Lawrence Economics Blog

Creative Instruction

“Incumbants Make Bad Revolutionaries”

Relying on incumbents to produce your revolutions is not a good strategy. They’re apt to take all the stuff that makes their products great and try to use technology to charge you extra for it, or prohibit it altogether.

That’s Cory Doctorow at Boing Boing, who won’t buy an iPad, doesn’t think you should buy an iPad, doesn’t think the iPad is going to do much for the beleaguered publishing industry,  and, frankly, doesn’t seem to have many nice things about the iPad at all.  In fact, he contends that Apple is showing “palpable contempt” for its customers.

Here’s some more:

For a company whose CEO professes a hatred of DRM, Apple sure has made DRM its alpha and omega. Having gotten into business with the two industries that most believe that you shouldn’t be able to modify your hardware, load your own software on it, write software for it, override instructions given to it by the mothership (the entertainment industry and the phone companies), Apple has defined its business around these principles. It uses DRM to control what can run on your devices, which means that Apple’s customers can’t take their “iContent” with them to competing devices, and Apple developers can’t sell on their own terms.

A very provocative perspective.  Probably even more so if you know what DRM is.

I recommend you would-be innovator types check it out.

Can you hear me?

There often seems to be a disconnect between what academics say and what other people hear, but the problem seems particularly acute in the economics profession.   Steven Landsburg has a rather amusing post on the subject, detailing how what we think are rather innocent comments can make us sound rather callous, to say the least.

Here’s my favorite from that piece:

A few years ago, in the state of Washington, some apartment buildings were converted to public housing. The buildings were described as having “million dollar views”. I was a silent witness to a conversation that went like this:

Person A: They’re giving million-dollar views to people below the poverty line?!!!???!

Person B (in an aside to Person C): He’s got some problem with that?

Well of course he’s got a problem with that. Ask any poor person in America to choose between a million-dollar view and a million dollars cash, and I guarantee you he will take the cash. So how callous would you have to be to give that person a grand apartment instead of selling the apartment and giving him the cash?

That, I am certain, is what Person A (who had some economics training) meant. What Person B heard was something like: “Why would you want to do anything nice for poor people?”

I’d probably take the cash, too.


Health Insurance Reform, Massachusetts Style

In 2006, Massachusetts (with Mitt Romney as Governor) passed a health reform law that shares many of the features of the U.S. reforms recently passed in Congress and signed by President Obama.  The op-ed piece linked below suggests that when “market failure” meets “regulatory failure” the results will be ugly.

Come to Econ Tea on Monday to discuss this topic.

  1. Asymmetric information and poor incentives cause private markets to work poorly.
  2. Collectivized markets (and strict regulation) poorly serve the public when there exists a wide range of preferences.
  3. Exchanges (which Alain Enthoven once called managed competition) “can” work but only if they don’t fall into the traps provided by 1 and 2 above.

We’re doomed!

http://seminal.firedoglake.com/diary/39434

Bubble, Bubble, Toil and Trouble

This comment follows directly on Professor Gerard’s observations about the difficulties political structures have in reducing governmental debt.  Ken Rogoff, fresh off his appropriately well received recent book with Carmen Reinhardt entitled This Time is Different: Eight Centuries of Financial Folly, opines in Wednesday’s Financial Times that “Bubbles lurk in government debt.”  (Follow the link below.) He argues, persuasively in my view, that “conventional economic theory can rationalize bubbles” and that Reinhardt and he observe that large increases in both leverage (debt) and asset prices often “implode if confidence fades,” which inevitably it will.  Losses in the equity market fall directly (and often quickly) on the equity holders.  Losses in the debt market, however, generate long, drawn out negotiations about who should bear the losses.  Opportunities for shifting these losses from the politically strong to the politically weak abound, for governmental debt (and off-budget guarantees), which lacks sufficient transparency until its too late.

http://www.ft.com/cms/s/0/f22a3704-4248-11df-9ac4-00144feabdc0.html

Cut Spending or Raise Taxes?

The Economist is taking a look at the unpleasantness that is the U.S. fiscal situation, and it finds most Americans ready to cut government spending.  In fact, when asked whether to cut spending or raise taxes, we chose cutting spending by a 62% to 5% margin (with the other 33% unwilling to commit).

Unfortunately, people don’t want to cut spending on things that we actually spend money on.  Check out this comparison from my favorite political science blog, The Monkey Cage:

What is clear from the graphic is that the vast majority of Americans are eager to slash all of that foreign aid we shell out.  The problem is, we don’t actually spend much on foreign aid.  Many are also willing to gut environmental protection spending, but that doesn’t seem like a very big target, either (though government spending isn’t the same as spending on environmental compliance; then again, spending on compliance doesn’t add to the public debt).

Perhaps we will just inflate the debt away instead.

Ambassador Mulford Speaks on International Finance

Former Ambassador to India and US Under Secretary of Treasury David Mulford ’59 will be on campus next Tuesday, April 13th , and students will have two major opportunities for interaction:

1:30 p.m. Presentation to Campus Community: “The ongoing economic and financial crisis in the major industrial countries and the effect this continues to have on the global economy” followed by Q&A Cinema, Warch Campus Center

4:30 p.m. Economics Club: Dr. Mulford will talk about current risks in the global economy and how one might hedge against them.

Briggs Hall 217

Among other positions, Mulford has served in the following capacities:

United States Ambassador to India — 2004 to 2009

Chairman International of Credit Suisse First Boston — 1992 to 2003

Under Secretary and Assistant Secretary of the U.S Treasury for International Affairs – 1984 to 1992

Chief consultant to the Saudi Arabian Monetary Agency 1974 to 1983

Make or Buy, Homework Grading Edition

Q: When are we going to get our tests back?

A: When I get them back from Bangalore.

The Chronicle of Higher Education has an interesting piece about outsourcing of homework grading to markers in India via the firm, Virtual-TA.  No, papers aren’t physically sent to India to be graded, but rather the transaction is done electronically.

Is that ethical?

Well, the story profiles Lori Whisenant, the director of business law and ethics studies at the University of Houston.  So the ethics professor thinks it’s ethical. Or maybe that’s just how they roll down in Texas?

That dimension aside, we spend a lot of time talking about the outsourcing/insourcing decision in Economics 450, and one of the main drivers for doing something yourself is the specificity, not necessarily the complexity, of the task.  And this comes out in the article a little bit:

Critics of outsourced grading, however, say the lack of a personal relationship is a problem.

“An outside grader has no insight into how classroom discussion may have played into what a student wrote in their paper…  Are they able to say, ‘Oh, I understand where that came from’ or ‘I understand why they thought that, because Mary said that in class’?”

On the other hand, it would be difficult to argue that the Virtual-TA is playing favorites.

The whole story reminds me of the opening of Ed Leamer’s classic review of Thomas Friedman’s The World is Flat:

When the Journal of Economic Literature asked me to write a review of The World is Flat, by Thomas Friedman, I responded with enthusiasm, knowing it wouldn’t take much effort on my part. As soon as I received a copy of the book, I shipped it overnight by UPS to India to have the work done. I was promised a one-day turn-around for a fee of $100. Here is what I received by e-mail the next day: “This book is truly marvelous. It will surely change the course of human history.” That struck me as possibly accurate but a bit too short and too generic to make the JEL happy, and I decided, with great disappointment, to do the work myself.

It was only a matter of time.

Greg Mankiw on CBO Scoring

The Congressional Budget Office is designated as the official scorekeeper for budgetary proposals.  It recently posited that the health insurance reform bill, passed by Congress and signed by the President, would reduce the Federal budget deficit over a 10 year.  Many economists, including Greg Mankiw and yours truly, beg to differ.  See the entry from Mankiw’s blog included below.  Don’t miss the warning label!

A Warning about CBO Scoring

There has been a lot of talk lately about the CBO scoring of the health bill.  Here is one thing people should understand about their numbers: When they estimate the budget impact of a bill like this, they assume the path of GDP is unchanged.

Recall that the bill raises taxes substantially.  Some of these tax hikes are the explicit tax increases on capital income to pay for the insurance subsidies.  Some of these tax hikes are the implicit marginal rate increases from the phase-out of the insurance subsidies as a person’s income rises.  Both of these would be expected to reduce GDP growth.

Indeed, to be very wonkish about it, these tax changes could have especially large GDP effects.  Some people like to argue that taxes have small GDP effects because income and substitution effects offset each other.  But if you give someone a subsidy and then phase it out, both the income and substitution effects work in the direction of reducing work effort.

Why does CBO assume no change in GDP?  It is not because the CBO staffers necessarily believe that result.  Rather, it is just one of the conventions of budget scoring.  Their estimates should come with a warning label:

More on Financial Reform and Start Ups

Craig Pirrong at the Organizations & Markets blog weighs in on the quizzical financial constraints placed on start ups under proposed financial reform legislation.

Here’s Pirrong:

The most fascinating question is the political economy one: whose interest is served by this provision? The most likely explanation is that incumbents — including, no doubt, one-time startups — having made theirs prefer to make it harder for others to displace them.  They liked creative destruction on the way up, but the idea of being swept away in some future gale is far less appealing. So hobble potential future competitors, future creative destroyers, by increasing the costs startups incur to raise capital. This pernicious provision also gives advantages to big investors, venture capitalists, and existing companies who would face less competition in supplying capital to potential startups.

I’m not sure I buy that — who is this group of now-successful former start ups banding together to create barriers to entry?   On the other hand, I don’t have a better explanation.

Anyone?

Michael Burry Saw the Financial Crisis Coming. Why didn’t the Fed?

Michael Lewis in his recently released book The Big Short highlighted several investors who anticipated the financial crisis and took actions to gain from it.  One of them, Michael Burry was featured on a recent edition of 60 Minutes.  In Sunday’s New York Times,  Burry lays out the case.

Op-Ed Contributor – I Saw the Crisis Coming. Why Didn’t the Fed? – NYTimes.com

//

April 4, 2010
Op-Ed Contributor

I Saw the Crisis Coming. Why Didn’t the Fed?

By MICHAEL J. BURRY

Cupertino, Calif.

ALAN GREENSPAN, the former chairman of the Federal Reserve, proclaimed last month that no one could have predicted the housing bubble. “Everybody missed it,” he said, “academia, the Federal Reserve, all regulators.”

But that is not how I remember it. Back in 2005 and 2006, I argued as forcefully as I could, in letters to clients of my investment firm, Scion Capital, that the mortgage market would melt down in the second half of 2007, causing substantial damage to the economy. My prediction was based on my research into the residential mortgage market and mortgage-backed securities. After studying the regulatory filings related to those securities, I waited for the lenders to offer the most risky mortgages conceivable to the least qualified buyers. I knew that would mark the beginning of the end of the housing bubble; it would mean that prices had risen — with the expansion of easy mortgage lending — as high as they could go. Continue reading Michael Burry Saw the Financial Crisis Coming. Why didn’t the Fed?

Proposed Financial Reform Does Not Tout the Start Up

Thomas Friedman might tout the start up, but proposed financial regulation does not.   According to Robert Litan from Kaufmann, there are provisions in the legislation making its way through Congress that would slow down start ups.

Under existing law, startup companies can raise money easily and quickly from “accredited investors” — individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be “accredited.”

Ouch.

So why are these provisions in the bill?   Again, according to Litan:

It is difficult to know why these provisions are in a much larger bill whose primary aim is to address the fundamental causes of the recent financial crisis…  There is no evidence that angel investment in startup companies played any role whatsoever in events leading up to the financial crisis.

Thomas Friedman Touts the Start Up

A few months ago in this space, we pointed you to a speech by Robert Litan of the Kaufmann Foundation on the importance of start ups in job creation.  The remarkable conclusion was this:

Since 1980 until the recession, all net new jobs—net meaning gross jobs minus layoffs — have been created by firms under five years old.

Not to be outdone by the Lawrence Economics Blog, New York Times columnist Thomas Friedman trots out the same data in his column this past Saturday.   Friedman argues that the U.S. needs to foster innovation, promote start ups, and relax its, um, restrictive immigration policies.

Battle Rap Explained

Duke University Political Economist and some-time Libertarian gubernatorial candidate, Michael Munger, explains the Keynes v. Hayek battle rap for those of us who don’t quite get it.

Munger is also a frequent guest on Russ Roberts’s EconTalk podcast, an excellent resource for inquisitive minds.  (However, I am not sure how accurate the subject lines are there, as I was listening to the discussion of franchising and pretty soon I’m not sure what they were talking about).

Of course, Munger is probably most famous for his role as the limo driver in the Keynes v. Hayek video.

This week’s SpecialTea: Fresh Ideas in Innovation

Our weekly EconTeaBA will get an intellectual boost from physicist and in-house innovation expert Professor Brandenberger on Monday. As this post noted a few days ago, he recharged and refreshed his thinking on innovation at a conference in Berkeley, where the world’s top thinkers on innovation gathered two weeks ago. The conference was organized by The Economist, and the list of speakers included Amar Bhidé, Robert Reich, Clayton Christensen, David Kelley, Michael Porter, Jared Diamond, Ray Kurzweil… and the list goes on. Professor Brandenberger will tell us about what these great minds had to say about the future, about innovation, and how that has changed his views on the subject. And there will be cookies, tea, coffee.

A Pigou and a Smile?

Would a tax on the sugary, em, I mean the corn syrupy sweet taste of soft drinks reduce consumption?  And would that in turn cause young people to drink less and possibly curb the tide of childhood obesity?  An article in Health Affairs suggests the tax would have to be pretty darn steep to do much good:

[T]here was no significant relationship between differential soda taxes and overall soda consumption for the whole population. This means that, within the limitations of our analysis, increasing the differential tax on soda doesn’t affect total soda consumption. We found a significant relationship between differential soda taxes and BMI change from third to fifth grades. But this finding does not hold up under different statistical analysis, and the effect may be attributable to children who are already at risk for being overweight.

The tax rates for the study ran up to $0.07 on the dollar, with an average of about $0.04.   The calculations suggest that it would take more than double the highest rate, about $0.18, to have substantial impacts. In other words, if you want to change people’s behavior in this case, a small tax isn’t going to do the trick.

What is the rationale for government intervention here? Is this a Pigouvian tax — that is, do soft drinks cause obesity and does obesity cause impose “external” costs on the rest of the population?   Or is it a “protect the children from their parents” rationale?

Let me know what you decide!

Coming to Briggs Second?!?

From NPR last year.   I haven’t heard how this is going…

The Economist reports that it has purchased real estate and is opening an amusement park called “Econoland.” It will combine a theme park with the joys of macroeconomics. Among the attractions: the currency high-roller, and fiscal fantasyland. The magazine says the park opens April 1.

I wonder if they have the Keynes v. Hayek video in 3d?

Lawrence Scholars in Business Chicago trip

The LSB program sponsors an educational trip to Chicago every year. The purpose of the trip is to provide students an “immersion experience” in one of the country’s financial centers. The trip will take place during reading period, on May 6th and 7th. We will leave at 6:00 am on Thursday, May 6th, and return in the evening on Friday. We will have a full schedule, visiting the Chicago Board of Trade, the Federal Reserve Bank, as well as some firms including Madison Dearborn, Copia Capital, the consulting firm Deloitte and Touche, and The Northern Trust Bank. The costs of the trip are covered by the LSB program. This trip is a great opportunity to learn about the financial world (and a consulting firm) up-close, in a way that you couldn’t do on your own.

If you would like to join, sign up by giving Adam Galambos an envelope with $20 in it, and your name on it. We will return the money to you when you board the bus at 5:45 am on May 6th. Should there be more students interested in going than spaces, preference will be given to students who did not go on the trip last year and to juniors and seniors, as they are less likely to have another chance to go. But, if you are interested in the business world, sign up, whoever you are—if you don’t get to go, we’ll return your deposit, of course. The deadline for signing up is April 12th. Email Adam Galambos with questions.

Lawrence I&E Continues its Ascension

Ripped from the headlines. A big congratulations to Prof. Galambos.  Here’s the story:

A $23,000 grant will support Lawrence University’s growing innovation and entrepreneurship program, a university-wide initiative launched in 2008 that engages students, faculty and alumni.

The two-year grant from the National Collegiate Inventors & Innovators Alliance will target the program’s flagship course “In Pursuit of Innovation.”  Cross-taught through Lawrence’s economics and physics departments, the course incorporates the use of guest experts from various fields, intertwines innovation with entrepreneurship and employs a project-driven, hands-on component designed to develop a learning community eager to pursue innovative and entrepreneurial ventures.

Since its launch, 41 students have taken the “Innovation” course.  Operating in three-person teams and in conjunction with the FabLab, a prototyping facility at Fox Valley Technical College, students have worked on projects ranging from the development of a multi-directional split-field camera and an ergonomic student desk to a hand sanitizing system for hospitals and schools and a personal identification system that allows health records to be retrieved automatically in the event of an accident.

“From its inception, our course has focused on diverse teams creating innovative products or processes, leading to functioning prototypes,” said Adam Galambos, assistant professor of economics and one of the program’s originators, along with John Brandenberger, professor emeritus of physics and Marty Finkler, professor of economics.  “This grant will enable us to take the Innovation course to a whole new level with student ‘E-teams,’ which will translate ideas into new products or services that benefit society.

“With its long-standing commitment to the liberal arts and sciences, Lawrence is the ideal setting for a program that inspires students and faculty to create innovative new ventures that combine ideas from diverse backgrounds, fields and perspectives,” Galambos added. Continue reading Lawrence I&E Continues its Ascension

Paying for “Quality”, SAT Scores Version

What accounts for the differences in prices of yogurt?  Well, there’s different size cups, different ingredients, different quality ingredients, some have nuts, brand name recognition, seems like a lot of things could drive price differences.

What accounts for differences in prices of female eggs on college campuses?  SAT scores.

“Holding all else equal, an increase of one hundred SAT points in the score of a typical incoming student increased the compensation offered to oocyte donors at that college or university by $2,350,” Levine reports. When the ad was placed for a specific couple, the premium was higher: $3,130 per 100 SAT points. And when an egg donor agency placed the ad on behalf of the couple, the bonus per 100 points rose to $5,780.

Here’s the report.