the nature of and some knotty problems with the concept of statistical significance. Not too much new here — be sure you understand what a P-value really is, don’t conflate statistical and economic significance — as Siegfried points out:

Experts in the math of probability and statistics are well aware of these problems and have for decades expressed concern about them in major journals. Over the years, hundreds of published papers have warned that science’s love affair with statistics has spawned countless illegitimate findings. In fact, if you believe what you read in the scientific literature, you shouldn’t believe what you read in the scientific literature.

The statistics blogosphere, to the extent that there is one, is all a flutter.   Andrew Gelman provides a round up on his blog.

My statistician pal generally endorses the Science News article, but I didn’t see his email to me because it got dumped in my junk mail folder.   He attributes this to spam filters using Bayesian methods.

No kidding.

Health Care Reform and Entrepreneurship

Partisan cheerleading or naysaying aside, there are many reasons that the health care reform is interesting.   Over here amidst I&E week, we might consider how health care reform will affect the level and rate of entrepreneurial activities.   It has long been asserted that the lack of health care creates “job lock,” whereby potential entrepreneurs stay in their current job for fear of losing health insurance.  The assurance of health care mitigates this concern, hence unleashing the full force of entrepreneurial activities…  Or so the argument goes.

Scott Shane from Case Western buys into the idea of job lock, but doesn’t necessarily believe that this week’s legislation will create any jobs.  He recounts his reasoning in Business Week, concluding:

In short, the current system of employer-sponsored health insurance creates job lock that keeps some entrepreneurs from starting businesses and creating jobs. But the size of that effect is smaller than most estimates of the number of jobs that health-care reform will destroy.

If you are interested in looking at how someone does a back-of-the-envelope calculation on such matters, the Business Week piece is quite interesting.

You might also consider checking out Megan McArdle’s blog for much more on this topic here, here, and here.

Innovation Summit on Left Coast

The Economist is hosting an innovation summit this week, and our own John Brandenberger is serving as our correspondent for the affair.    The speakers list is too long to get into here, but it includes many well-known folks in the field.  This morning’s keynote is from Jared Diamond, author of the classic Guns, Germs, & Steel, and there are dozens of other high-profile folks.

We look forward to the report.