Lawrence Economics Blog

Creative Instruction

The BI5 team?

How simple can it get?

It may not be as exciting and mysterious as the MI5 unit, but the UK government’s Behavioural Insights Team could be the economist’s version of influencing the world from the shadows. BIT is also known as the “Nudge Unit.” As The  Telegraph explains,

The unit’s work is described by them as “libertarian paternalism”, a phrase coined in the 2008 book Nudge: Improving Decisions About Health, Wealth and Happiness by Chicago University professor Richard Thaler and Cass Sunstein (now required reading for the Coalition front bench). And yet while their language might sometimes seem worryingly close to management-speak – using “choice architecture” to create “rational economic optimisers” – it belies some basic common sense.

Cass Sunstein now has a new book (to be published April 9th), Simpler: The Future of Government. Sunstein has some experience in putting his ideas to practice, as this Fortune article describes:

Cass Sunstein, a friend of Obama’s from his University of Chicago Law School days, spent the last four years running the Office of Information and Regulatory Affairs (OIRA). It’s an obscure but exceedingly powerful perch that enabled Sunstein to put his imprint on everything from fuel efficiency standards and the redesign of the food pyramid to the rules for the landmark health care and Wall Street overhauls.

Sunstein used his office as a laboratory for his brand of “libertarian paternalism” — his self-described and seemingly paradoxical approach to structuring prompts for people that promote their welfare by protecting them from their more self-destructive impulses.

I suppose we are bound to hear more and more about libertarian paternalism. This is not new to those of you who just took Comparative Economic Systems, and neither are the warnings of Harvard’s Ed Glaeser on the dangers of “soft paternalism.” That leaves just one last question: What would Hayek say? Economics student Ryan Kottman answered that question for the Comparative Economics crowd in his presentation on “libertarian paternalism:” Hayek would worry very much about the government’s nudging leading to less individual responsibility. Kottman quotes Hayek’s Constitution of Liberty: “We assign responsibility to a man, not in order to say that as he was he might have acted differently, but in order to make him different.”

Rainy Days and Mondays and 8 a.m. Finals

The big events seem to be steady rain and the onset of finals, so my guess is that you are busy being busy, doing things like studying and writing papers. Or, possibly even taking a break and surfing the internet.  Why else would you be reading this? 

How much is that internet worth to you, anyway?  Probably a lot.  

The Economist surveys the evidence.

See you in the Spring.

Spring Econ Reading Group

The Spring Economics Reading Group will feature the astonishing Winners, Losers, and Microsoft: Competition and Antitrust in High Technology by Stan Liebowitz and Steven Margolis.  The book is more about competition in high technology than it is about Microsoft itself, and it was written back when people still used VHS players and Apple was a bit player in the computer market (pun possibly intended).

Oh, how times have changed.

This book is tried-and-true.  Last year students gave it rave reviews as the featured reading for the Economics Senior Experience, and we also read it in my Industrial Organization this past term.

If you happened to have already read it, don’t despair, I am compiling an auxiliary set of readings to complement (and update) the Liebowitz and Margolis book.  Indeed, the group discussion might be the ideal setting for you to augment your knowledge of the knowledge economy.

We will meet Thursdays from 11:10 to 12:15, provisionally in Briggs 217.    

 

We’re Live from the Lincoln Tunnel

In response to our series of posts documenting the advertising campaigns launched to attract FDI to eastern Europe, we received this trenchant (and profanity-laden) correspondence from our friend, “New Jersey Tommy”:

[What the heck], eastern Poland? [Spending all of that money] on advertisements. Those mad men are ripping off the literally poor taxpayers of eastern Poland.

Waitaminute. Huge coal and natural gas reserves. NOW we all understand what “investing in eastern Poland” means: it means supplying fossil fuel energy to hungry and thirsty western Europe. Badda bing.

In possibly related news from the March 1 Wall Street Journal reports that “Germany debates fracking as energy costs rise.”

And, as if you didn’t know already, the internets move quickly.

Deregulation and Consumers

This week in Industrial Organization we will talk about the peculiarities of the deregulation movement that got going in the Jimmy Carter administration (?).  One peculiarity is that — like the Spanish Inquisition — no one expected the deregulation movement. Why? Because the benefits of regulation generally flowed to a nice, concentrated group of producers at the expense of diffuse, often clueless consumers.   This is pretty much the point of the Stigler-Peltzman-Becker characterizations of regulation.

A second puzzle is the public suspicion of regulation, and in particular the lack of recognition that consumers have been the overwhelming beneficiaries of the deregulation movement.  On each of these points, I refer my students to the Clifford Winston’s excellent (but somewhat dated) piece from the Journal of Economic Literature.

Derek Thompson has a quite excellent piece in The Atlantic online, “How Airline Ticket Prices Fell 50% in 30 Years (and Why Nobody Noticed).”  Well, some of us noticed, I guess, like those of us who teach IO.

Of course, deregulation has had its share of fiascoes and industry handouts as well, so perhaps that’s more etched in our brains than the radical price differences and innovation that often accompany industry deregulation.

Two more reasons…

That creative new strategy to spur FDI almost had me convinced, but I felt I needed perhaps a little more evidence. Maybe… a video? Why, I am glad I asked—there is one.

But still—that’s only one reason. Is there another? But of course, why didn’t I think of that: my father-in-law could ask me, not to mention my psychotherapist (with a father-in-law like that, I might need one).

Still, I wasn’t quite sold… until I saw this barrage of reasons. Obviously, a great many have already invested heavily in Eastern Poland; I suppose I might have already missed my chance.

I suppose I’ll just have to invest in Hungary, where all the important things were invented, and therefore many more important things are clearly going to be invented. (This video follows the great Hungarian tradition of claiming inventions as Hungarian even if they were made abroad, for foreign companies, by Hungarian-born immigrants…)

Goulash capitalism?

The Hungarian version of Soviet-style economy was often referred to as “goulash communism“—it was a more permissive, generally more prosperous variant than what existed in several other Warsaw Pact countries. If the unique capitalism that Hungary is creating is to be “goulash capitalism,” it’s going to be a low-fat version. This will give yet another reason for some older folks wistfully to declare that “at least in the good old days, goulash used to be goulash.”

Brings to mind some of the happiest moments of my childhood… thanks, NYT!

(This seems like a good time to point out that goulash is a soup, and a very good one. It has beef, potatoes, paprika, sometimes beans, and other things. It is not some kind of a stew, or, worse yet, ground meat with some sauce.)

Hungary rarely gets on the front page of the New York Times, but the new Hungarian tax on fatty, sugary foods was such a bold step towards a healthier Hungary that even American journalists took notice. While the justification for the tax is the national need for a leaner populace, the real reason is probably the government’s need for a fatter treasury. Those of you taking Comparative Economic Systems are probably crying “soft paternalism!” right now. Or “hard paternalism.” As to the financial consequences: if the tax really cuts down on the consumption of unhealthy foodstuffs, not only will there be little revenue generated form the tax, but the very low Hungarian life expectancy will rise, costing the state more in health care expenditures.  Continue reading Goulash capitalism?

The Great Wines of New Jersey

Here’s a nice little piece on VoxEU from Orley Ashenfelter and his colleagues about how wine experts have trouble vertically differentiating wine quality.  And when I say “have trouble” what I really mean is “they simply can’t do it.”

This column argues that alleged experts repeatedly cannot tell a superstar wine from a cheaper bottle.

We’ve sort of suspected this since the so-called Judgment of Paris back in 1976, but a more recent Judgment at Princeton adds some real perspective by pitting the wines of France against those of, um, New Jersey:

The important conclusion of the ranking, as analysed by Richard Quandt from Princeton, is that Clos des Mouches is statistically significantly better than the nine other whites, which are all judged of equal quality, while one New Jersey red wine is statistically worse than all other nine reds.  None of the remaining wines, whether French or from New Jersey, is statistically different from the other. This implies that Château Mouton-Rothschild and Château Haut-Brion, two French superstars, cannot be distinguished from New Jersey reds, which cost only 5% of their French counterparts.

 The bold is mine, indicating a bold conclusion, indeed.

As is sometimes the case, the most amusing part of the article is buried in the footnotes:

Ginsburgh, the only writer of this paper who contributed nothing to the Judgment of Princeton, wants nevertheless to point out that he did not even know that New Jersey produces wine.

 

La Cerveza Mas Roguish

Great post at Cheap Talk about beer pricing and Anheuser-Busch’s thwarted attempt to acquire Grupo Modelo, based on a New York Times article.

For decades, [the Justice Department] argue[s], Anheuser-Busch has been employing what game theorists call a “trigger strategy,” something like the beer equivalent of the Mutually Assured Destruction Doctrine. Anheuser-Busch signals to its competitors that if they lower their prices, it will start a vicious retail war…. Budweiser’s trigger strategy has been thwarted, though, by what game theorists call a “rogue player.” When Bud and Coors raise their prices, Grupo Modelo’s Corona does not.

Definitely worth reading, especially if you spent the last term engrossed in the ins-and-outs of the beer industry.  See pages 168-170 of Tremblay & Tremblay for some illuminating background.

Hans Rosling on Global Health and Economic Development

Some of you may recall Hans Rosling’s TED talk entitled “The Magic Washing Machine” which uses his famous Gapminder software to characterize past and prospective economic development.  Well, he’s done it again. Rosling’s talk last summer explains why it makes little sense to split the world into Developed and Developing.  Using his stellar graphical tools, he makes numerous fascinating comparisons you won’t want to miss.  If you have 20 minutes to spare, watch his talk here.

The Economics of Obesity

I will be participating in the “Weight of the Fox Valley Summit” this week, ostensibly to talk about the economics of obesity.  Economists, of course, get their fingers in a lot of pies, and so this turns out to be a very broad ranging topic.  For example, this USDA Economic Research Service workshop includes topics from why have Americans become more obese to labor market impacts of obesity, to what you might expect — implications for health insurance and economic costs of obesity.

I haven’t published in this area, but I did spend a year working with colleagues and students at Carnegie Mellon on a database charting obesity in the American population, so I have some idea of the basic issues.  For those of you interested in an introduction, as always I recommend you go through the back issues of the Journal of Economic Perspectives to see what the profession has been up to.  As per usual, you don’t have to go back very far to find some work by some top scholars in the area:

Jay Bhattacharya and Neeraj Sood (2011) “Who Pays for Obesity,” Journal of Economic Perspectives, 25(1): 139-158

David M. Cutler, Edward L. Glaeser, and Jesse M. Shapiro (2003) “Why Have Americans Become More Obese?” Journal of Economic Perspectives 17(3): 93-118.

Those should provide a reasonable, readable introduction to the economics literature on the topic, chock full of references to the primary research.

Another good source for a rough approximation is the EconTalk archive.  I learned a lot listening to Russ Roberts interview Darius Lakdawalla.  Here’s a nice cite on differential costs, with the surprising finding that the overweight and obese might actually live longer than “normal” weight folks, but spend a higher proportion of their years battling diabetes, hypertension, heart disease, and osteoarthritis.   The authors estimate an additional $40,000 in lifetime medical expenses for the obese compared to someone with normal weight.  Here’s that cite:

Darius Lakdawalla, Dana Goldman, Baoping Shang, The Health And Cost Consequences Of Obesity Among The Future Elderly, Health Affairs (2005)

Taking the Flare Out of US Energy Production?

The Dakotas continue to be in the news for something other than Al Swearengen’s vocabulary, as the hydraulic fracturing boom continues the dramatic expansion of natural gas and oil production.   In fact, the natural gas production has driven domestic prices so low that almost a third of all natural gas is simply burned off, called “flaring,” as the marginal cost of capturing and sending it to market is evidently higher than the market price.  Yes, you read that correctly, almost a third of all natural gas production is literally set on fire rather than captured and sold to consumers. Consequently, the bright lights of North Dakota can now be seen from space.

One of the reasons natural gas production is so abundant is that it is a co-product with the far more valuable shale oil down there, and the Energy Information Agency (EIA) estimates that the US will be the leading oil producer in the world by 2020, producing more than any single country in OPEC. That is hard to believe.

But back to the gas — doesn’t that seem rather silly, all that flaring?  Do economists really believe that this is the “efficient” use of a scarce resource.

Well, no, we don’t.

And one of the main reasons is that the “external” cost of the carbon dioxide remains unpriced.  Economist Ed Dolan discusses the basic economics of flaring and the potential effects of a carbon tax.  

Of course, my guess is that given the discrepancy between U.S. and world natural gas prices (or here), we should be seeing the opening up of more robust export markets some time in the future.  Or, one would expect that we would.

Another possibility is a move to natural gas in the transport sector.

Either way, the brown revolution is upon us.

American Capitalism as A Delicious Milkshake

One of the greatest films you are ever likely to see about the intensity, competition and dynamism in American capitalism, There Will be Blood, is the midnight movie tonight in the Warch Campus Cinema.  As I watched the movie, I marveled at how all of those people and resources made their way into the middle of backwater nowhere within days of identifying a promising play. If you are a night owl type, I recommend you stroll over and see it.

As for the famous “milkshake” reference, that has to do with the “fugitive” nature of petroleum.  Indeed, as I tell my students, oil is more like buffalo, and gold is more like cows.  Gary Libecap has written extensively on oil field unitization as a solution to the “milkshake” problem.  Indeed, yours truly knows a thing or two about how this all played out.

Armen Alchian: You tell me the rules and I’ll tell you what outcomes to expect

One of my favorite economists died earlier this week, Armen Alchian of the UCLA school of economics.   If you don’t feel like reading any further, there is a Wall Street Journal obituary that probably says whatever I say, only better.  But, since he’s had such a pronounced impact on how I think and what I teach, I’ll add my piece to the dialog anyway.

For those of you who have taken Orgs/Theory of the Firm with me, Alchian, of course, is influential with his piece on team production (Alchian and Demsetz — the grocer article), as well as his work on asset specificity (Klein, Crawford, and Alchian).  These have, of course, been cited thousands of times because they are foundational to how economists think about firms. And his review with Susan Woodward of Oliver Williamson’s vision of transaction cost economics, “The Firm Is Dead; Long Live the Firm,” will undoubtedly leave you smarter for having read it.

Alchian is also renowned for his work that helped to spawn “evolutionary” economics, writing at about the same time as Schumpeter, it turns out.  The paper “Uncertainty, evolution, and economic theory” is also a classic that has also been cited thousands of times, and has shaped how economists think about the dynamics of market competition.

I also cover the Alchian and Allen conjecture during the first week of Econ 300, so the teeming masses of students taking that this Spring should look out for that.  Speaking of Allen, here he is discussing UCLA economics and the liberal arts, cited right here at LU Econ Blog.

If you are interested in reading something touching about Alchian, I suggest this piece by Fred McChesney, which contains this cool story from Alchian himself:

The year before the H-bomb was successfully created [in the 1950s], we in the economics division at RAND were curious as to what the essential metal was—lithium, beryllium, thorium, or some other. The engineers and physicists wouldn’t tell us economists, quite properly, given the security restrictions. So I told them I would find out. I read the U.S. Department of Commerce Year Book to see which firms made which of the possible ingredients. For the last six months of the year prior to the successful test of the bomb, I traced the stock prices of those firms. I used no inside information. Lo and behold! One firm’s stock prices rose, as best I can recall, from about $2 or $3 per share in August to about $13 per share in December. It was the Lithium Corp. of America. In January, I wrote and circulated within RAND a memorandum titled “The Stock Market Speaks.” Two days later I was told to withdraw it. The bomb was tested successfully in February, and thereafter the stock price stabilized.

An awesome precursor to the event study!

For a forceful statement on the economics of property rights, check out Alchian’s piece here that ends with a bang:

Private property rights do not conflict with human rights. They are human rights. Private property rights are the rights of humans to use specified goods and to exchange them. Any restraint on private property rights shifts the balance of power from impersonal attributes toward personal attributes and toward behavior that political authorities approve. That is a fundamental reason for preference of a system of strong private property rights: private property rights protect individual liberty.

Finally, here is our recent guest, Doug Allen, talking about Alchian’s influence.

Han Solo, Sharecropper?

Movie icon Harrison Ford will reportedly return reprise his iconic role as intergalactic hero Han Solo in the upcoming Disney epic, Star Wars VII: A Sith in Time til Episode Nine.

On the heels of Doug Allen’s visit, we pause to ask whether Mr. Ford be paid a fixed wage, or will instead demand a share of the revenues from the film and the merchandising?

Perhaps we should consult Darlene Chisholm for some clues?

 

Sustainable China Info Sessions

If you are interested in spending the 2013-14 Winter Break in China as part of Sustainable China: Integrating Culture, Conservation, and Commerce , you should plan to attend an information session at the Warch Campus Cinema 

Wednesday, February 27th at 4:30 PM

OR  

Thursday, February 28th  at 11:10 AM

Here are the Program Components:

  • Fall 2013 courses – Environment and the Economy, Destination China, Chinese for Special Purposes (including language related to science and the environment), and Contemporary Chinese film
  • December trip to China with urban and rural segments chosen from sites in Shanghai, Wuxi, Guizhou Province, Shenzhen, & Hong Kong
  • Paid independent summer research support
  • Post graduate internships 

The program is funded by a 4 year Henry Luce Foundation Initiative on Asian Studies and the Environment

America’s Future: A Look on the Bright Side

Last Friday, Motley Fool’s Morgan Housel highlighted several positive aspects about the American economy.

1. The most beautiful de-leveraging on record.

Despite a 6% drop in employment from the beginning of the 2007 – 2009 recession, US employment loss has been less than most other industrialized countries in the last 35 years.


2. America has the best demographics of any developed country in the world.

 

3.  America’s businesses have never been more profitable.

4.  We have abundant and increasingly cheap energy.

For example, natural gas in the US sold for $3.30 per million BTU in contrast with $10.60 in Europe and $16.70 in Japan.

Perhaps, in contrast with Robert Gordon’s vision (see here and here) , the best is yet to come.

 

 

ECON 225 Decision Theory Added to Spring Term Schedule

You might be interested to know that a new 200-level economics course has been added to the schedule for the quickly approaching spring term. ECON 225, Decision Theory, will be taught by Professor Galambos MWF 1:50 to 3:00. He has offered this course in the past as “Game Theory and Applications.” The new title reflects  a greater emphasis on the decision theory foundations, after which game theory and its applications will follow in the second part of the course. If you’d like to get an idea of what the course is like, take a look at last year’s syllabus. This year’s offering will not be exactly the same, but it will be very similar. The course is now listed on Voyager, so you can register any time.