Lawrence Economics Blog

Creative Instruction

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.

Mazel tov!

If you don’t find abstract mathematics palatable, try this one. Thanks to George Hart, Chief of Content at The Museum of Mathematics, we finally have proof: it is possible to slice your bagel into two and produce two linked, unbroken halves of this delicacy of Jewish origin (its name comes from Yiddish “beygel”).  The proof is constructive.

From George Hart

The layperson might take a quick look and say “Hey, that’s a Möbius strip shaped bagel!” Of course, it obviously isn’t, as it has a cream cheese side and a non-cream cheese side. But Mr. Hart does pose the Möbius bagel problem as a possible extension. My guess is that poor young George’s mathematical growth was seriously impeded by remarks such as “How many times have I told you not to play with your food?!” I definitely see an entrepreneurial opportunity here: just imagine how many math conferences would pay big bucks for catering that features Möbius bagels, dodecahedron-noodle soup, a spaghetti-knot challenge, and many Klein bottles of wine. I am soooo tagging this entry “Food for thought…”

[HT to Jeff Ely at Cheap Talk]

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.

Puzzelah

Listening to the latest Car Talk, I was happy to hear a variant of the muddy children puzzle as this week’s “puzzelah.” Here it goes, straight from Ray:

The warden admits three prisoners into his chambers. He tells them, “One of you fellas is going to have a chance to get out. Here’s the deal.

“I’m going to blindfold all of you, then I’m going to put hats on your heads. I have three white hats and two black hats. Each of you is going to get a hat. You have to figure out which color hat you have to get released.”

He blindfolds them and puts a hat on each prisoner. They’re led out of the room in single file. When the blindfolds are removed, the guy in the back can see the two people in front of him, the guy in the middle can see the one guy in front of him, and the guy in front can see nobody.

They walk around the prison, stopping outside the warden’s office. The warden says to the fellow in back, who can see the two people in front of him, and their hats, “Can you tell me what color your hat is?”

Don’t forget, there are three white hats and two black hats available. The fellow in back says nothing. He doesn’t know.

The fellow in the middle is asked the same question. He is unable to answer.

The guy in the very front, who can see no hats, knows. He says, “I can identify the color of my hat.”

How does he know?

Those of you who have taken Advanced Game Theory will be done with this before I can finish this sentence. And if you haven’t taken that course yet and enjoy this sort of thing, you should definitely take Advanced Game Theory (Econ 410) this coming Spring, where we ponder some similar puzzles (and, yes, I do know that the course title has “& Applications” in it). All this goes under the heading Interactive Epistemology, and it is generally as complicated as it sounds. But also very important, as the surprising answer to this puzzle will no doubt show you.


Schumpeter and the Fashion Industry

Today we are treated to a discussion of the fashion industry from Ms. Richter & Ms. Li.   The first from the Schumptoberfest collection.  Enjoy!

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“The evolution of the capitalist style of life could be easily – and perhaps most tellingly – described in terms of the genesis of the modern Lounge Suit.” -Joseph Schumpeter

Creative destruction saturates the fashion industry; you must be the trend-setter otherwise the “foundation of your very life” will be in jeopardy. Large firms enjoy an advantage in spreading risk over many projects (e.g. inventions that never “catch” as a trend) and have the resources and brand power to set trends, thus helping their inventions turn into successful innovations, driving the fashion cycle forward through induced obsolescence. Due to lack of IP laws, large firms do not enjoy the monopolistic protectionism that IP rights provide, but they have other means justifying their investments. Schumpeter’s hypothesis suggests that large firms foment innovation for factors other than scale economies, and in the fashion industry, and the fashion cycle is a key example of this phenomenon.

The fashion industry, a $200 billion industry in the United States alone, is comprised of nearly 150,000 establishments, ranging in size from large fashion houses to smaller start-ups. Although there are a large number of firms competing in the industry, according to the 2002 Census, five percent of firms in the clothing industry accounted for twenty percent of total revenue and sales. These large firms, , also play an important role in the diffusion of new design trends and the continuation of induced obsolescence, the dynamic force driving the fashion cycle forward; the influence of large firms contributes to the top-down structure of the industry.

Consumers are not strictly motivated by price, but also pay attention to  brand, quality, design differentiation, or trendiness (flocking). Because of complex consumer decision-making, product differentiation and new designs are essential to driving the industry forward Raustiala and Sprigman (2009) argue that  induced obsolescence is the process by which designs, through copying and diffusion into mainstream fashion, become obsolete and therefore undesirable to fashion-forward consumers. These fashion-forward people then demand new designs, which are invented by top firms and diffused downward through trends, again, through copying. This process is called the fashion cycle. This cycle is very rapid and is completed each season.

Continue reading Schumpeter and the Fashion Industry

If you can’t beat ’em, join ’em

The Wisconsin State Journal reports:

Inside the elevator that ascends six floors in the UW-Madison Humanities Building to reach the university’s art department, the aesthetics had sunk low, really low.

Over the years the metal walls of the bare-bones, slightly rumbly elevator served as a magnet for 2D creativity, some of it intriguing, but a lot of it slapdash and much of it resembling graffiti more often found on the sides of a bathroom stall. In other words, the kind of vandalism someone can pull off between stops on a 20-second elevator ride.

My feeling is that this was simply art students practicing their elevator pitch. In a city that already has Connected Bits service, you simply would have used your smartphone to take a quick pic of the graffiti and send it on to the authorities. By the way, the person behind Connected Bits (and other very intriguing ventures) is Dave Mitchell, who is a Lawrence alum and will be guest speaker for In Pursuit of Innovation (Econ 211) next term. But, in Madison, they took a tip from the pop-up gallery movement instead, and turned that doomed “lift” into the Hi/Lo Gallery, “seven floors of visual candy.” Appleton is likely soon to get its first pop-up gallery, thanks to Sydney Pertl and Krissy Rhyme , who have been continuing the project from Entrepreneurship in the Arts and Society, and hope to open the first exhibition in February.

[HT to Inside Higher Ed]

New Ideas: The Good, The Bad, and The Uggos

As I prepare to pick up Steven Johnson’s Where Good Ideas Come From for a piece of holiday reading, I got a couple of emails talking about where some good ideas came from.  The first was YouTube, which most of you have probably encountered at some point, which was originally conceived as a video version of Hot or Not?

What’s Hot or Not? you say?  PC World calls it like it sees it:

YouTube’s original goal, its founders have said, was to build a video version of HOTorNOT.com — you know, the site where you look at a bunch of uggos and rate just how repulsive they actually are.

According to the Wikipedia page, the early incarnation of Facebook had similarly lofty ambitions.

It’s not clear what type of sharp conclusions to draw from those episodes, so moving on to our second example, today we have a 64% discount on a platinum detail package at Tender Car, courtesy of your friendly neighborhood Milwaukee GroupOn.  For those of you not familiar with the GroupOn concept, here’s the gist:

Groupon negotiates huge discounts—usually 50-90% off—with popular businesses. We send the deals to thousands of subscribers in our free daily email, and we send the businesses a ton of new customers. That’s the Groupon magic.

So where did this idea come from?  Well, according to this bit by David Lowery (of Camper Van Beethoven fame) the basic idea germinated with a couple of indie rock bands looking to limit their financial risks.

Cracker and Camper Van Beethoven have a festival,  The Campout.  It’s rather remote and since we produce the small festival ourselves we take considerable financial risk.  While the previous years had been marginally successful we were worried about the rapidly deteriorating economy (I believe Bear Stearns had just gone bankrupt).  So I started a campaign to get a “break even” amount of CVB and Cracker fans to commit to attend the festival. In this way our fan’s promises to attend would become a sort of promissory note. no pun intended. While you couldn’t exactly peg it’s value,  these collective promises to attend at some point seemed to be worth enough to go ahead and book the flights, PA, lights, and port-o-potties.

Other successful “campaigns” on The Point also involved similar commitments for  group purchasing.  It wasn’t long before The Point became Groupon.

That’s right, the brainchild behind my bargain-basement car detailing deal germinated long ago with the same geniuses that brought us “Pictures of Matchstick Men” and “Take the Skinheads Bowling.” And the idea is simple enough, over some range, marginal costs are pretty low, but you still have to cover your average costs:

[I]it had not gone unnoticed that most concerts have a lot of empty seats.   And Groupon works best when the “incremental” cost of adding clients/patrons is very low.  Adding concertgoers to a half full arena is a perfect example of low incremental costs. So concerts were seen as a natural fit for Groupon.

My editing of that clip does a bit of violence to the spirit of the post, so I suggest you go check it out for yourself. The lesson here might be that those punk rockers might be a bit sharper than they look.  Or, perhaps this fits into Johnson’s hypothesis about innovation environments.

More on this one later.

Streaming Econ 400

Many students have asked me about the types of things covered in Industrial Organization (Econ 400), and I typically respond with blah blah blah price theory blah blah blah structure-conduct-performance until the student leaves my office.  Perhaps a better response would simply be to give students a list of interesting topics that would come under an IO umbrella, such as Comcast’s dispute with Netflix. There’s many issues embedded there, including this tasty one:

A recent study found that at peak times, Netflix represented 20 percent of Internet download traffic in the United States. That makes it a de facto competitor for incumbent distributors like Comcast and Time Warner Cable, which are eager to protect both the subscription television business and the emerging video-on-demand business.

I wonder how soon cable and satellite television will be relegated to economic history courses, a la the video rental business.

Perhaps you can write a paper on that next term.

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?

Grading Criteria FAQ

For those of you finishing up a final paper or a thesis this term, be sure to check out the full requirements, including the snake wrestling.  This part often confuses students, but we don’t believe there is “one” way to measure academic performance:

Q: Would someone who wrote a bad thesis and defeated a large snake get the same grade as someone who wrote a good thesis and defeated a small snake?

A: Yes.


Capitalism, Socialism, & Democracy Group Read

For those of you interested in an extra unit or two, next term we are offering an independent study / tutorial reading Joseph Schumpeter’s classic, Capitalism, Socialism, and Democracy. For those of you unfamiliar with the book, here is a review by Schumpeter biographer, Thomas McCraw.

This is a thick book, so if you are interested, I would recommend that you pick up a copy and start in on it over break. The likely trajectory for this is for us to set up a weekly discussion time, and for each student to provide a review essay.   See Professor Gerard or Galambos for details.

Will NYC prosper?

The answer depends on whether it manages to preserve its history of entrepreneurship, says Edward Glaeser in his piece Start-Up City in New York’s City Journal. He argues that the strength behind the spectacular economic development New York City has experienced in most of the past two hundred years grew out of entrepreneurship. Industries have come and gone, but the entrepreneurial spirit remained. But will this be the case after the Fall of Finance? Glaeser worries that the financial firms that have come to dominate the City aren’t small and entrepreneurial, but relatively large, possibly undermining that culture of entrepreneurship. Moreover, in several studies and surveys New York state and New York City show up as one of the worst places to do business in the US. One other piece of this picture that I think deserves more attention than Glaeser is granting is the constant influx of immigrants that New York has experienced for a long time. See this paper by Waldinger on immigrants and the famous New York garment industry, or this study by the Kauffman Foundation on immigration and technology entrepreneurs in particular. Of course when great numbers of immigrants became entrepreneurs in NYC, it was in small-scale manufacturing industries such as the garment industry, where no knowledge of English and no higher education were required. My great-uncle has several childhood friends who successfully became such entrepreneurs in the US, and spoke rather limited English to the day they died. It is doubtful that such a mechanism of low-skilled immigrant entrepreneurship could function today. But, as the aforementioned study suggests, technology may be the new garment industry.

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?”