David Gerard

Author: David Gerard

The Citizen Kane of Macro Battle Rap Videos

Do you find that your friends lose interest when you start discussing the nuances of Keynsian and Hayekian views on boom-and-bust cycles? Well, this might be just the video to help you get your point across.

The messages seem to align with my admittedly-limited understanding of macro theory, and I’m pretty certain Russ Roberts knows more about these issues than I do. And it has received critical kudos from Alex Tabarrok.

Catchy, too.

I’ll look forward to hearing this blaring in 120 and 320 in the coming years.

Enjoy!

Kasparov Goes Mano-a-Mainframe

Gary Kasparov talks about his experiences going mano-a-mainframe on the chessboard in the latest New York Review of Books. Here’s a tasty bit discussing when the programmers finally prevailed:

It was the specialists–the chess players and the programmers and the artificial intelligence enthusiasts–who had a more nuanced appreciation of the result. Grandmasters had already begun to see the implications of the existence of machines that could play–if only, at this point, in a select few types of board configurations–with godlike perfection….

The AI crowd… was pleased with the result and the attention, but dismayed by the fact that Deep Blue was hardly what their predecessors had imagined decades earlier when they dreamed of creating a machine to defeat the world chess champion. Instead of a computer that thought and played chess like a human, with human creativity and intuition, they got one that played like a machine, systematically evaluating 200 million possible moves on the chess board per second and winning with brute number-crunching force…

It was an impressive achievement, of course, and a human achievement by the members of the IBM team, but Deep Blue was only intelligent the way your programmable alarm clock is intelligent. Not that losing to a $10 million alarm clock made me feel any better…

Here in the economics department, we believe people and firms make choices among alternatives. Of course, it can be both difficult and costly to identify all those alternatives ex ante.

Great read.

The Times, They Aren’t a Changin’

Speaking of the New York Times, you might have heard the buzz that they are going to begin charging for content. Will that save them? Well, as one critic put it, “Do you like getting pecked to death by ducks?”

It’s a pretty interesting piece, integrating some aspects of market structure, competition, innovation, and, yes, organizational adaptation.

Apple doesn’t even announce its tablet, and suddenly Amazon flips the deal on Kindle royalties to comport with Apple’s app world. Yup, yesterday Amazon said publishers would get 70% of revenue instead of 30%. Sure, there are caveats, you can read the fine print, but the point is Amazon could see the Apple juggernaut coming and adjusted. Where’s the adjustment at the “New York Times”?

Check it out. You might learn something along the way.

Just Think How Much They’d Be Worth With Tasteful Uniforms

Have you ever wondered how much a sports team is worth to the community? Many people think about direct benefits in terms of jobs, sales of novelty headwear, Economists typically find that on net, such benefits aren’t very big, or are even negative.

One thing that has been tough to measure is the value that individuals place on having the team, and a recent piece in the Southern Economic Journal has done just that for the Minnesota Vikings. According to a piece in the Wall St Journal,

Sports teams sell their facilities as economic-development projects that create jobs and generate tax revenue. But a slew of studies have shown that publicly subsidized stadiums–usually paid for by selling bonds and paying the cost and interest with tax revenue-rarely return the money governments put into them. Teams continue to argue, often successfully, that they are worthy of subsidies because they are a source of civic pride and purpose.

But what is that worth? Economists Aju Fenn and John Crooker tried to answer the question in a study published in July 2009 in the Southern Economic Journal.

The two used “contingent valuation methodology,” which is a nerdy way of saying they surveyed people and used statistical models to turn the answers into an average price Minnesotans place on the Vikings.

The result: The Vikings’ “welfare value” is $702,351,890– $530.65 for each of the roughly 1.32 million households in Minnesota.

The study was conducted in 2002, and the figures are not adjusted for inflation (or for the recent acquisition of quarterback Brett Favre)

The contingent value method was pioneered by environmental economists, trying to get at the value of non-market amenities, from clean air to a day of fishing to preserving the Arctic from oil development. It relies on, of all things, estimates of the compensated demand curve. So for those of you laboring through Econ 300 right now, this is one application of that whole “prices rise and we give you just enough income to keep you on the same indifference curve” business.

One of the major criticisms of the method is that it’s easy to talk the talk about what you’d be “willing to pay,” but it’s a much different thing to actually plunk down the cash.

Making the Grade

College kids these days seem to have it easy. When I was that age, I had to walk twelve miles uphill through a blizzard to get to class, and then make a similarly brutal trip uphill to get back home. Not to mention that back then the median grade was somewhere around a C-. And this was during the easy courses in summer session.

Well, perhaps that isn’t all completely accurate, but according to a forthcoming paper by Philip Babcock in Economic Inquiry, it seems likely that we did study more back then. The key result is that students spend more time studying in classes where the expected grade is lower. So, if grade inflation leads to higher expected grades, I read that to mean that on average students will study less.

Abstract: College grade point averages in the United States rose substantially between the 1960s and the 2000s. Over the same period, study time declined by almost a half. This paper uses a 12-quarter panel of course evaluations from the University of California, San Diego to discern whether a link between grades and effort investment holds up in a micro setting. Results indicate that average study time would be about 50% lower in a class in which the average expected grade was an “A” than in the same course taught by the same instructor in which students expected a “C.Findings do not appear to be driven primarily by the individual student’s expected grade, but by the average expected grade of others in the class. Class-specific characteristics that generate low expected grades appear to produce higher effort choices — evidence that nominal changes in grades may lead to real changes in effort investment.

The emphasis is mine.

If we here in economics announced that the average course grade is a half point lower than the average campus grade, would we get harder-working students? Or just fewer students?

Twitter to Solve Corporate Governance Problems — Screenshots at 11

That’s according to former New York Governor,* Eliot Spitzer, writing in Slate.com. As emphasized in the Economics of the Firm course (Econ 450), the evolution of the ubiquitous “M-Form” corporate structure created a chasm between equity shareholders and company managers. The split presents the classic principal-agent problem (or simply “agency” problem) where the incentives of owners and managers might not be aligned. Although Williamson (1975) goes to great pains to show how the problem is resolved, Chandler (1977) flat out says that corporate managers are clearly not maximizing shareholder wealth.

However you come down on the issue, the Spitzer piece argues that new communications technologies that (allegedly) transformed political campaigns in 2008 can also be used for shareholders to reclaim ownership of their firms.

Whether that is a good thing or not, I suppose, is an open question. Some would argue that shareholders are more interested in short-turn returns than looking out for the long-run health of the country. Certainly, this question isn’t settled.

Economics of the Environment from The Economists’ Voice

We continue to reap benefits from our subscription to The Economists’ Voice. The site provides short, readable pieces on economics and public policy topics of the day, typically from some of the top scholars in the field.

For those of you interested in environmental issues (or simply a preview to Econ 225), the latest edition has several articles on incentive systems for reducing carbon emissions. For those of you not up to speed on the lingo, the basic mechanisms are “command-and-control,” where the regulator typically specifies some cleaner technology; a per-unit tax on emissions; and a “cap-and-trade” system, where the regulator picks a maximum quantity of emissions (the cap) and uses a market that allows firms to sort out which has the lowest cost of reducing emissions (trade). A basic result is that under the right conditions, the pollution tax and the cap-and-trade systems give equivalent outcomes. However, in practice, the cap-and-trade seems to be the route that is taken.

Don Fullerton and Daniel Karney start out The Economists’ Voice articles by looking at issues associated with the allocation of pollution permits within the US. Should they be handed out for free or auctioned off to the highest bidder? What are the distributional impacts? That is, are poor people hardest hit because increased firm costs are passed on in the form of higher energy prices.

Next, Ozge Islegen and Stefan J. Reichelstein look at the economics of carbon capture This is an interesting technology that involves capturing carbon before it goes into the atmosphere, compressing it into a supercritical state, and then “sequestering” it underground or under the sea for time eternal. The pro side of this is that we can still burn fossil fuels without having increased atmospheric carbon concentrations.

Lee Friedman and Jeff Deason discuss whether regulators are markets are better fit to determine when carbon emissions are reduce. And, finally, Éloi Laurent looks at France’s pending carbon tax. Ah, the French.

While we’re playing the blame game, we might as well ask whether we should blame the Copenhagen debacle on China or on the economists?

Don’t look at me.

Is Wall Street Ruining America?!?

Last week I posted a blurb that pointed to a New Yorker article by finance writer John Cassidy on how members of The Chicago School think of the financial meltdown. For some perspective on how a writer views economics and finance, you might check out his new book: How Markets Fail: The Logic of Economic Calamities. (Let me know what you think). One of the giants of the economics profession, Robert Solow reviews it here on The New Republic‘s new book site.

As I suggested before, Cassidy seems a bit antagonistic to the pro-market guys at Chicago (e.g., Fama and Cochrane) and Professor Solow suggests that we get a similar white hat, black hat story here. Even so, the take home point seems to be this:

John Cassidy’s book should confer on a thoughtful reader a lasting immunity to erroneous free-market sloganeering, whether simpleminded or devious, while still conveying some feeling for what a well-functioning market system can actually do. Both ideas are important.

Making America More Innovative through, wait for it…

There are lots and lots of Lawrence folks out there interested in how to improve US innovation. How, indeed? One answer comes from a recent article at Slate.com, where Economist Ray Fisman discusses how, surprise!, giving scientists greater incentives can foment higher levels and more novel types of medical innovation.

His source is a new paper from Azouly, Zivan, and Manzo that looks at the relative successes of different groups of medical researchers with similar academic pedigrees: Here’s a key excerpt from the abstract:

[W]e study the careers of investigators of the Howard Hughes Medical Institute (HHMI), which tolerates early failure, rewards long-term success, and gives its appointees great freedom to experiment; and grantees from the National Institute of Health, which are subject to short review cycles, pre-dened deliverables, and renewal policies unforgiving of failure… We find that HHMI investigators produce high-impact papers at a much higher rate than two control groups of similarly-accomplished NIH-funded scientists. Moreover, the direction of their research changes in ways that suggest the program induces them to explore novel lines of inquiry.

You can find the research paper here.

Much more on the topic of innovation and entrepreneurship as the term progresses.

Global Health Workshop at Beloit

Do you have any interest or expertise in global health issues? If so, you might consider checking out the March 12 and 13 workshop on Global Health and the Liberal Arts Curriculum at Beloit College. shelia Tlou, former Minister of Health for Botswana, will speak about the AIDS there on Friday night, and the conference runs Saturday. They are looking for presenters and participants, including student posters.

The Elasticity of Demand for Superstar Bankers

The first lesson of Economics 300 is that the economic incidence of a tax is independent of the legal incidence. So who will pay a tax on banker bonuses?

Not the bankers, evidently. Here’s the skinny:

“The tax is going to be 90 per cent absorbed by the banks,” said one senior recruitment consultant with clients in the City.

In many cases that will mean banks doubling bonus pools, with the cost of the tax borne by shareholders. Dividends, already under pressure as regulators force banks to retain earnings to boost capital, are likely to be hit, bankers concede. tax?

Seems like a reasonably good question for coin-toss Tuesday.

Organs for Sale?!?

Alex Tabarrok has an op-ed in the Wall Street Journal discussing how various countries regulate the exchange &/or sale of human organs. Unfortunately, in the US the quantity supplied of organs is insufficient to meet the quantity demanded, and thousand of folks die each year waiting for a viable organ.

We talked about this a bit in Econ 300 this week, specifically discussing how Becker and Elias derive an estimated market-clearing price if organ trade were liberalized in the US. This is a really nice piece that really illustrates how economists think about what supply and demand curves represent.

I also highly recommend an accompanying article in the Journal of Economic Perspectives by Alvin Roth about how repugnance can constrain market exchange.

The Real Estate Crash: Evidence in Search of a Theory

Megan McCardle at The Atlantic Monthly has an interesting column on the commercial real estate crash, and what it might imply about the residential crash. It turns out, the boom and bust of commercial property follows pretty much exactly the same trajectory as the residential market. Echoing Paul Krugman’s piece, McCardle points out that the overlapping trends undermine any number of explanations:

Yet we can’t blame this on predatory lenders tricking the unsophisticated into unwise loans, because these were basically all professionals. Nor can we argue that banks were willing to write toxic loans because they were just going to sell the garbage off to investors; a much smaller percentage of commercial mortgages were securitized (though that percentage did increase as the bubble inflated). And we certainly cannot blame them because they “should have known better” than their borrwers, who usually had more experience than the banks in pricing commercial real estate.

Somehow, everyone got stupid all at once.

So what was it?

To answer that question, John Cassidy of The New Yorker headed to Chicago to chat up the big thinkers from The Chicago School about what they think. Although the beginning presents what I think is a misleading caricature of Chicago versus the Keynesians in a black hat, white had fashion, it’s interesting to hear what the likes of Richard Posner, Gary Becker, John Cochrane, and Eugene Fama view the crisis. I especially liked reading about Fama, who canceled his subscription to The Economist because he was tired of reading the word “bubble.”

His piece is currently gated, but I have a copy if you care to take a look.

The Costs and Benefits of Grad School

Well, there’s good news and bad news making the rounds on the blogosphere. The good news, as most of you probably know, is that a bachelors degree (on average, of course) is a pretty good investment in terms of future income stream.

About a third of you (again, on average) will make a return to the ivory tower to pursue an advanced degree. And that’s where the bad news, if you can call it that, comes in. Check out the data from this post on law school and especially the figure showing salary differentials.

The table is especially revealing in the dangers of relying on “averages” when making a decision. If I was making a decision about heading to law school, I’d want to know whether I was more likely to end up in the high or the low-income humps of that distribution.

The Secret Lives of Economists

A recent Wall Street Journal piece provides a rare glimpse into the propensities and proclivities of economists. If you don’t find what the economists are doing at all unusual, then you are probably in the right place.

The article includes a nice couple of quotes from Yoram Bauman, who will be speaking at Lawrence later this year:

“The economics students seem to be born guilty, and the other students seem to lose their innocence when they take an economics class,” says Mr. Bauman, who has a stand-up comedy act he’ll be doing at the economists’ Atlanta conference Sunday night. Among his one-liners: “You might be an economist if you refuse to sell your children because they might be worth more later.”

I’m not sure if the take-home point is that we take our models too seriously or not seriously enough.

Opportunity to Improve Your Quant Skills

The Center for Teaching and Learning will sponsor workshops to provide students with an opportunity for a review of quantitative concepts. Each workshop will be held in Briggs 420 and is approximately 90 minutes long.

Algebra 4:30 PM on Wednesday, January 6, 2010

Workshop 7:00 PM on Monday, January 11, 2010

The goal of the algebra workshop is to share information on an algebra reference sheet that should empower students with a resource to help answer common algebraic questions. The algebra reference sheet will include information on fractions, exponents, algebraic properties, the order of algebraic operations and the FOIL method of multiplying binomials.

Graph 4:30 PM on Thursday, January 7, 2010

Workshop 7:00 PM on Tuesday, January 12, 2010

The goal of the graph workshop is to share information on a graph reference sheet that should empower students with a resource to help answer common graphing questions. The graph reference sheet will include information on the Cartesian Coordinate System, linear equations in two variables, the slope of a straight line, axis intercepts of a straight line and reading data from a graph.

Word Problem 4:30 PM on Friday, January 8, 2010

Workshop 7:00 PM on Wednesday, January 13, 2010

The goal of the word problem workshop is to share information on a word problem reference sheet that should empower students with a resource outlining strategies for approaching word problems. The word problem reference sheet will include information on general strategies that encourage students to extract relevant information, organize the information into patterns and work toward the successful completion of word problems.

You’ve Got to Admit It Could Be Getting Better

“This Term Will Be Better”

What: An opportunity to learn how to decrease stress, increase motivation, and manage your time

Who: All students looking for strategies to make this term more productive and successful

When & Where: Tuesday, Jan. 5th from noon-1pm in one of the meeting rooms in Andrew Commons AND Thursday, Jan. 7th from 9-10pm in the Kraemer Room of the WCC (the same presentation will be given on two occasions)

What to do next: If you have questions, contact Rose Wasielewski or Julie Haurykiewicz. If you can’t make it but still want to talk with someone about academic success and time management strategies, contact Julie Haurykiewicz in the CTL.

(Mostly) Happy New Year from Equities

Happy new year to you Lawrentians and other fellow travelers. The Dow was up nearly 20% over the past 12 months, so perhaps our collective fortunes are on an upward trajectory. Unless, of course, you were holding “The Tiger Fund.”

Shareholder Value Destruction following the Tiger Woods Scandal

Christopher Knittel & Victor Stango

University of California Working Paper

December 2009

Abstract: We estimate that in the days beginning with Tiger Woods’ recent car accident and ending with his announced “indefinite leave” from golf, shareholders of companies that Mr. Woods endorses lost $5-12 billion in wealth. We measure the losses relative to both the entire stock market and a set of competitor firms. Because most of the firms that Mr. Woods endorses are either large or owned by large parent companies, the losses are extremely widespread. Mr. Woods’ top five sponsors (Accenture, Nike, Gillette, Electronic Arts and Gatorade) lost 2-3 percent of their aggregate market value after the accident, and his core sports related sponsors EA, Nike and PepsiCo (Gatorade) lost over four percent. The pace of losses slowed by December 11, the date on which Mr. Woods announced his leave from golf, but as late as December 17 shareholders had not recovered their losses.

See you in 2010.

Savings = Investment, Ebenezer Scrooge Edition

Before The Accidental Theorist, before Freakonomics, there was The Armchair Economist, and that’s Steven Landsburg.

In this Slate piece, Landsburg makes the case that Scrooge wasn’t such a bad guy, and that savings, in fact, might just be more virtuous than spending. To wit:

In this whole world, there is nobody more generous than the miser–the man who could deplete the world’s resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer–because you produced a dollar’s worth of goods and didn’t consume them.

You will know you’ve arrived as an economist when you can annoy your brethren by expounding on the virtues of Scrooge over the holiday season. For more pithy advice from Landsburg, we’ll be using his text in Economics 300 next term.

See you there.