General Interest

Category: General Interest

Growth in Words and Pictures

The Economic History Blog refreshes our memories on the various types of growth:

Recently I was reminded of the distinction made by Joel Mokyr, in the Lever of Riches, between the four types of growth:

  1. The Solovian growth, after Robert Solow, which is driven by an increase of the saving rate leading to more investment and thus a jump of the production per unit of labor.
  2. The Smithian growth, after you know who, which is driven by the positive feedback between the gain from trade and division of labor (specialization).
  3. The Boserupian growth, after Ester Bosrup, when demographic expansion leads to positive size effects once some thresholds have been reach.
  4. The Schumpeterian growth, after Joseph Schumpeter, where an increase in the stock of knowledge applied to economic production leads to to the increase of the said production.

And the Visualizing Economics blog provides the visuals.

Now, this is a pretty good illustration of the taking the natural log of an exponential, I’d say.

What, Me Worry?

For those of you without enough to worry about this holiday season, Calculated Risk has the top 10 economic questions for 2011.  Most of these seem to be macro issues, and 4 and 6 seem to be pretty boilerplate — is economic growth ever not an issue?  Nonetheless, worth your perusal.

With any luck, we’ll be getting the rest of those Schumptoberfest essays up for the holidays.

Mandated Health Insurance: the Big Tradeoff


David Leonhardt in today’s New York Times opines that the constitutional debate regarding the mandated insurance provisions of the health reform bill passed last March sends us back to many previous “constitutional” battles including those related to Social Security and Medicare.  Fundamentally, countries must set the boundaries for both risk taking and security provision.  He argues, in my view quite persuasively, that the security blanket of mandated insurance both encourages constructive entrepreneurship and discourages free-riding.  I wish that our public debate might take his arguments seriously.

Always Check the Second-Order Conditions

Here’s something to consider as Wall Street gets set to report record profits — a  Sunday New York Times piece on the machinations of the derivatives market.   As it turns out, the new banking regulations tend to restrict entry and favor incumbent firms.

“When you limit participation in the governance of an entity to a few like-minded institutions or individuals who have an interest in keeping competitors out, you have the potential for bad things to happen. It’s antitrust 101,” said Robert E. Litan, who helped oversee the Justice Department’s Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. “The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break.”

Sometimes known as “capture,” of course. When I learned this back in the day, my professor emphasized that capture does not mean that firms necessarily want regulation, but given that there are regulations, firms will bend them to their own advantage — especially politically connected ones.

And shouldn’t be all that surprising, even to the most optimistic of you.

Well worth reading.

UPDATE: For rather convincing rejoinders, see here and here.

The Moment of Truth

On December 1st, the President’s Commission on Fiscal Responsibility and Reform published its report on how taxes and spending patterns can be made sustainable.  For the most part, the report contains the recommendations of its two c0-chairs Republican Alan Simpson and Democrat Erskine Bowles.  The report garnered support from 11 of the 18 commission members.  I encourage everyone to at least peruse the report.  As noted in a November 11th  blog entry , it’s a serious attempt to change the unsustainable fiscal path for the U.S. Federal Government.

Another Puzzelah

Here’s another question for you — is Wall Street worthless?  I think I’ve asked this before, but I came across two items this week that take this head on.  On the pro-market side, we have Russ Roberts over at Cafe Hayek wondering why he never noticed the rampant cronyism between Wall Street and Capitol Hill:

I am increasingly pessimistic about the fake nature of Wall Street as part of the capitalist system. It is part of the crony capitalist system. I am ashamed at how long it has taken me to notice this. But once you start paying just a bit of attention, it’s hard not to notice.

He then adds fuel to the fire by wondering whether the Bootleggers and Baptists apply to Wall Street generally.  Don’t know the Bootleggers and Baptists story?  Check it out here.

So while Roberts gnashes his teeth, John Cassidy at The New Yorker spills out 10,000 words on the general worthlessness of Wall Street, concluding that most of what it does is socially worthless.

This shouldn’t come as too much of a surprise to you:  Professor Finkler cites it here and I posted something about it here.  We have also seen John Cassidy in the thick of the economics profession here.

IHRTUCFHC… or Not.

In this remarkable video, a professor at tells his students that he has used a statistical analysis and has determined rampant cheating in his class. I’m pretty sure what he did wasn’t a statistical analysis, but he did offer the offending students a chance to redeem themselves.

Jeff Ely from Northwestern offers some thought-provoking discussion:

So he is offering a deal to his students.  They can individually confess to cheating, attend a 4 hour ethics course and receive amnesty, or they can take the risk that they will not be caught.  What would you do?

  1. Professor Quinn’s speech reveals that the only evidence for cheating is an anonymous tip plus a suspicious grade distribution.  Based only on this the only signal that you cheated was that your score was high. But it’s not credible to punish people just for having a high score.
  2. If Professor Quinn expects his gambit to work and for cheaters to turn themselves in, then he should believe that everyone who doesn’t turn himself in is innocent.  So you should not turn yourself in.
  3. The biggest fear is that someone who you collaborated with turns himself in and he is induced to rat you out.  Then as long as you are not sure who knows you were in on the scam you should turn yourself in.
  4. It’s surprising that this possibility was never mentioned in Professor Quinn’s rant because without it, his threat loses much of its force.
  5. The fact that he didn’t raise this possibility reveals that he is not so interested in rounding up every last cheater but simply to get a large enough number to confess.  That way he can say that a lesson was learned.  This suggests that you should confess only if you think that your confession will just push the total number of confessions over that threshold.  Unlikely (unless everyone is thinking like you.)

What would you do, indeed?

Well, as it turns out, about a third of the class (200 students) threw themselves on the mercy of the court.  The sheer magnitude propelled the story into the headlines in the first place, making Professor Quinn something of a YouTube icon.

But the plot thickens.

As it turns out, the “cheating” involved was for students to get access to a test bank and studying from that.  The folks over at techdirt (techdirt?) think this sounds kind of fishy.

But watching Quinn’s video, it became clear that in accusing his students of “cheating” he was really admitting that he wasn’t actually writing his own tests, but merely pulling questions from a testbank. That struck me as odd — and I wasn’t really sure that what the students did should count as cheating. Taking “sample tests” is a very good way to learn material, and going through a testbank is a good way to practice “sample” questions. It seemed like the bigger issue wasn’t what the students did… but what the professor did.

The question seems pertinent given that Professor Quinn claimed that he wrote his own questions (video here).

Now, my guess is that the students knew that Professor Quinn used a test bank, and so their faux innocence seems kind of ridiculous.  On the other hand, I spend a lot of time writing my own tests.  Indeed, even when I taught large sections of intro (150+), I wrote my own multiple choice questions, so I’m not so sure how much sympathy is due for Professor Quinn here. And it’s not clear whether the ground he is on is all that high.

I’m not sure what the moral of the story here is, but it certainly is a remarkable case.

The Strangest Man?

All right, who said it?

I am not interested in literature, I do not go to the theatre, and I do not listen to music. I am occupied only with theories.

Is that Professor Galamobos talking about what he did on his sabbatical leave? His advice to students taking Econ 300 during winter term?  Professor Brandenberger talking about how LU professors used to be back in the day? Our new mantra for the Math-Econ major?

Not at all.

It’s Nobel Prize winning physicist, Paul Dirac, describing the work ethic that led him to international superstardom, if only he would have desired such a thing.  I picked up Graham Framelo’s biography of Dirac this past summer, and I would definitely recommend it as a good read for break, or a gift to that bookworm in the family.

Here’s a short review:

Continue reading The Strangest Man?

You Fix the Budget

 

Yesterday’s New York Time provided an opportunity for each individual to propose ways to close an estimated $400+ B Federal budget gap for 2015 and a $1.3+ B budget gap for 2030.  The exercise is structured in such a way as to show you how much “savings” is generated by each action.  For example, the complete elimination of farm subsidies would yield an estimated $14B per year.  As noted by many, including the co-chairs of the Presidents Deficit Reduction Commission (addressed in a previous blog entry), “fixing the budget” cannot be done without considering cuts in Medicare, Social Security, and Defense spending.  My first attempt can be found here.

The fundamental question, directly posed by Clive Cook in today’s Financial Times, is:  Will the President back the commission co-chairs, and thus demonstrate serious leadership, or will he – in the time honored tradition of political discourse – duck the issue?  Who will be the losers in this game of “duck, duck, goose?”

Business, Entrepreneurship, and Society Program

Last Friday and Saturday, I participated in a variety of activities related to the Chicago ACM program on Business, Entrepreneurship, and Society.  Two current seniors, Alex Chee and Cuong Nguyen, are enrolled in the program and have fascinating internships that they will tell us about when they return in January.

We visited the Industrial Council of Nearwest Chicago (ICNC), which has been serving business start-ups for 40 years.  The above building houses over 120 tenants that are in the early stages of business development.  ICNC owns and manages this 410,000 square foot space and supports the resident entrepreneurs with a variety of services including counseling and technical assistance, advocacy, recruitment, funding, and employee training.  We met with one firm (Souldier) that recycles automobile seatbelts into guitar straps (for famous and not so famous bands) and another (Aloft) that teaches how to do aerial acrobatics on silk ribbons hung from the rafters – an awe inspiring vision.

If you fancy yourself as an entrepreneur, seriously consider enrolling in this program.  You will find out whether such a lifestyle is a perfect fit for you.  If you have questions or seek more information about the program, come see me.

Access to Capital

When I conceived of the “free market Monday” tag, this recent Reuven Brenner article in Forbes is what I had in mind.  Brenner is one of the great champions of the idea that access to capital and fluid capital markets are prime drivers of capitalist economies. In this piece, he talks about the importance of risk capital in revitalizing the North American economic outlook.

I also recommend Brenner’s Force of Finance for anyone looking for a modern day capitalist manifesto.  You can get a good taste of Brenner in his review of Invention of Enterprise.

Grand Challenges in Economics Research

The National Science Foundation solicited the views of a number of leading (?) economists on what the grand challenges of economic science are for the next decade. Some of the responses are available here–you may not understand much of what these white papers are about without serious background in economics, but I still encourage you to take a look and see where the hottest stuff in economics might be when you are in grad school, if you choose that route. After a quick glance, it does seem to me that many of these white papers are about the authors advancing their agendas rather than visionary perspectives that live up to the “grand” in the challenge. These are certainly no Hilbert’s ten problems for economics. Another thing that occurred to me: of the fifty or so authors of these white papers, only three or four are women. Therein lies another grand challenge for economics, I think.

[HT to Noam Nisan at the Algorithmic Game Theory Blog]

The New JEPs are Here!

Things are going to start happening to me now!

Just in time for the end of term, the new Journal of Economic Perspectives is here, the new Journal of Economic Perspectives is here.  And this quarter’s issue is chock full o’ articles* about the state of macroeconomics after the financial crisis, so that should be fun to peruse.

The new JEP also has an article titled “Activist Fiscal Policy” by Alan Auerbach and colleagues, which has been a continuing source of consternation inside and outside of the profession (see here for our previous post on this topic).  Here’s the abstract:

During and after the “Great Recession” that began in December 2007 the U.S. federal government enacted several rounds of activist fiscal policy. In this paper, we review the recent evolution of thinking and evidence regarding the effectiveness of activist fiscal policy. Although fiscal interventions aimed at stimulating and stabilizing the economy have returned to common use, their efficacy remains controversial. We review the debate about the traditional types of fiscal policy interventions, such as broad-based tax cuts and spending increases, as well as more targeted policies. While there have been improvements in estimates of the effects of broad-based policies, much of what has been learned recently concerns how such multipliers might vary with respect to economic conditions, such as the credit market disruptions and very low interest rates that were central features of the Great Recession. The eclectic and innovative interventions by the Federal Reserve and other central banks during this period highlight the imprecise divisions between monetary and fiscal policy and the many channels through which fiscal policies can be implemented.

It’s interesting to look through the article, if for no other reason to look at the variances in estimated multiplier effects for different policy levers.  For example, direct government purchases have a range of 1.0 to 2.5, whereas the extension of the homebuyer credit seems to be self-defeating, ranging from 0.2 to 1.0.  Federal transfers to state and local governments vary depending on whether the spending targets infrastructure, and transfers to individuals range from 0.8 to 2.2.

Wow, we really don’t have a very good idea about how this works.

*Yes, Chock Full O’ Nuts is really a coffee brand.  As we saw in class, it has a lower price elasticity than brands such as Folgers and Maxwell House.

A Serious Deficit Reduction Plan, At Last

President Obama created a deficit reduction commission that has been asked to propose ways for the United States to bring down the (annual) deficit to GDP ratio from above 8% presently to 3% by 2015.  The two committee chairs,  Alan Simpson – former Republic Senator from Wyoming – and Erskine Bowles – former Clinton administration chief of state – have published a list of contentious ideas they believe necessary to achieve the intended target.  They have not avoided controversial programs such as Social Security, Medicare, mortgage interest rate deductions, and defense spending since they recognize that serious plans require serious discussion.

Their report must be made public by December 1st, and if it garners the votes of 14 of the 18 commission members, it must face an up-down vote in each house of Congress.  I find this effort the most interesting one related to politics since the Greenspan Commission to modify the Social Security program presented its report in 1983.  I wish them good luck.  They (and we) will need if we are to make serious progress and reducing future economic instability.

“It’s like a United Nations of tobacco victims…”

File this one under truth is stranger than, well, it’s pretty strange.  The United States Food and Drug Administration (FDA), the agency responsible for regulating cigarettes — yes, you read that correctly — has proposed some innovative mandates on cigarette packaging, intended to reduce tobacco consumption.

And, here they are:

There is a whole tortured history of how the agency responsible for approving new drugs is also the agency responsible for regulating the “safety” of cigarettes, but that’s probably for another day.  For today commentary, the wise guys over at The Awl sum it up pretty nicely.

They’re all here: hole-in-the-throat guy, child at risk, toe-tag dude, skeletal cancer man, preemie, zipper-chest fella, weepy lady… it’s like a United Nations of tobacco victims.

Another place to file this is under “Health and Human Services” and its proposed tobacco strategy.

EntrepreneurTheArts

Another very interesting person I heard at the CEO conference on Friday was Lisa Canning. Well-known for Entrepreneurthearts.com, Lisa Canning is a prominent face of arts entrepreneurship these days.

Lisa Canning with her baby at CEO

She founded the Institute for Arts Entrepreneurship, which has a two-year post-graduate certificate program that could be of interest to many Lawrentians. Their mission: “The IAE is committed to helping our students discover meaningful solutions to one essential question: As a person committed to the arts, how do I develop the knowledge and skills to create a successful, meaningful and sustainable life in today’s world?” Ms. Canning has started six highly successful ventures in the past twenty-some years. She sold all of them to start the Institute for Arts Entrepreneurship, except one: the one that is about her “baby,” the instrument she has played since her childhood, the clarinet. Lisa’s Clarinet Shop is still helping musicians of all levels find the perfect clarinet. Even when she was running those earlier businesses, Lisa hired artists and helped them build on their artistic skills and develop entrepreneurial skills. Artists can use their empathy and ability to connect with people to become successful entrepreneurs. Rather than pitching the “what” to a customer, it is much more important to make a human connection around the “why” and the “how.” This is good advice to anyone–Gary Vaughan was telling me on the way home that in any business, people buy from you because they like you. As Lisa said, she never has to talk about price, because it becomes a secondary issue to the customer. She is certainly a very kind and very emotional person, and I believe that she can teach a lot to artists about “entrepreneuring their art.” I hope we can get her to Lawrence in the not-so-distant future.

Collegiate Entrepreneurs’ Organization conference

Gary Vaughan and I spent the last two days at the Collegiate Entrepreneurs’ Organization (CEO) conference in Chicago. The conference is largely sponsored by the Coleman Foundation, who also made our Entrepreneurship in the Arts course possible through a grant, and who continue to fund some of our arts entrepreneurship initiatives. Our own Alex Chee and Cuong D. Nguyen are still at the conference.

This three-day event features a number of entrepreneurs who share their experiences with about 1500 students from all over the country. We heard, among others, Jimmy John talk about his story. (His father lent him $25K to start a hot-dog stand, and said that if he makes it, Jimmy gets 52% of the company, father gets 48%; if he fails, he agrees to enlist. The threat of boot camp pushed Jimmy to succeed and buy out his father. How did he sell his first sandwiches? Well, he didn’t. After he opened his shop and not a soul showed up by 2pm, he grabbed a few sandwiches and went to the neighboring businesses to hand them out as samples.) Another interesting person I heard was Phillip Leslie. Formerly a Microsoft software engineer (mobiles apps division), Mr. Leslie just couldn’t help getting into the iPhone app gold rush when he was an MBA student at Chicago’s Booth School of Business. So he launched ProOnGo, a mobile expense reporting app. In the middle ages, when you went on a business trip, you came home with a pocketful of receipts, which you then meticulously recorded and submitted. With ProOnGo, when you get that receipt, you take a pic of it with your iPhone, or Blackberry, or whatever, and in a few seconds you are done. At the end of the trip, you click to submit your expenses in excel or pdf format. Huge hit. Mr. Leslie gave very good advice indeed on how to make it with an app. For example, do you know the three ways to make money with an app? Through ads, one-time sales, or subscription service. Sounds obvious, but, actually, he is one of the pioneers of the last of these: it was believed that subscription service just wouldn’t be viable for iPhone apps. And how much do you get per impression if you advertise on your free app? Well, between a tenth of a penny and a penny. He also encouraged students with economics and social science-type skills to pair up with computer science majors to produce an app. But be clear about one thing: is this a hobby (which will cost you money), or a business (which should make you money)?