General Interest

Category: General Interest

“Pencil-necked academics” and the VSL

H. Spencer Banzhaf has a very cool piece in the new Journal of Economic Perspectives on the intellectual history of the concept of the value of a statistical life (VSL).  This evidently owes some debt to work at the RAND Corporation, where analysts were addressing the “classic problem” of maximizing damages to the enemy subject to a budget constraint.  The proposed solution of sending up lots of vulnerable decoy planes to distract the Soviets, however, hit a snag with the Air Force:

While RAND was initially proud of this work, pride and a haughty spirit often go before a fall. RAND’s patrons in the US Air Force, some of whom were always skeptical of the idea that pencil-necked academics could contribute to military strategy, were apoplectic. RAND had chosen a strategy that would result in high casualties, in part because the objective function had given zero weight to the lives of airplane crews. In itself, this failure to weigh the lives of crews offended the US Air Force brass, many of whom were former pilots.* (Banzhaf 215).

In response, some of the big thinkers at RAND, including legendary UCLA economists Jack Hirshleifer and Armen Alchian, went to work framing the problem.

In our society, personnel lives do have intrinsic value over and above the investment they represent. This value is not directly represented by any dollar figure because, while labor services are bought and sold in our society,human beings are not. Even so, there will be some price range beyond which society will not go to save military lives. In principle, therefore, there is some exchange ratio between human lives and dollars appropriate for the historical context envisioned to any particular systems analysis. Needless to say, we would be on very uncertain ground if we attempted to predict what this exchange ratio should be.

But picking out what the exchange ratio should be is exactly what the Value of Statistical Life is all about.  So, eventually, Thomas Schelling picked up on the problem with Ph.D. student Jack Carlson, culminating in Schelling’s 1968 piece, “The Life You Save May Be Your Own” exploring tradeoffs in willingness to pay for reductions in microrisks.  According to Banzhaf, Schelling’s contribution was to make the connection between public policy tradeoffs between lives and equipment and individual decisions involving risk (e.g., taking “hazard pay” that provides a premium for taking more dangerous assignments) (Banzhaf 222).

Earlier this term I gave the Freshman Studies lecture on Schelling’s Micromotives and Macrobehavior and spoke extensively about microrisks, though I was not aware of this particular contribution.  I guess I will put that incorporate that if I give another talk next year.

References after the break.

* Banzhaf also gives us a taste of public choice to go along with that:  “But moreover, that failure led RAND’s program to select cheap propeller bombers rather than the newer turbojets the US Air Force preferred” (215).

Continue reading “Pencil-necked academics” and the VSL

Semi-Annual Daylight Savings Post

Those of you who follow this blog have probably noticed that I (a) study mortality risks, and (b) that I have something to say about how those mortality risks change when the clocks spring forward and fall backward.   This fall is no exception, as I am quoted in a blurb on the Time magazine blog about how things are about to get more dangerous late in the day as a result of the time change.

Behold!:   The break in the series starting in month 11:

The Appleton Day

 

That’s daylight for Appleton, Wisconsin, from the remarkable Gaisma.com site.  Starting Sunday it is going to be dark at 5 p.m.  meaning that you are far more likely to get hit by a car at 5 p.m. next week than you are this week.   When I say “far more likely,” our estimate is that the risk is about three times as high!

Of course, you are also far less likely to get hit at 6 a.m. in the extremely unlikely event that you are out 6 a.m.  But, notice, but January 1 the sun won’t rise until after 7 a.m., and if DST was permanent, that would be 8 a.m.   Sunlight is the ultimate scarce resource.

Here is our previous coverage.

 

Economics / Gender Studies Talk

Claudena Skran
Professor of Government
Lawrence University

UNHCR’s Gender Policy for Refugees in Sierra Leone: Economic vs. Political Agency​

 ABSTRACT: The challenge of integrating refugee women into societies recovering from warfare is a difficult one.  Although numerous programs by the UN and other actors exist to promote women’s economic agency and political participation, few studies have examined their impact.  This project tries  to close that gap by examining the gender policy of the Refugee Agency of the UN in Sierra Leone, West Africa.  Based on research in the Kailahun District, the site of the recent Ebola outbreak, this talk will argue that while many projects benefited women and girls by improving economic livelihoods and access to education, similar efforts to improve health care failed.   In addition, the talk will consider how to best promote the participation of women in a democratic political process.

Thursday, October 30
Steitz Hall 202
4:30 p.m.

Why Study the Liberal Arts?

Economist and President of Randolph College, Brad Bateman, discusses the value of the liberal arts in an opinion piece in the Pittsburgh Post-Gazette.   Here’s the punchline:

There is a deep irony in the fact that a liberal-arts education is great preparation for employment. It is not designed for that purpose, but rather to prepare people to live as free citizens. It just happens that the breadth of learning required to create well-functioning citizens also is great preparation for being an effective employee.

President Bateman was on campus in 2013 discussing the role of advising as an integral part of the liberal education.

Tirole wins Nobel; Galambos wins Nobel-Picking Contest

Jean Tirole is the sole winner of the 2014 Nobel Prize in Economics, for his work on industrial organization. He is certainly well-known among graduate students, as his industrial organization textbook was the industry standard for decades.  He is a favorite on Briggs 2nd for, among other things, his classic 1980s co-authored piece, “The Fat-Cat Effect,the Puppy-Dog Ploy, and the Lean and Hungry Look.”

Some of his more recent work is on platform markets, which is the subject of our ECON 495 course this term!   Here is Alex Tabarrok’s take:

Platform markets or two-sided markets are markets where a firm brings together two or more sides both of whom benefit by the existence of the platform and both of whom may (or may not) be charged. A trivial but telling example is the singles bar that brings together men and (usually) women. Other examples are the Xbox a platform for game players and game developers, credit cards bring together buyers and firms that accept that card, newspapers bring together readers and advertisers, mall brings together stores and customers.

A key difficulty in these markets is that the price charged to one side of the market influences the demand on the other side of the market… [T]he cost of the technology that goes into an X-box console is often more than or not much less than the price of the console. So Microsoft sells the console at near cost and instead makes it money by charging game developers for the right to write games for the Xbox.  Antitrust and regulation issues come into play here because the two sets of prices may look discriminatory or unfair. In a mall, for example, it’s often the largest firm (the anchor) that gets the lowest price (sometimes even zero!). Does this represent an unfair advantage that a large firm has over smaller rivals or is it a rational consequence of the fact that the anchor store may bring the most customers to the other, smaller stores in the mall so that the total package is welfare maximizing? Is Microsoft engaging in predatory pricing if it prices the Xbox at or below cost?…  Platform markets mean that pricing at marginal cost can no longer be considered optimal in every market and pricing above marginal cost can no longer be considered as an indication of monopoly power.

Professor Galambos picks up the department prize for his selection.

“You could walk out rich. Rich!”

Jordan Weissmann at Slate has a fabulous opening in his most recent post:

Want to guarantee yourself a steady, well-paid career? Major in engineering. Want to take a shot at striking it rich? Then major in economics.

Now, I realize that money isn’t everything, it can’t buy you love, etc, etc… but the idea that economics majors are disproportionately represented at the top of the income distribution is too tempting to pass by.  Weissmann draws this conclusion after looking at a Hamilton Project report and an accompanying interactive tool that probes the distribution rather than the average earnings of various college majors (as well as comparing a college degree to various other levels of education).  As one might expect, the college degree is still a premium, and you can bank on quantitative skills:

Majors that emphasize quantitative skills tend to have graduates with the highest lifetime earnings. The highest-earning majors are those in engineering fields, computer science, operations and logistics, physics, economics, and finance.

That takes care of average earnings.   But the Hamilton Project does something clever and plots the distribution of lifetime earnings by major.  Here, Weissmann shows the lifetime present discounted value of earnings for a selection of popular majors — engineering, English, business administration.   Note that the median (50th percentile) engineering major earns more than the other majors, but as you move to the upper-end of the distribution, economics majors make considerably more money:

Economists surpass engineers at about the 60th percentile and the highest-paid econ grads can expect to make $3 million more (in NPV terms) than the highest-paid engineering grads.  Notice that economics and business management are not close substitutes at all in the figure, as the management grads don’t fare nearly as well at any point in the distribution, and certainly not at the  top. That observation is possibly consistent with some evidence on who becomes a CEO.

The lifetime earnings calculation is not a straight number, but a present value calculation at a 3% discount rate.  To provide a wee bit of perspective, an individual that graduated college into a $50,000 per year job and got a 3% raise every year would retire at age 65 with an income of approximately $175,000.  The NPV of that individual’s lifetime earnings would be just north of $2 million, which is right about the median lifetime earnings of a typical engineering and econ graduate. Not bad, but not exactly the 1%, either.

The interactive tool is pretty cool.  I changed the majors to include computer science, mathematics, and art history.  Predictably, the art history majors lag behind the other disciplines, but it is interesting to note that the top-earning, say, 10% of art history graduates have lifetime earnings higher than about 70% of the economics graduates.

Earnings Data

The thread title, of course, is a quote from Ben Loman.

The 4th or Possibly the 5th Predict the Nobel Prize in Economics Competition

Nobel
Any news?

Once again it’s time where I (sometimes) remember to post the Vegas odds on the Nobel Prize in Economics.  Here are the venerable Thomson Reuters predictions for the 2014 cycle:

  • Philippe M. Aghion and Peter W. Howitt for contributions to Schumpeterian growth theory
  • William J. Baumol and Israel M. Kirzner for their advancement of the study of entrepreneurism
  • Mark S. Granovetter for his pioneering research in economic sociology

Wow, if you had to pick three topics of interest at Lawrence economics, you could do worse than Schumpeterian growth theory, entrepreneurism, and economic sociology.

For my pick, I would probably  take Daron Acemoglu if he wasn’t so young.   Last year I picked Philippe Aghion, so maybe I should just go ahead and pick him again this year?

Professor Galambos is going with Paul Milgrom and/or Jean Tirole.

Professor Caruthers is picking Daniel Hamermesh

UPDATE:  Tyler Cowen goes with William Baumol and William Bowen for their work on the venerable cost disease.

Send me your picks or put them in the comments.

Must be 18 or older to enter, void where prohibited.

Econo Life, It’s Super Fun!

John Cawley has updated his indispensable paper for young Ph.D. economists searching for new positions, “A Guide and Advice for Economists on the U.S. Junior Academic Job Market: 2014-2015 Edition.”  Though I realize most of the paper is irrelevant for this (or any) audience, these facts are remarkable:

[A]lmost everyone lands a job that they like…. In fact, National Science Foundation data indicate that Ph.D. economists have the lowest unemployment rate (0.9%) of any doctoral field, as well as one of the highest median salaries of any doctoral field. Finally, the vast majority of people are happy with the outcome of their search. Of the new Ph.D. economists in 2001-02, 94% reported that they liked their jobs very much or fairly well.

My emphasis because, Wow!   Those of you interested in pursuing a Ph.D. in economics, applied economics, agricultural economics, law & economics, or public policy, should consider having a chat with several members of our faculty.

For our previous coverage, see here.

Updated Schedule, Redux

This is the amended schedule for 2014-15 as of July 21.  The Registrar’s office will incorporate these changes in the next few weeks.   The one addition is the 8:30 a.m. econometrics section!!!    Development Economics has moved from the fall to the winter.

 

FALL TERM
100 INTRO MICRO Lhost MWF 1:50-3:00
200 DEVELOPMENT Staff MWF 9:50-11
205 INTERNATIONAL ECON Caruthers MWF 12:30-1:40
211 IN PURSUIT OF INNOVATION Galambos, Brandenberger MWF 11:10
300 MICROECONOMIC THEORY Gerard MTWR 8:30-9:40
300 MICROECONOMIC THEORY Gerard MTWR 9:50-11
495 MARKETS AND INNOVATION Galambos, Gerard MWF 1:50-3:00
500 ADVANCED MICROECONOMICS Galambos See Instructor
WINTER TERM
100 INTRO MICRO Caruthers MWF 8:30-9:40
200 DEVELOPMENT Caruthers MWF 1:50-3:00
225 DECISION THEORY Galambos MWF 12:30-1:40
215 COMPARATIVE ECON SYSTEMS Galambos MWF 8:30-9:40
380 ECONOMETRICS Lhost MTWF 8:30-9:40
380 ECONOMETRICS Lhost MTWF 3:10-4:20
410 ADV GAME THEORY Galambos MWF 9:50-11:00
425 ENTREPRENEURIAL VENTURES Vaughan MWF 11:10-12:20
444 POLITICAL ECON OF REGULATION Gerard TR 9:00-10:50
495 INDIVIDUALITY & COMMUNITY Wulf TR 12:30-2:20
601 SENIOR EXPERIENCE: READING Gerard T 12:30
602 SENIOR EXPERIENCE: PAPER Finkler R 12:30
SPRING TERM
100 INTRO MICRO Caruthers MWF 1:50-3:00
223 QUANTITATIVE DECISION-MAKING Gerard, Parks TR    9:00-10:50
245 LAW AND ECONOMICS Lhost TR    12:30-2:20
280 ENVIRONMENTAL ECONOMICS Gerard TR  12:30-2:20
295 TOP: FINANCE Vaughan MWF 12:30-1:40
320 MACROECONOMIC THEORY Finkler MTWR 3:10-4:20
460 INTERNATIONAL TRADE Caruthers MWF 9:50-11:00
495 APPLIED ECONOMETRICS Lhost MWF 3:10-4:20

Legalized It

As some of you may know, a number of states have legalized the sale and use of marijuana for general (that is, non-medicinal) purposes.   For your weekend reading pleasure, I give you a theoretical and empirical assessments of what has happened since the votes were counted.  First up is EconoMonitor‘s Ed Dolan, who diagnoses the mystery of the missing marijuana in his home state of Washington, complete with some tasty supply & demand diagrams.  Dolan sees “government failure in the making”, as overzealous licensing requirements and prohibitive taxes work together to keep the market thin.

A little-ways east, however, the Colorado market has been blossoming, and there are some early empirical assessments of the results (see here for the story and here for the report). Is it not surprising that actual demand is 30-90% higher than the “experts” projected?  Tough to say.  Paging through the report, I see that 20% of the users account for roughly 70% of total demand,  a familiar phenomenon.  Taking that a step further, there are approximately 175,000 adults who smoke 21+ times per month, and these folks on average consume more “per time” than the less dedicated users (a lot more, it turns out).

You can see more on economists’ views of drug prohibition and legalization in one of our previous posts.

Supremes 1 Economists 0

No, this is not the score of a virtual soccer match designed to parallel the World Cup.  It’s Uwe Reinhardt’s assessment of Monday’s Supreme Court ruling in Burwell v. Hobby Lobby.

As Reinhardt puts it “These justices seem to believe that the owners of ‘closely held’ business firms buy health insurance for their employees out of the kindness of their hearts and with the owners’ money.  On that belief they accord these owners the right to impose some of their personal preferences – in this case their religious beliefs – on their employee’s health insurance.”

The literature in economics is clear on who pays for employer organized health insurance: most of the burden is borne by employees, no matter who actually “writes the check.”  Health plan coverage benefits are part of employee compensation.  In contrast with the argument made by “The Supremes,” all employers subject to competition in the goods and services they produce and sell have to compare the total compensation to labor with the value generated by such labor.

Since many employees have virtually no choice in the type of health care coverage they receive, in the United States we effectively grant “quasi parental power” to their employers.  Furthermore, such powers carry over into other aspects of employee’s personal life including retirement plan choices and wellness programs.  I find it intriguing that a Supreme Court with a strong contingent that believes in primacy of liberty accepts such restrictions on personal freedom.

The Affordable Care Act (aka ObamaCare) may right the balance as next year small businesses and their employees, in addition to the more than 8 million individuals who signed up this year through the exchanges, will leave employer paternalism for more choice and better value (especially for those who are able to take advantage of income-related Federal governmental subsidies.) Wouldn’t it be ironic if this Supreme Court decision actually underpins support for participation in the health plan exchanges and thus the ACA?

Summer Reading

My summer reading is being colored by our new, exciting fall additions.  And people named Thomas.

Thomas Schelling, Micromotives and Macrobehavior.  This is a new one on the Freshman Studies reading list for the fall and parts of it promise to feature prominently in our instruction as we continue to emphasize the utility of abstract modeling.

Thomas Piketty, Capital in the 21st Century.  This is all the rage right now, and even the critical reviews say it’s worth a read.  So read it I will!

Glen Greenwald, No Place to Hide. As William Burroughs once said, “Paranoia is just having the right information.”  If you’ve ever wondered who General Keith Alexander is, what a FISA court is, or what the whole Edward Snowden thing is all about, Greenwald lays it out for you.   I was planning on doing some reading on security regulations, and this seemed like an appropriate preface…

John Mueller and John Stewart, Terror, Security, and Money.  This has been on my shelf taunting me for a couple of years.  It walks through security regulations and gives a sketch of how benefit-cost analyses are done (or not done).  This will make its way into ECON 444 in the Winter, I am certain.

Thomas Pynchon, Inherent Vice.  Speaking of paranoia, nobody does it better than Pynchon. This is a quintessential summer read, the SoCal surf-side detective story from an iconic American author.   Here’s a taste:  

“It’s like Donald and Goofy, right, and they’re out in a life raft, adrift at sea? for what looks like weeks? and what you start noticing after a while, in Donald’s close-ups, is that he has this whisker stubble? like, growing out of his beak? You get the significance of that?”

Ain’t that the truth?  This one is coming to a theater near you, so read it before the hype-la.

William Nordhaus, The Climate Casino: Risk, Uncertainty and Economics for a Warming World.   A lot of interest on climate change and its effects, so I will probably revisit this one and do a seminar on it with interested students next year.  A great book for anyone interested in the nuts-and-bolts of the economics of climate change from the president of the American Economics Association.

Summer Innovation Links: Disruption, Stagnation, and Fame

Clayton Christensen’s well-known theory of disruptive innovation has been applied all over the place, from personal computers to cellular telephones to higher education — he seems to have written about 500 books on the topic. From his perch at the Harvard business school, he has established himself as one of the more influential thinkers on the planet.

Jill Lepore, also from Harvard, has been spreading her influence via her explorations of various academic “literatures” (including this one) for the New Yorker. This week Lepore sets to disrupt the disruptive innovation mojo with a lengthy, critical takedown of Christensen’s prime examples (“easy targets” according to Joshua Gans).

It seems to be making some noise on my RSS feed (do people still have RSS feeds?) along these lines:

I suppose I should offer my thoughts (Gerard on Klein on Gans on Lepore on Christensen) to keep that whole thing rolling, but instead I return to the “stagnation” debate, this time between Northwestern heavyweights, Joel Mokyr and Robert Gordon.  If you know a Google trick or two, you can get access to this piece in the Wall Street Journal.  

The upshot is that Mokyr thinks innovation is booming, whereas Gordon thinks it isn’t.   We’ve seen this before in the Gordon v. Brynjolfsson  TED smackdown, and I suspect we will continue to see it going forward.

We get the pointer via the Cheap Talk guys — also from Northwestern — who are somewhat bemused by the WSJ reporter’s assertion that Gordon is “more famous” than Mokyr:

Since when is Bob Gordon more famous than Joel Mokyr?  I suppose it depends on the audience you ask – Joel is not known to journalists. But in academic circles, the fame ranking is reversed.

For a summer starter kit, you can learn a lot about how people think about innovation by reading through some of these links.

UPDATE:  Christensen responds to Lepore!

 

Environmental Econ Updates

Here are some quick hits as we wrap up this term’s ENST 151 and ECON 280 courses:

Will shuttering the Keystone pipeline leave a “billion” barrels of oil from tar sand production in the ground?  That’s a recent assessment out of Berkeley (blog post).

Speaking of not opening Keystone, what’s with all of these tank car explosions?  Tradeoffs, tradeoffs.  Yikes.

In other news, should we take a “wait-and-see” approach to climate change? Not according to this recent Brookings piece.  Tax, baby, tax!

Or cap, baby, cap.  The New York Times shows us how a carbon market works!

And, finally, James Hamilton gives the rundown on resource scarcity and prices for myriad commodities.