Lawrence Economics Blog

Creative Instruction

Nobel prize

Though this year’s winners of the Bank of Sweden’s prize in memory of Alfred Nobel may not have been on the radar screens of many, at least two of the three were predicted by a very prominent group of economists. As reported on the Cheap Talk blog,

Northwestern Econ and Kellogg Nobel predictions

Northwestern’s economists and those in several departments at the neighboring Kellogg School of Management put Dale Mortensen as their top prediction, with Peter Diamond in third place. Well, perhaps I should mention that Dale Mortensen is at Northwestern… Anyways, Jean Tirole was also highly favored, really by everyone except the Nobel committee. The only rational conclusion can be that the Nobel committee has good reasons to believe that Monsieur Tirole will have a long life. Though he did not get the Nobel (again) this year, he should be able to use this to get a lower life insurance rate. Anyways, take a look at Jeff Ely’s “live blogging” of the Nobel at Cheap Talk. By the way, In spite of 12 faculty members in the relevant disciplines believing that Mortensen was getting the big prize, apparently this news caught the Northwestern PR people by surprise, too. Almost three hours after the prize was announced, the top news on the Northwestern homepage is still the refurbishing of Evans House:

Nobel for Search Theory

In what I’d have to say is a surprise, Peter Diamond, Dale Mortensen, and Christopher Pissarides picked up this year’s Nobel in economics for their work on search theory in labor markets. That means, for the second year in a row, the Lawrence University prize for picking the winner will roll over to the next year.

Tyler Cowen on Mortensen.

Tyler Cowen on Diamond.

I was chatting with Professor LaRocque on Saturday, and he felt that we were due for some theorists, so here you go.

April 1 Comes Early

Though I’m not one to pile onto the United States Postal Service, it is probably worth noting this news item — Postal Union Election Delayed After Ballots Lost in Mail.

Coming on the heels of a post where everyone seems to have an opinion, I would guess that in this case you just have to shake your head and laugh.

So this post isn’t totally bereft of content, I point you to Rick Geddes’ review of postal reform in the Economics Journal Watch.

This essay examines the published views of vital economists regarding postal reform. I define a vital economist as one who has produced scholarly research on this issue, and who has expressed an opinion about the direction reform should take. The ten vital economists surveyed here express surprisingly similar opinions on the proper direction for postal reform. The vast majority advocate some combination of privatization and elimination or relaxation of the delivery monopoly. Those opinions are in stark contrast to the published views of economists who have not carefully examined this issue.

Geddes himself is pretty much the noted expert on the subject, so when he says it’s surprising, it may well be surprising.

Have a good weekend, Lawrentians.  Perhaps I’ll see you out at the festivities.  Watch out for that Nobel announcement.

James Dana Memorial Investment Challenge

The James Dana Memorial Investment Challenge has arrived, and it appears to be an excellent opportuntiy for those so inclined.  The details are below, and you have any questions, contact Syed Abbas (syed.k.abbas AT lawrence.edu) for the answers.

Our thanks to Larry Domash, the Lawrence University Investment Group, and Syed for making this happen.

JAMES DANA MEMORIAL INVESTMENT CHALLENGE FOR UNDERCLASSMEN

Larry Domash’81, in collaboration with the Lawrence University Investment Group, is organizing an investment idea competition for underclassmen. Each participant will choose a marketable investment (defined by avaialable market price on a daily basis)  which they believe either long or (shor)t has the highest potential return over the next 12 months. Participants will be responsible for completing a write up on the the investment and identifying the daily pricing source by December 20, 2010.  Additionally, each particpant wil provide a brief written update  as to how the investment is performing and what factors have changed every 2 weeks from January 15 – December 30 2011, this includes when Lawrence is not in session. There here will be 2 winners – the first prize ($2,500.00) will go to the participant which provides the most accurate and articulate bi – weekly update. The second prize ($2,500) will go to the top return over the 12 months ending December 31, 2011.

An information session will be held on October 20th 2010 from 7-8 in the economics “lab,” Briggs 223.

Wall Street Incentives Have Not Changed

Despite 2,000 + pages of D0dd-Frank legislation and new  Basel III conditions,  NY Times columnist Willam Cohan, author of among other works House of Cards (The Rise and Decline of Bear Stearns), opines that few incentives have changed for the high rollers on Wall Street.  In short, he argues that Wall Street financiers are still playing with everybody else’s money but their own; so “heads I win, tails you lose” effects are still with us.  To cite, Steven Landsburg’s favorite definition of economics: “incentives matter; all else is commentary.”   I encourage you to read the details.

A Very Hot Topic

I'm an ordinary guy...

If you don’t make your car payment, can you reasonably expect to drive off the lot with a car?  If you don’t pay your doctor, can you reasonably expect him to take care of you next time you are sick?  If you don’t pay your $75 for fire protection, will the fire department really stand by and watch while your house burns to the ground?

Well, that’s only approximately what happened in Tennessee this past week.

From the story:

A local neighborhood is furious after firefighters watched as an Obion County, Tennessee, home burned to the ground.

The homeowner, Gene Cranick, said he offered to pay whatever it would take for firefighters to put out the flames, but was told it was too late.  They wouldn’t do anything to stop his house from burning.

Each year, Obion County residents must pay $75 if they want fire protection from the city of South Fulton.  But the Cranicks did not pay.

Remarkable.

I have yet to talk to anyone who didn’t find this an engaging question. Where does an ordinary guy draw the line?

For those of you without anyone to talk to, these links provide about three hundred sixty five degrees of background and commentary.

Review of “Where Good Ideas Come From”

The Atlantic Monthly‘s economics blogger, Megan McCardle, reviews Steven Johnson’s “Where Good Ideas Come From” in today’s Wall Street Journal.

Mr. Johnson himself has a big idea, but it’s not a particularly incisive one: He proposes that competition and market forces are less important to innovation than openness and inspiration.

McCardle packs a lot of review into a short space, and it is probably worth thinking about, especially for the Schumptoberfesters…

Yes, I just wrote that.

Yet Another Update on the Economics Nobel

Some wagering odds have arrived on the scene. UPDATE: And here.

Looks like my picks of Thaler and Shiller are leading the way, followed by Weitzman, Hart, Nordhaus, and Tirole.

This time of year, there are typically grumblings about the lack of sufficient talent to justify a yearly Nobel in economics, but that is certainly an impressive list.  Weitzman wrote a paper 30 years ago that still defines the core idea of environmental economics.  No one has done more on the empirical cost-benefit modeling of climate change than Nordhaus.

Tirole is a co-author of a standard graduate industrial organization text,  as well as several highly-influential pieces on the economics of innovation.  This title alone should merit consideration for Tirole — “The Fat Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look.” Is there a more effective title to help teach strategic behavior?

Oliver Hart helped to push agency theory forward, developed a formal theory of the firm that is still being hashed out (in Economics 450 among other places), and probably has substantially expanded our understanding of corporate governance.

It’s probably worth noting that last year’s odds-on favorite, Eugene Fama, is not even among the leaders (UPDATE: The Ladbrokes odds have him 5:1).  Not to mention Armen Alchian.  No, I don’t think there is an absence of talent.

Of course, I’ll write about Shiller and Thaler next week after they win the prize.

UPDATE: Professor LaRocque has predicted Jeffrey Williamson.

Nobel Prize Contest Update

The picks are pouring in for our Second Annual Pick the Economics Nobel Prize contest (see here).  The consensus pick around the department seems to be Paul Romer, so we might be dividing up that bag of M&Ms pretty thin if he wins.

Here are some more thoughts today from Tyler Cowen:

  1. Richard Thaler joint with Robert Schiller.
  2. Martin Weitzman and William Nordhaus, for their work on environmental economics
  3. Three prominent econometricians of your choice, bundled.
  4. Jean Tirole, possibly bundled with Oliver Hart and other game theorists/principle agent theorists.  But last year the prize was in a similar field so the chances here have gone down for the time being.
  5. Doug Diamond, bundled with another theorist or two of financial intermediation, such as John Geanakopolos.  Bernanke probably has to wait, although that may militate against the entire idea of such a prize right now.
  6. Dale Jorgenson plus ???? (Baumol?) for a productivity prize.

Thaler was my original (anomalous?) pick, though yesterday I hedged and went with Shiller.  So this might be a case of great minds thinking alike, or of me being brainwashed by reading Marginal Revolution too often.

I like the Marty Weitzman pick better.  Economics hasn’t given a prize for global climate change or for environmental work in general, and Weitzman has been a big deal forever for his canonical “prices versus quantities” paper, as well as for some more recent work on the “fat tail.” I’m not so sure about Nordhaus paired with him, however.

Professor Finkler has Paul Romer.  I have yet to hear from my other colleagues, who are no doubt strategically plotting their picks as I type here.

The Browning of America

PBS senior correspondent Ray Suarez will be on campus Tuesday to deliver the University Convocation lecture, “The Browning of America,” concerning the changing character of U.S. demographics.

Student attendance at Convocation has recently been low, so I hope you give this one a chance.  He is generally an interesting character, so the talk should be provocative. And the music and performances book-ending the speaker are generally superb at Convocations.

The action starts Tuesday, October 5 at 11:10 a.m. in Memorial Chapel.

The Extraordinary Influence of Freshman Studies

One of my more clever colleagues was telling me how impressed he was with the noticeable effects of our Freshman Studies curriculum, even extending well beyond affecting just Lawrence students and faculty.

How can he be so sure?

Just check out the similarities between this year’s Freshman Studies reading list and the frequently bought together books at Amazon.com.

So, how do you like that?  Some guy camped out in the mountains looking to pick up a copy of The Republic is suddenly prompted to buy a copy of Martin Guerre?

We should have negotiated a lower price.

Coincidence?

Second Annual Predict the Nobel Prize in Economics

As Professor Finkler points out, the Nobel Prize in economics will be awarded on October 11. That must mean that it’s time for the Second Annual LU Pick the Nobel contest.

So, who should you pick? Well, one strategy is to check out the Thomson Reuters picks from Science (Alesini, Kiyotaki, Moore, Murphy). If you don’t like any of those to win, you might peruse the “Vegas” odds and see who you like there. As of me typing this, these odds do not appear to be out yet, but keep an eye out here and check here are last year’s odds. The same favorites from last year are obviously in play for this year — Eugene Fama for his efficient markets and Paul Romer for endogenous growth theory, Aplia, and charter cities.

Another good choice might be Emmanuel Saez, who is fresh off winning a MacArthur “Genius” Grant. As a dark horse, you might pick the prolific blogging superstar, Tyler Cowen, for his work on the economics of culture.

Or, you can always defer to The Simpsons for your pick (Bhagwati).

A sentimental favorite, at least for me, is Armen Alchian. Don Boudreux points us to this essay and says that in a just world he would have already won the prize.

My pick, which I forgot to pick in the original post, is Richard Thaler.  I just hope that pick doesn’t somehow curse me.

To enter the contest, submit a pick in the comments or via email to me. One entry per person, need not be present in Sweden to win. This year’s winner will take home an authentic piece of Schumptoberfest merchandise. Ties will be decided by Random.org at the Economics Tea.

The 300 Challenge, Parts 1 & 2

Hey, that's not Steven Landsburg

What is it with Steven Landsburg and apples?

PART 1: Audrey shops at Wegman’s supermarket, where she spends $20 a week to buy 10 apples and 5 bananas.  IF she bought the same 10 apples and 5 bananas at Top’s supermarket, she’d pay $30.   True or False:  Audrey is wise to continue shopping at Wegman’s.  (Hint: This is easy).

PART 2: You earn $100.  You can use your $100 to buy 100 current apples, 200 future apples, or any combination in between.

Consider a 50% tax on wages versus a 40% tax on all income (that is, wages and interest income)  and assume both taxes raise the same amount of revenue.

Which tax do you prefer?  Under which tax do you consume more (and save less) today? (Hint: I’m not sure if this is easy or not).

Professor Shober: Appleton not part of the Russ belt

Government department Professor Arnold Shober is in the news, handicapping the fall elections for the Appleton Post-Crescent.  Here’s a portion of the transcript in response to a question on whether Wisconsin Democrats are going to be taken to the woodshed this November:

The answer to that question is really how well Russ Feingold does. He’s the top race in the state. We think about governor, but Feingold gets a lot more attention. If he has trouble — and a series of recent polls suggest that he really does — then it will very bad. If he can’t carry reliable Democrats into the polling booth, nobody can.

Polling out last week suggested that, in northeast Wisconsin, Ron Johnson is up 60-40. That means Steve Kagen (in the 8th Congressional District) is certainly out. Penny Bernard Schaber (in the 57th Assembly District) is most certainly out. Tom Nelson’s seat (in the 5th Assembly District) will probably flip, and on and on and on, because that’s a big margin.

Certainly, everyone voting for Russ Feingold is going to be voting for a Democrat. He’s a maverick, but he’s definitely on the left. So if he does poorly, Democrats across Wisconsin are going to be in big trouble. If he can hold it even, it may not be so bad.

Emphasis is mine (Prof. Shober typically doesn’t speak in bold font), and included so I could use the pun in the title.

You can see the latest polling results outside of Professor Shober’s door right here on Briggs 2nd.

Interdependent Utility Functions

Does knowing what your peers make matter to how happy you are?  Certainly, the utility functions that I sketch in Econ 300 say no.  As Ray Fisman puts it in a recent piece at Slate, “Why do we care what those around us make? It doesn’t affect the real estate or furniture or sushi dinners we can afford.”

On the other hand, of course it matters. And Fisman continues:

[I]n recent years, economics has become both more social and behavioral, borrowing evidence and ideas from elsewhere in the social sciences. Economists now acknowledge that we constantly judge our own accomplishments in comparison to others, and salaries serve as one ready benchmark. People (and perhaps monkeys, too) are also averse to inequality—unequal pay for equal work just isn’t fair (especially if you’re the one who drew the short straw).

Monkeys? Wow.

Fisman talks about an ingenious study by group of economists, including David Card and MacArthur genius grant winner Emmanuel Saez, that investigated how differences in pay affect variables like job satisfaction.  If you are interested in how economists think about these things and how they evaluate them empirically, this paper is worth checking out.  The abstract is below the fold: Continue reading Interdependent Utility Functions

Economics Resources

As I head into mid-term here (yes, the first 300 exam is a week from today), I note that I am even more behind than usual.  Part of this is due to overreaching on my professional commitments.  Part is teaching Freshman Studies and wading through The Republic with the rest of the bunch.  Part is the preparations for the upcoming Schumptoberfest Creative Instruction weekend (we have some space for those of you who missed before).  And, drinking tea and who knows what all else.

So, for those of you looking for content, you might check out the Links section down the right-hand margin. One of those links is the RSS feed for recent economics acquisitions from The Mudd.   There are some great items there, including Nouriel Roubini’s new book, as well as some treatments of development in East Asia and Brazil.

You might also check out the link to my recommendations.   The list includes some of the blogs I frequent, resources available at The Mudd (including some excellent databases), and a list of some other handy sites.   It’s a lot easier to find good stuff if you look in the best places first, that’s for sure.

If there are some other resources you think I should add, please let me know.

Stuck in the you know where

Tax Credits and Income Tax Exemptions are the “Hidden Hand of Government Spending”

Whether the government gives you a tax credit of $100 towards some specific expenditure or spends a $100 on that same item and thus reduces the out-of-pocket cost to you, the effects are the same:  1) a increased deficit to be funded, 2) distorted incentives.

Edward Kleinbard in the Fall 2010 issue of the journal Regulation argues that these incentives in 2008 amounted to foregone tax revenue of roughly $1.2 trillion per year which exceeds what was raised through the individual income tax ($1.1 trillion) and “is more than twice as much as all non-defense discretionary spending ($528 billion.)”

For example, mortgage interest rate deductions, health insurance premium deductions, and energy tax credits all distort our economic choices (often in regressive fashion) and deepen our budgetary abyss.  More of these, which seems the purview of both political parties, does not make our aggregate fiscal situation better, it just means that the day of reckoning when it comes, will be much more difficult than it otherwise might be.