Me in businessweek

More shameless self-promotion. A mention in businessweek.

No quotes from the interview. I haven't learned yet to give good sound bites.

A fundamental misunderstanding about the economy: Stuff

Post recession, the mass media and people more broadly seem somewhat more economically literate, but one big misconception still lingers, that the economy is about producing Stuff. Pundits from both parties are deathly afraid of the loss of manufacturing jobs, because they think that if we're not producing Stuff, we're going to be poor. Pundits in all my science/technology magazines constantly say we need to train more engineers in order to produce the Stuff of the future. People worry that we will soon be spending 1/5 of our income on healthcare, leaving less money for Stuff.

(David Brooks column that inspired this).

My question is why? Do Americans need more stuff? People associate the Wealth of Nations with Stuff, but even today, the vast majority of our GDP is in services; the fraction of Stuff in GDP has been declining, and will continue to decline. Why should we be encouraging the production of more stuff when it is a dying industry.

Of course we will always want Stuff, we still eat food, even though the industry now only accounts for a percent or two of our labor force when it once accounted for nearly all of it. Just most of us shouldn't be making it. Services like healthcare, education, leisure, entertainment, these are the industries of the future. On any given day, I mostly am pretty happy with the Stuff I already have. But where I am stymied is finding a good movie to watch. Or a good TV show. There are a few good movies or tv shows that come out, but there could be more.

And some of the things I call services, are related to Stuff. Like iPhones. Yes, ths is an innovation in stuff, but it was mostly an innovation in design. The technology for the iPhone has long been around (so say people like Kodak, Creative Labs, and Nokia in their patent infringement lawsuits), what made it work was the design of it. Healthcare services require some new gadgets, but it is mostly the service that is valuable (as an aside, yes, wasted healthcare money is bad, but on the whole there seems to be little solid evidence that the US healthcare system is especially wasteful).

I'm not the first to note this of course. I suppose back in the 90's at the MIT Media Lab, they talked this in terms of Bits not Atoms. Apparently there's even a new book out on the subject. But it will take a while for this idea to percolate out there. (Analogously, I'm reading Stephenson's account about the century before Adam Smith, when the Wealth of Nations shifted from how much gold it had to how much trade. A professor of mine in grad school noted, that Adam Smith figured out the Wealth of Trade just when Wealth shifted from Trade to Industry. And then noted that Marx figured out Wealth from industry just when Wealth shifted from industry to human capital, which is building block of Memes, not Stuff)

Maybe irrationality's a good thing

Even before I was an economist I was a big fan of rationality. My friend from Singapore spoke with pride about how another economist friend of hers noted "it's like they've given my people (economists) a country, and they did good! I didn't hear an irrational comment all week," something I noted myself when I was there 8 years ago (wow time flies).

But now, my reaction was, well maybe a little irrationality is good.

To explain, let me just cite Wachowski (2003)

"The first matrix I designed was quite naturally perfect. It was a work of art. Flawless. Sublime. A triumph only equaled by its monumental failure. "

"As I was saying, she stumbled upon a solution whereby nearly ninety-nine percent of the test subjects accepted the program provided they were given a choice - even if they were only aware of it at a near-unconscious level. While this solution worked, it was fundamentally flawed, creating the otherwise contradictory systemic anomaly, that, if left unchecked, might threaten the system itself. Ergo, those who refused the program, while a minority, would constitute an escalating probability of disaster."

"Your life is the sum of a remainder of an unbalanced equation inherent to the programming of the matrix. You are the eventuality of an anomaly, which despite my sincerest efforts I have been unable to eliminate from what is otherwise a harmony of mathematical precision. While it remains a burden assiduously avoided, it is not unexpected, and thus not beyond a measure of control. Which has led you, inexorably, here. "

Or consider Huxley's Brave New World for a more literary citation.

Rationality is all fine and good and probably great for 99 percent of the people. But maybe you need irrationality for beauty, or for innovation, for disruptive change, for paradigm shifts, for freedom (whatever that means; I took a class on defining freedom and still don't know what it means), and all that. For magic too.

(And I bet you thought watching that movie was a waste of your time...)

Thoughts on Copenhagen II: On Negotiations amidst the Circus

Back in Copenhagen, I attended a briefing for US NGOs. Two things that struck me.

One is I am ambivalent about NGO invovlement. One notable thing was at the meeting, you had Fred Krupp, president of the one of the largest environmental groups (who quite reasonably should be there), but he was sitting next to a couple kids painted and dressed as green aliens carrying placards. On the whole, it was a surprisingly young group.

The other was again, how similar the US government position is in the current administration as it was under the previous. That the US will not concede sovereignity in terms of taxes it must pay. That the US cannot commit to greater cuts than Congress will allow. That the US cannot commit to spending, in such contexts.

And again, on the sovereignity issue, which is not unique to the US (but a big part of why negotiations broke down with China and India), that the idea of a binding carbon price/limit may be futile because it requires a higher extra-governmental power. The WTO did achieve this (somewhat) but that took half a century, and in general, free trade is win-win (countries generally benefit from lower trade barriers, even though they may suffer from political trouble from noisy constituents, overall countries are typically better off). Whereas in climate change, it is by and large a pure public good to constrain carbon, so an even harder sell without a world government. This suggests again that the technology push is key making green technology cheaper than dirty. (This was the position of the Bush administration--I don't mean to be so defensive on that, really--and also what Bjorn Lomborg has been pushing, hopefully that doesn't automatically discredit the idea) I think economists by and large agree that technology is key, though many would then say that a carbon price would be the key the incentivizing new technology, though I think most economists agree that we have little evidence to that effect, only faith.

Thoughts on Copenhagen I: Legitimate Policy or Optimal Policy?

It is kind of fascinating. How different policy is actually made, compared to political econonmy models. I am reminded a bit of the march and olsen garbage can model, but instead of policy by flight and by oversight, this is policy by pseudo-consensus, generated by people sitting in a room, making comments, randomly interacting, and in the end, people agreeing not because they are happy with the outcome, but out of fatigue, or out of agreement that sufficient process has been conducted.

It has been noted that while economists focus on outcomes, lawyers care about process. Economists have written a bit about preferences over actions (legitimacy) vs preferences over otucomes, but the latter still largely defines the field.

Policy folk like typologies. I worry a bit that much is decided by policy folk who understand politics and process well but have often only a cursory understanding of the scientific and economic details. They like colorful bar charts, and 2 x 2 typologies.

Not so different than whitehouse. A consensus process. Difference is there is no executive, essentially a dictator, of last resort, who may be convinced to make the optimal decision.

This leads to interesting implications for what good policy should look like. Economists would like a global carbon tax (or cap and trade) since that is likely optimal, but given that consensus is required this may no longer work. Even amongst the countries that agreed to Kyoto, half of them failed to comply and many of the ones who did, did so because they had an economic collapse.

This gives further credence to the Bush administration's technologically focused environmental policy.

how smart was issac newton?

Marginal Revolution asks what is the probability the person with the most chess aptitude in the world today actually knows how to play chess. The question is how much wasted potential there is out there because people with high aptitude never get the resources to take advantage of that aptitude.

I often think about this type of analysis when trying to figure out how smart Issac Newton was. Sure he had the most success of math as anyone of his day (by a bit, Leibniz discovered much of the same shortly after him), but he was only the best out of the very small set of people born who had access to the resources to become good at math. Let's say 100,000 at the most, or the top 0.001 percentile. Being in the 0.001 percentile these days means there are tens of thousands of people better than you at math in the world, and thus is probably not good enough to get you into a good graduate program in math these days.

The Ethics of Killing Brussels Sprouts: And the Ethics of Climate Change

In Krugman's obituary for Paul Samuelson, he mentioned that one of his contributions is he clarified the idea of welfare for economists, and the common good. Economists have a very well defined notion of social welfare, that is entirely human centric, but at least it is clear and well defined.

I do concede that animals and plants must fit in there somewhere, but since I have yet to come across a good definition, I tend not to use use it.

This interesting nytimes article questions whether killing brussels sprouts is any better than killing a pig for food?

This is particularly relevant when it comes to the issue of climate change, since if we just consider the impact of humans, climate change has arguably negligible impact 0 +/- 2% of GDP say the best estimates (of course extreme events are possible). But the impact on plants and animals is tricky. Many animals will die, though plants on the whole stand to benefit. And was it wrong for say the mammals to kill the dinosaurs (as some theories suggest)?

Star Power in Copenhagen and Lots of Lines

Waited in line today 90 minutes in 0 degree C weather to get in for the UN COP\15 Climate Change Conference (people who hadn't registered yet apparently had to wait 5+ hours in the cold yesterday). Leaving tomorrow, which is good because I imagine the logistics will only get more hectic tomorrow. They apparently registered nearly 40,000 people for a confernce center that only holds 15,000.

In some ways, it is a shame I'm leaving, since the star power is starting to heat up today. Up until now, it was all very policy wonkish. (More substantive thoughts in my next post.) But today, after waiting in line to get in, I waited in more lines to see Arnold Schwarzeneger and now I'm seated in a CNN debate with Bjorn Lomborg, Kofi Annan, Thomas Friedman and Darryl Hannah (let's play the Sesame Street game: one of these things is not like the other, three of these things are Kinda the same).

I arrived too late for the Al Gore tickets, but might be able to see part of the opening ceremony for some of the more high powered guests (minsters only now though) the heads of state mostly arrive tomorrow or Thursday.

Copenhagen: First Impressions

Just arrived on red-eye flight, straight to the COP15 conference. Impressed by Copenhagen's airport. Very nice, clean scandinvaian (ie Ikea-style) aesthetic. R- says "i always just think all the nordic countries are like one big ikea...organized, natural looking." Also impressed by how well organized they are for the conference. Special passport lines, lots of conference information booths, special free shuttle buses, nice graphic design of posters, free public transportation passes, free wifi at the conference center, lots of power plugs, impresively good and cheap conference food, even a specially designed iphone app to disseminate news, videos and meeting schedules, lots of stunts makes it a little silly -- WWF drawing cartoons and doing a skit with a giant baloon earth; people carrying around skis, a group in matching red suits. Lots of lines. Long security lines, but lots and lots of scanners unlike at airport.

Shameless Self-promotion: me on NPR

I don't sound as awful as I feared, but I was still too nervous to get through the thing without getting stuck on words. If they had only taped the conversation I had with the other guest (David Biello) while we were waiting in the green room. I was fine there.

The Takeaway: Why It's Not Easy Being Green

The Takeaway is unfortunately one of the new format public radio shows that tapes things live, and doesn't edit out stutters and umm's, as is typical for NPR (technically also, the show is a PRI show, not an NPR show but close enough). The only consolation was that the hosts got stuck over a couple words too while I was there.

Inequality has NOT increased

Professions can have blind spots, and I think one thing that not only have pundits been mistaken on, but economists as a whole may also have been, has been rising inequality. It has become a oft repeated stylized fact that inequality (which has declined for centuries) has been increasing in the United States since the 1970's.

I never believed it. Mostly due to my own prejudices for optimism. Prejudice can be good when it forces you to seek out more information.

A lot of the inequality can be explained by increases in immigration which opened up in the 1970's; inequality amongst American born Americans has declined (Easterbrook). Also, the inequality picture looks a lot better when looking at outcomes like health, where inequality continues to decline, rather than just income (Lomborg).

Yet despite this, most economists still believe that inequality is on the rise, and the profession has mostly come to take this for granted. Two new studies have revisited this (Gordon and Winship):

They emphasize that the measured inequality has really only occurred in the top 1% (bankers and CEOs and movie stars, the superstar winner take all effect that economists like Frank and Rosen have emphasized) of the population, but does not reflect shifts amongst the population as a whole.

Anyway, this could still be a reflection of my own biases for sunny-optimism and that the world is always getting better.

The best thing I've heard on npr in recent memory...

This story reaffirmed why I still trust NPR.

It echoes the most important thing I learned from psychology classes (see the 1.14.03 entry here)

America owes less money than you think

It is impressive, how much more economic literacy the country has developed in the past 12 months. Just enough to be dangerous. I've often lamented that a little bit of economic knowledge (say from Econ 1) gives people a dangerously distorted view of the world. The recent education people have gotten from newspaper editorials and headlines is perhaps even more distorted. Though I have been impressed with coverage, it still worries me because it gives people a false confidence in their own economic literacy. Many times, I'm sitting in a restaurant, overhearing snippets of conversation at tables next to mine where everyone's talking about the economy with great conviction while at the same time it is quite clear that no one knows what they are talking about.

I was recently waiting at a bus stop recently, and when it came up that I'm an economist, the guy having just seen a movie about the debt starts ranting about how the US debt is unsustainable. And we are headed for doom.

Really?

So the national public debt has gone up a lot in the past few months, to around $11 trillion. Is that a lot? Sounds like a lot. On a per capita basis, that's about $110,000 per household.

So 11 trillion is a lot, maybe 80% of GDP. Is that a lot?

Let's put this another way. If your annual income is $100,000, and you take out a mortgage to buy a house that costs $80,000. That seems quite reasonable doesn't it?

There's a bit of a slight of hand there, because GDP is how much money the country as a whole makes, and public debt is just how much the federal government owes. So let's try this another way:

If the US makes about $13 trillion a year, how much does the US as a whole (including government and private companies and individuals) owe to other countries? Note (over half of the federal debt is borrowed from Americans, so when we pay back our creditors, we are giving money to our children). The answer is about $13 trillion. The thing is, the US is also owed $8 trillion by other countries. So on net, the US debt is only about 35% of GDP.

Back to our analogy, that's like someone with an annual income of $100,000 having a mortgage of $100,000 but also holding $65,000 in stocks and other assets. Doesn't sound so untenable.

You might also note that the real problem is not the current debt (as the OMB chief likes to point out) but the size of the obligations to Social Security and Medicare. Which some estimate are in the tens of trillions, most of which is medicare and medicaid. So if you look at the numbers, the deficits in Social Security can be wiped out just by raising the retirement age by a couple years, or by indexing payments to inflation, rather than to wages, meaning that retirees in the future will get as much money as retirees of today, which doesn't sound so bad. Both are still politically difficult, but quite reasonable. Medicare and medicaid costs are the far bigger looming obligation, but those obligations assume that unchecked health expenditures, and given that the US spends more or less twice as much as every other developed country on health care, it is quite plausible that health expenditures can be brought down significantly in the future.

Of course the problem with metaphors is they are always imperfect (for example, if the US really needed to, it could just print more money to pay off its creditors). But many smart people are quite worried about the current levels. But put in perspective they are not as big as people seem to believe.

Ways of Seeing (Art)

I guess one main reason I post these publicly instead of keeping them as a private journal is that usually comments from all of you make me think about things in a new way. Recently, comments to a snobbish nytimes article I posted about art made me think about how we visit museums, and the ways of seeing (as an old art history book of mine called it).

The article laments the practice of people who jog through the Louvres, to snap their photo next to the Mona Lisa, without spending more than a few seconds in front of each work.

Nowadays, when i go to a museum, i try to go to the special exhibits, mostly because they are transient, but also because they often tell more of a story, in terms of how they were curated. (Hanging out with art historians, you realize someone puts a ton of thought on these things) I'm also actually sympathetic with the jogging (though R- didn't like the fact I made her do that for her first visit to the louvres). I guess I got that from my art history prof who did that for my first visit. Even though over the course of the 6 week course, we spent pretty much every other day in some Paris museum, we still only saw a tiny fraction, and the prof thought it would be a travesty if we didn't at least see the mona lisa, the venus de milo and the nike. You can see many reproductions, but I've learned that reproductions are always a poor substitute in terms of image fidelity, size, impact, context in terms of other paintings, but also geography, and the other people watching.

Just like watching a movie alone is different than watching it in a theater. I'm also at the end of the day, less judgmental than the article. It is true that for a lot of people, they are there because they feel it is good for them, or because it is a status symbol. saying "hey, i saw the mona lisa last weekend" is similar to driving up in a hybrid car, or giving someone a diamond ring. but maybe that's ok. Americans are more likely to go to a museum than go watch sports, and somewhere along the way, that probably leads to something good.

SCOTUS Live!

(Sorry for the hiatus. Was in Australia. Will post photos and recap some day...)

I had never really understood the fascination people have with the surpreme court (nor with the continuing coverage of the space shuttle though that I can explain to historical path dependence) but people seem to love talking about Nina Totenberg (a favorite answer in nytimes crosswords and this comic) and the latest antics of Scalia or Roberts, or that Thomas never talks, or the excitement over Sotomayor.

Though a recent minor change allowing surpreme court proceedings to be taped may change my mind. Flipping on CSPAN as is my habit on the elliptical, I happened on the latest hearing on campaign finance reform.
From the cold logic of propositional calculus and induction based machine learning, to the somewhat rigorous forms of economic proofs, to the styles of academic argumentation, it amuses me to think formally how conversation/debate/dialectic/dialog works. These other forms are easier for me to follow, but it is interesting to see the logics employed by the supreme court. The reliance on analogy and precedent, the backward induction and strategic consequences of various statements, what is allowable as evidence and what is not.

I guess I knew some of this given that I teach it in class and have been working on a model of malpractice, but it is neat to hear it directly. I imagine allowing the voice recordings will help (a bit) get people more involved in the courts; I'm surprised it took so long.

Though one thing that sadly may be lost, is Nina Totenberg's dramatic re-enanctment of surpreme court debates on NPR, now that we have actual recordings.

Damn you Congress for ruining my credit line

I still have the same credit card from 2000 back when credit was cheap and interest rates were low and I got offered a credit card with a 7.99% APR. Not that I use it much, but it's nice to know I have a credit line that's almost cheap enough to finance buying a car, or to borrow money to invest in the stock market. So a couple weeks ago, for no apparent reason, they tell me they are doubling my APR to 17%, and if I don't like it, they will cancel the card.

Thanks Congress. Since Congress made it much harder to increase APR in the event of missed payments, the credit card companies reasonably responded by pre-emptively raising APRs on everybody including me.

Stupid populist policies and stupid populist NY Times who thinks this is a good thing. Last time I checked, price discrimination was welfare enhancing, but I guess it doesn't feel fair.

Good times for the car industry

Wrote the paragraph below a few months ago. Just wanted to state for the record, that even with out the Cash for Clunkers program, the car industry is in for good times. The Clunkers program which probably has no redeeming social value except as a very rapid $3 billion stimulus (the last $2 billion are still being debated though) into the economy. I am probably also more annoyed because my "clunker" missed qualifying by just 1 mpg. But otherwise, it is likely bad for the environment, potentially quite wastefully destroying good cars.

Despite the doom and gloom, the short term forecast for the car industry is good times ahead. This article takes a gloomy look, saying that US demand for news cars will fall just like it fell 46% this year from 17 million to 10 million. But the short term effect of that is a huge pent up demand for new cars that is going to help the car industry come roaring back in the next few years. That along with the $60 billion or so in handouts GM alone got, will mean the US car industry should be quite profitable in the short term. Of course, one still has to wonder whether it was worth the $60 billion+ in tax payer money.

Breathtaking performances and thoughts on science funding

On a whim, R- and I went to see the ballet of Midsummer Night's Dream yesterday at Lincoln Center. And while all were quite good, one performer was breathtaking, even for a complete ballet novice like me. And apparently, it wasn't I alone who thought so, given the audience response to his solos and the couple in the seat next to us who came just for him. It reminded me of our recent trips to the opera, most of which were simply whelming, but one performance of La Boheme had a lead that was once again breathtaking (a view confirmed by the nytimes review we read later). And finally, our trip for the year to see the symphony, to see Joshua Bell perform a violin concerto, again breathtaking. Note, it's not like we do this a lot, these are among the handful of times we've been to Lincoln Center, but I expected in every case that these are among the world's best performers, they surely must all be at a level where a novice like me couldn't tell them apart, but there is still clearly a scarcity of true breathtaking talent.

Which again reminds me of my response to all those who constantly call for more scientists and engineers. There isn't much evidence that we need more of either. Both are good at producing new stuff for cheaper, but not at all clear I need any more stuff. (New health stuff is still genuinely useful, but there is already vast funding for health, not at all clear that more money could be efficiently spent).

Maybe what we need are more ballet teachers, and opera singers, and violin teachers. Gladwell's Outliers eloquently makes the point that genius is not born, it is made. And there are no doubt lots more out there who could achieve at such a level. And while we're at it, why not more chefs and artists and designers (I always use the example that it wasn't the iPhone's engineers that made it a hit--Apple is still paying off a patent infringement lawsuit to Creative who had the technology long before--it was its designers). Or even better, government bureaucrats shouldn't be deciding what we need, instead we should maybe let markets figure it out (of course market failures should still be addressed).

Political Theory works: Stop blaming Obama

David Brooks echoes the sentiment of many pundits, that Obama is letting Congressional Democrat leaders determine the agenda, and moving policy far left instead of keeping policy near the center.

This is as dumb as the folks who complained about Bush for moving policy to the right.

Basic median voter agenda setting theory (specifically Cox McCubbins) explains why.

I still believe that both Obama and Bush have policy views close to the median voter. Presidential politics pushes presidents in that direction.

Congress looks like this: (you may recall my past such diagrams here)

<----D------m------R---->

With D representing the Democratic median (and thus the Democratic leadership). R the Republican median (and thus the Republican leadership), and m representing the country median (and roughly Obama and Bush).

Under Bush, Congress was mostly under control of R and while the president has some ability to hold policy to the middle through veto threats, in general, R will be able to pull policy to the right. We will denote policy from the Bush years as q.

<----D------m----q-R---->

In this case, Democratic leaders who get to propose the alternative under our system of government, can basically get their way, and propose something far to the left (denoted p), and Obama will go along, even though he might personally prefer something more centrist, he'd still support a far left policy over the current right leaning status quo.

<----D--p---m----q-R---->

Obama may wish for a policy that is more centrist, but our system of government prevents him from achieving it. (And similarly, Bush was forced into more conservative policies than he would have liked, by the same logic)

Of course, there's a lot more theory can say. For a more thorough analysis, see this article, by my classmate, Jonathan Woon.

Read this article! Finally, a reasonable answer to the health care crisis.

Apparently, this New Yorker article by Atul Gawande has been getting a lot of attention, circulated amongst doctors, and pushed by Obama's team, and frankly I am heartened, because it is the most reasonable response to the health care crisis and the puzzle that I normally devote a lecture of my classes to: Why does US healthcare cost so damn much. Written by Atul Gawande, a Harvard surgeon and long time New Yorker columnist, I've loved his books Complications and Better, because he is a doctor who appreciates the views of economists, but with a healthy dose of skepticism.

To save you some time, Gawande's answer is that the high costs are due to excess healthcare (too many scans, too many procedures, too much surgery). I can believe that, though it may be too simplistic an answer, but I have long argued that the traditional reasons people give for excess costs don't hold up to scrutiny--medical malpractice, insurance administrative costs, paper records, emergency room visits, excess end of life care, these all do lead to waste, but none come anywhere close to explaining why the US spends pretty much twice as much per person more than any other country.

Gawande then argues that as a result, the left's solution--government paid healthcare, and the right's solution--individual paid healthcare, won't work. Since neither gets the incentives right. Gawande is a bit too dismissive of the profit motive--nothing wrong with the profit motive if the incentives are properly aligned as in most industries. But his solution is reasonable nevertheless.

All that said, Gawande doesn't provide any evidence to back up his hypothesis beyond charming anecdotes. There is still reason to believe that actually the US is underspending on healthcare, because while we're spending a lot, we're actually getting a lot of value from it despite what others may claim. However, at least unlike just about everybody else out there, he's not pushing an argument that I know for a fact is patently wrong.

Also, a cool aside on the small world of academia, even though this isn't my field, I know half of the academics he cites in this paper, I happen to know them all pretty well actually. Kate Baicker I worked with at CEA. Amitabh Chandra I chatted with a long time when he came to visit Cornell, and he once co-authored a paper with R-'s classmate. And Woody Powell, I took two seminars with at Stanford.

Healthy Eating on a Dollar a Day

I have noted here in the past, that it is a fallacy that healthy food is more expensive than junk food (it seems that way because rich people like healthy foods and shop in expensive stores, while poor people like junk food and shop in cheap stores; but there is no particular reason why healthy food has to be expensive, see Chinatown for loads of cheap produce).

I have also noted that it is not that hard to feed yourself well on $3 a day. In response to all of these politicians looking like idiots by living for a week on the money people get for food stamps ($21 a week) and claiming it is impossible and that it leads to weakness and starvation, so in response I made up a shopping list of a variety of meals that aren't that far from what I normally eat for $21 a week.

So nice to know that I'm not alone. In fact this woman claims to be able to do it on $1 a day which impressed me.

But also just emphasized for me again that hunger in America is largely by choice (of course there are exceptions). This American Life story about a couple homeless guys emphatically makes that point that there is so much food available for the homeless that it is impossible to go hungry unless you choose to. As well as this photo I saw in the NY Times a while back, about people who have to skip meals to feed their children. The illustrating photo was a woman who claims she regularly skips dinner so her kids can eat. The thing was, that the woman in the photo was huge; she must have weighed at least 300 pounds.

A very dumb idea: make b-school like law/med school

The idea that we should "professionalize" business school so that it is more like med school or law school has been making the rounds recently (e.g. Time, NY Times, NPR, etc.). Whereas a true profession like law or medicine has a code of ethics designed to serve the greater good, business school is different because no such code exist.

Very large red alarms goes off for the economist in me at this idea. Because whereas others see professions as something noble, the economist sees a cartel. The standard view of professional societies (stemming from the medieval guilds) is that by regulating who can enter the market, they create a cartel that keep prices high by keeping people out. As Time noted, professionalization implies "a professional exam, a licensing board and exposure to malpractice," as institutions quickly become cooped by government. Economically, these institutions use government's coercive power to maintain their high prices. Some of the largest sources of dead weight loss and inefficiences in the economy are associated with the legal and medical industries.

That said, I am sympathetic to the benefits of monopolies. Like a benevolent dictator, a benevolent monopoly can often do the right thing, where a competitive market cannot (see Google for example). So maybe the lawyer and the medical cartel is justified, but the idea of professionalizing business so that you would need government approval to run any company is more than a little scary.

When politicians argue, what they really believe rarely matters, all that matters is what they want.

Obama announced the intention to raise the requirements for average fuel economy standards.

Note this is much the same as the plan I helped develop for the Bush administration that got pooh poohed by the press. Obama wants 35mpg by 2016 and its get called historic, (we proposed a similar level by 2017, and the compromise with Congress came to 35 mpg by 2020).

The frustrating thing is that part of the defense for the increase that Obama and pundits have been using is that they are merely homogenizing standards since allowing different states to have different standards is highly inefficient.

Of course when Bush used that reasoning to block California from setting their own standards, this was roundly bashed by Obama and the media as impeding progress. The only reason different standards exist is because Obama overturned the Bush ruling.

How to fix the economy: On Transparency

When people ask my opinion as to what to do about the economy, I mostly punt the question. Arguing that is a macro question, and I gave up on studying it, because I think it is too hard a problem, not only for me to figure out, but even for the profession. I'm not sure anyone knows. But if pressed, one reform that does seem to be pretty easy to advocate is to increase transparency (this is a favorite prescription proposed by my students). Or perhaps not. As Truman famously lamented, there's no such thing as a one handed economist.

On the surface, transparency is good. It increases the free flow of information, and economic theory has told us that more information is almost always good, theory says that perfectly efficient markets depend on perfect information. And when information is hidden (i.e. when there is asymmetric information) you get market failures and inefficiencies. A practical implemenation of this idea in the financial sector that is often tossed around is to make more securities traded openly on exchanges rather than over the counter.

Of course thinking a little more deeply, there are problems with transparency. Partly, is the practical matter of standardizing incredibly complicated securities to put on an exchange. But more fundamentally there is the problem that transparency impedes the firms abilities to maintain trade secrets. Trade secrets, like patents, are another form of intellectual property protection (some argue they are the primary form of intellectual property protection given that the patent system is so broken), and though all intellectual property protection is bad for competition because it creates monopoly power and higher prices, it is good for innovation. So a byproduct of greater transparency could well be less innovation.

It isn't Easy being Green: and how feel-good environmentalism is usually dumb

In class, I talk about how hard it is to figure out which activities are good for the environment, once the entire supply chain is factored in. And how common strategies to reduce your footprint are often dumb. In class, I talk about how ridiculous policies like banning bottled water (ala San Francisco) or banning air conditioning (Japanese government) are just incredibly dumb.

Part of the problem is that once you calculate the entire supply chain, it is unclear what practice is better for the environment. This recent nytimes article argues that steel water bottles are better than disposable plastic if you use it at least 50 times, though if you read the article carefully, if you wash your water bottle with hot water, then there is no benefit at all. The same is true for local food. Though you are not shipping your produce from Mexico, the fact that local food is often brought in smaller trucks and you drive more to buy it, means it is often worse for the environment.

The other part of the problem is that there are much cheaper and simpler ways to help the environment. For example, for about $20 you can take a ton of CO2 out of the atmosphere. Companies like Terra Pass will take your money and use it to plant trees or reduce landfill emissions or buy more fuel efficient stoves in poor countries.

So yes, you can reduce your carbon footprint by about a ton a year if you give up meat, or you can achieve the same effect for $20. If you value meat at less than $20 per year, than go ahead, but otherwise, that's not the best approach. There are of course other reasons to be vegetarian, just like I love local food.

Given the complexities, how do we make figure out what's right. Of course the easy economic approach is to make sure you pay for the carbon you are responsible for. This can be accomplished most simply with a carbon tax, or a little less simply with the cap and trade proposals currently on the table. That way all you have to worry about is the price, which encapsulates all the environmental costs within it.

new policy wonk blog KeithHennessey.com

Keith Hennessey, someone I used to work/with for at the White House (also a Stanford alumni) has been making the morning talking heads circuits recently. He was the National Economic Adviser, the position that Larry Summers now holds. To complement his punditry in today's new media age, he has a new blog.

This is his blog entry on gas prices based on a memo I wrote.

His latest entry on counting the under-insured is quite interesting, and contains lots of the other side of the story that we worked on producing under the W White House, but rarely gets play in the press. For example, he notes that of the 45 million without insurance, about a quarter are non-citizens, another quarter are automatically covered by government insurance even though they may not know it know it, but would if they walked into any hospital, and another quarter are young or with above average income.

Reminds me of another useful stat we found on minimum wage. Of those making minimum wage only 20% are in poverty, and only 20% of those in poverty make the minimum wage. Essentially most are well-off teenagers or people who may not really need the money.

An Economic Theory of Super Villains

Watching Watchmen (my Watchmen review here) recently reminded me of a theme of Batman (at least of the higher brow batman) found in Miller's Dark Knight Returns, and the more recent movie version, The Dark Knight, is that Batman "creates" his enemies. In Miller's Dark Knight Returns, it was a post-modern form of creation, a Hegelian thesis creating its antithesis (this was in the heyday of post-modernism, when people believed that the rules of literature could somehow be applied to reality). In Burton's film, it was a literal creation, Batman, dropped Jack Nicholson into a vat of chemicals, that turned him into the Joker. In the recent movie with Heath Ledger, it was somewhere in between, less literal, but also less literary, more sociological perhaps.

But I was wondering, could we have an economic theory of super villains. What would happen in our society if a super hero suddenly showed up. Can we think about this, Gary Becker Economics of Crimes and Punishments style. In some sense, a Batman, would effectively massively up the productivity of crime fighting technology, putting most crooks out of business. Essentially, by shifting up, the marginal cost of crime, Batman reduces the quantity of crime, but that also increases the marginal benefit of crime. Then, it becomes quite plausible that if the payoff to crime has gone up, the impact of Batman will cause talented people in other fields to shift professions, to take advantage of the high marginal benefits. Thus creating supervillains, villains who would have stayed out of crime before because the competition with the small time crooks kept profits in the crime industry too low.

This makes us wonder if it is possible then, that Batman actually makes crime worse. In a static world no. We are still at a low equilibrium for the quantity of crime. However, if talented people (who would otherwise have been at hedge funds or something) have now shifted to crime, and find that they are exceptionally good at it, thereby shifting the MB curve out, or the MC curve in, then maybe Batman can make things worse.

The words billion and million should be abolished from news coverage.

Ha. I've said before the words billion and million should be abolished from news coverage.

Two Visions of Healthcare reform: Bush v. Obama

The NY Times recently laid out succinctly Obama's plan for healthcare. Something that sounds eminently reasonable, especially to an economist. Roll out a national system of electronic healthcare records, which will create a dataset that the government can spend $1 billion to analyze, so that they can design the proper incentives system to give doctors the right incentives to treat patients efficiently.

It all sounds very reasonable, especially to an economist. Because economists don't have tools to understand its central flaws: big government projects tend to screw up. A national electronic records system sounds eminently sensible, but the industry that creates such software systems (Enterprise Resource Planning ERP) is more known for its multi-billion dollar failures than its successes. The FAA has been trying to computerize for the past 40 years but so far is still using 40 year old technology. Plus, assuming that underpaid government bureaucrats can properly interpret the data and create the right incentives is a heroic assumption.

Seeing the Bush plan, first hand, you see a clear difference. It favored electronic records but it was hesitant to mandate a national system, preferring to make ways for private enterprise like google to solve the problem. It recognizes the failings of the free market (failings economists are quick to recognize) such as moral hazard, adverse selection, externalities, myopia, but also recognizes the main advantage, that competition leads to cost minimization, whereas lack of competition such as the case of government bureaucracy leads to potentially massive waste.

Giving an A for effort

A recent NY Times article laments the fact that students these days have come to expect an A for effort.

Thinking about it, I'm actually ok with the idea of A for effort (there's the Marxist in me again), Assuming of course we could measure effort accurately, and they really put in sufficient effort. From a contract theory point of view, arguably grades are designed just to incentivize effort, and if they really put in maximum effort then an A makes sense.

Also, from a Rawlsian distributive justice point of view, it also makes sense. There's an interesting paper by John Roemer on how in a fair Rawlsian economy wages should be based only on effort. and things like innate ability and privleged background should all be subtracted out.

The only reason not to give the A for effort is if we believe our job is to provide accurate signals for employers or if it would be unfair to other students. Though perhaps the ability to put in effort is the only dimension that employers really care about. That is far more useful to them, than the ability to write essays about the fall of carthage or to derive Legrangians for maximization problems. There is evidence (that gladwell for example popularizes in his latest book) that innate ability doesn't matter too much, and that people we call geniuses like Mozart, are people who just had a low cost of effort. They only became geniuses after 10 years of hard effort and practice.

More Finance Schadenfreude

This nytimes article reports a finding by economists at EPI that Wall St pay has only been out of line with other professional pay (Doctors, Lawyers, and presumably, academics, though academics I learned at a recent seminar are paid significantly less than doctors and lawyers, but still on the same order of magnitude at least) for two periods in the past 100 years, that was the period leading up to the stock market crash of 1929, and the past 10 years.

So nice to have hard numbers backing up the sense of schadenfreude this has given me, making me feel less regret for giving up on Wall St. 8 years ago. Of course, if I had stayed, I might have made my $10 million by now (F^*& U money as Stephenson calls it). But who knows. Probably not.

A clear failure of the financial bailout: mental health reform (and contract theory!)

One provision of the TARP financial bailout is a clear failure. (The rest requires macro, and I have to little expertise to judge, and doubt anyone does).

One feature that got slipped in is a provision that requires insurance companies to give equal coverage for mental health as they give to non-mental health. No one in the media has noted that this is very bad from the point of view of basic contract theory. Two recent npr stories highlight why.

1. On the media on the DSM
2. Leanord Lopate interviewing Norah Vincent on A Year in the Mental Institution

Health insurance is an example of a contract that deals with uncertainty and private information. On the point of uncertainty, there is much more uncertainty in mental health than there is other health. This is highlighted by the On the Media story which notes that one study finds that 84% of Manhatannites would be classified as having a mental illness under the DSM (the definitive book used to define mental disorders). They also note a study where a researcher had his healthy grad students hospitalized for schizophrenia but told them to act normally. It took them weeks before before they were allowed to go. In a follow up, hospitals were told to look for such grad students and identified dozens, though all the ones the hospitals thought were faking it, were in fact real patients.

Contract theory suggests that the higher uncertainty makes such diseases much more expensive to insure. And thus most rational individuals would choose to have more coverage for non-mental illness, and less coverage for mental illness. The new regulation would likely reduce overall health coverage in the market.

The second concern is the problem of moral hazard. The second npr story above interviews the writer of a recent book who was depressed herself, and later researched the treatment for depression by getting herself hospitalized at different psychiatric wards over the course of a year. She argues quite lucidly and fairly (to me anyway) that there is some room for individual effort involved in mental illness, and that more insurance could reduce the incentives for patients to get better themselves. Of course, there is also moral hazard in non-mental illness, such as eating right and controlling your cholesterol. However, insofar as moral hazard is worse for mental illness, than coverage is more costly, and therefore, people would optimally prefer less coverage for mental health. Again, the new regulation would reduce health coverage overall.

Overcoming Brand Prejudice: Windows and Burger King

There is this longstanding stylized fact that although people prefer
pepsi to coke in blind taste tests, they prefer coke to pepsi when
they can see the logo; evidence of the power of brand.

Two recent examples of companies trying to overcome the power of brand.

1) Microsoft's Mojave experiment.So many people (including many I know when buying a computer) have decided without really trying it that Vista is bad, such is the negative power of the Microsoft brand, and the power of Apple commercials (the irony is that I personally have far more software crashes with my iphone than with Vista, and most mac users I know will reluctantly admit having their share of software problems and recently even viruses. So the Microsoft campaign is to have people try Vista without knowing it is Vista, and see their reactions.

2) Similarly, Burger King has tried the same. Whopper probably loses to Big Mac amongst consumers, but their new ad campaign "Whopper Virgins", by finding people who have never had either, never heard of either, people in remote countries, to offer their taste preferences, on the assumption that they are immune to the power of brand.

Financial Reporting and the "$62 trillion" securitization market

I do have to say that economic reporting on the financial crisis has been amazingly good. Sure I've had my gripes but venues (especially This American Life's Planet Money) have done on the whole pretty well.

One failure though is the failure to note the winners along the way. The millions of people who were able to purchase a home who otherwise wouldn't have.

The other failure is just accounting, making the $62 trillion notional value of the credit default swap market sound like a big deal. It is a meaningless number.

Two reasons in particular.

1) Many of the trades are double, triple, etc. counted. It's like if I sold a pen to R- for $1, who sold it back to me for a $1, and then we repeated this 1 trillion times. That would create $1 trillion of notional value, but no real value. The swap market is counted this way.

2) The trillion is the notional value, but it is not representative of how much money is changing hands. You can think of these as insurance contracts. Taking out $1 million in life insurance doesn't mean $1 million is changing hands, far less. Just the premium. The insurance company is not taking up a $1 million obligation.

Two Tiered Teacher Contract

An interesting "innovation," separate high ability teachers from low ability teachers by offering a choice of two contracts, one with low powered incentives that low ability folk take, and one with high powered incentives that high ability teachers will select into. Something you learn in day 1 of a (econ) contract theory class (contract theory means very different things in poli sci and different again in law). And then you spend the rest of the semester learning far more complicated contracts. So it amusing that actually using that day 1 invention is considered novel enough to be an idea of the year.

Amusing, but not surprising.

Obama's Economic Miracle

I made this call on my facebook page on election day, but figured I'd elaborate on it here. Obama will get credit for both the inevitable economic recovery and the end of the Iraq war (both of which would have happened regardless of who is President), which should likely guarantee a second term.

It is annoying that president's get credit for just standard movements along a business cycle that are out of their control. Reagan won re-election because of it, Carter lost for largely the same reason.

More broadly, Obama like Clinton will benefit from a large peace dividend. Clinton likes to claim credit for balancing the federal budget, but more credit should go to an intransigent Newt Gingrich led Congress, balanced budget laws passed under his predecessor, and military spending (as % or GDP) that had halved in the past 10 years.

Greg Mankiw's Blog: The Sociology of Economics

Greg Mankiw's Blog: The Sociology of Economics

This is an awesome post. Basically, it was a letter by a medical resident at Harvard noting that at interdisciplinary conferences economists are

0) Always has something to say regardless of discipline of talk, present better papers, and are less likely to be caught off guard by questions.

1) The most aggressive. (Probably responsible for part 0)

2) The most willing to engage with statisticians.

3) Will readily attack other disciplines on questions of causality and selection bias.

4) Economists are smarter

5) Economists have more rigorous training

6) Economist believe more in science than advocacy. They are less likely to base opinion on preconceived priors.

7) The economics job market is more efficient.

I think this is stuff that every economist secretly believes but has enough humility not to say it aloud. At least I've certainly noticed it, but maybe that's because I hang out in other disciplines too much.

I think people outside economics don't appreciate that basically half of an econ phd is essentially Stats, whereas in other disciplines, from Sociology to Medicine, you tend to take one maybe two classes on stats and that's it. And usually the stats they take is helpful for experimental designs, but useless and in fact misleading for cases where you don't have experiments.

Though I wouldn't say economists are "smarter," but better at math, certainly. But as Mankiw admits, perhaps worse at social skills and other dimensions.

As my advisor liked to say, economists are better at answering questions, but that's cause they massively limit the scope of the questions they ask. (i.e. they only look for their keys by the lamp post)

And I agree very much of the fact that economists are not advocates. It is much easier for one economist to convince another to agree with you, or to conclude that "it remains an empirical question" whereas in other disciplines, people spend their careers making ad hominem attacks on opponents to make their point. Within the White House, the CEA was known as the most conservative group, because all the economists advocated essentially consensus economic opinion, even though nearly everyone at CEA was a Democrat.

Clinton Foreign Policy = Bush Foreign Policy = Obama Foreign Policy

I have long argued here (and here) that Bush Foreign Policy is not that different from Clinton Foreign Policy. Here is someone else who agrees. I hate Ithaca's NPR station, mostly because they play the most left show (on an already liberal station) I've ever heard on NPR, Democracy Now, which I often wake up to many mornings as my clock radio goes off. It is useful for the different point of view.

In a recent episode, the author is arguing that Bush merely continued the policies of the Clinton administration (extraordinary rendition, unilateral nation building) and it appears that esp with a Clinton under Obama, those policies are likely to continue. Argument again that it is the situation and environment that matters more than president him/herself.

The Economics of Ethanol

A friend of mine asked me to write a guest post for his blog. Here is it reproduced here.

Ethanol is an immensely complicated issue that requires a detailed institutional background to fully appreciate, and those with a little bit of knowledge often jump to wildly wrong conclusions.

On the Benefits of Ethanol

The environmental benefit of ethanol has been hotly disputed over the years. Various studies have found various things over the years as is typical in science (a recent study finds that 1/3 of the most cited publications in a top medical journal are refuted in just a few years). A meta-analysis of all of these papers shows a clear time trend. Newer studies show greater benefits. The reason for this is simple. While the environmental benefits from corn-based ethanol are arguably small today, they will only grow in the future. Corn yields have been increasing steadily for decades, and there is every reason to expect that to continue. Thus we should get more ethanol per environmental cost each year. Furthermore, new enzymes are being developed again to get more ethanol from the same amount of corn, thereby further increasing the amount of ethanol per given input.

All of this also does not account for the possibility of more dramatic technological shifts that subsides make possible. Current car engines are tuned for gasoline from oil. However, engine tuned for gasoline from ethanol could lead to 25-30% increases in engine efficiency. Furthermore, the infrastructure being developed is helping to pave the way for new biofuels, like biodiesel and cellulosic ethanol that have substantial and already demonstrated environmental benefits.

Finally, environmental analyses ignore the other benefit of ethanol, which is a diversification away from oil consumption. Much of the problem s in the oil markets comes from the monopoly power of the oil industry given the lack of substitutes for oil. By helping develop a viable substitute, there are immense gains beyond just the environment, for example, dampening the geopolitical power of OPEC, and alleviating the resource curse in the Middle East.

On the Ethanol Subsidy.

Many people wrongly assume that the government specifically subsidizes only corn based ethanol. In fact, regular ethanol gets a 51 cent per gallon subsidy, biodiesel gets around 80 cents, cellulosic ethanol gets over $1. Other fuels get subsidized in their own way. And in fact a system of mandates and other tax credits makes total subsides substantially higher and substantially more complicated.

This is not an ideal system. A carbon tax would be much simpler that would replace this myriad of complicated and overlapping policies. But we do not live in an ideal world. So on the simple question of whether we should repeal the ethanol subsidy, we go back to the tools of cost benefit analysis (something I used to teach back at Stanford).

What are the costs of a subsidy? The subsidy is effectively just a transfer from one American to another, so the cost is only the cost associated form the distortions to the economy from raising that 51 cents. A large literature estimates the cost of raising 51 cents to be around one quarter of that, or around 12.5 cents. Is that worth it?

It is first worth noting that mathematically, a subsidy on a good works exactly the same way as a tax on a bad. So if you believe we should increase gasoline taxes by 51 cents, then you should support a 51 subsidy for ethanol.

The benefits of an extra gallon of ethanol are hard to quantify, but if you add it up (the small environmental benefit, the impact of geopolitics, the fostering of technological innovation, the support of an agricultural lifestyle) it is actually fairly easy to find benefits far outweighing 12.5 cents.

Again, subsides for ethanol is messy ugly kludgy policy. But absent a comprehensive gasoline/carbon tax, repealing the subsidy could be even worse.

On the Ethanol Tariff

Many people (including free-market economists) decry the 54 cent tariff on imported ethanol, without really understanding the institutional background for the tariff. First of all, most imported ethanol falls under various free trade agreements that makes them exempt from the tariff. Second of all, while it is true that we place a tariff on Brazilian ethanol, Brazilian ethanol also enjoys the 51 cent subsidy, hence leaving Brazilian ethanol producers no better or worse off than in a free market environment. The main purpose of the tariff is just to make sure only American ethanol producers get the subsidy.

Whether this is fair from a global justice perspective is debatable but from a standard economic cost-benefit analysis, it is eminently reasonable. Recall that a transfer between two Americans is not considered an economic cost from the point of view of America since it has no net effect on American social welfare (only the dead weight loss of raising the taxes is considered a cost). However, a transfer from American tax payers to a Brazilian producer is considered a cost.

On Ethanol and Food Prices:

It is incredibly difficult to estimate the impact of biofuels on food prices. This is why most respectable economists decline to give exact numbers. I was asked to do such an analysis for the White House in 2007, and found that drought and crop failure combined with rising energy costs (a major input in production) and increased meat consumption in places like China, account for a far larger share of the price increase. This may have changed in 2008 (though I doubt it), though either way, the argument seems strange to me.

I find it incredibly odd that the same economists (like those at even Oxfam) who have for years been decrying farm subsides for depressing food prices and therefore hurting developing world farmers are today decrying biofuel subsides for increasing food prices. It is hard to say whether the developing world would prefer lower or higher food prices, though one would think that since developing countries tend to have a comparative advantage (note I said comparative, not absolute advantage) in agriculture (seen by the fact that they devote most of their labor force to agriculture), then increasing food prices leads to a favorable shift in their terms of trade, which means it should be good for developing countries overall (yes it hurts the non-farmers in these countries, but it helps all of the farmers who tend to out-number the non-farmers, leading to a net gain).

Worries for a new administration

A friend of mine used Krehbiel's Pivotal Politics model to analyze the implications of a Democratic Congress and Presidency. He finds the scene is set for substantial policy change.

That was a good time to reflect on the perils of an Obama administration.

Higher trade barriers (which will mostly hurt the poor in developing countries and the poor Walmart customers in the US), more frivolous lawsuits (something the current administration has been fighting behind the scenes), more wasted bureaucracy, less school choice and school reform, slower growth (see QJE paper by a former classmate of mine), regulation that leads to less home ownership, higher minimum wage (which hurts the poor through more unemployment and increases the prices at places they shop most like walmart). Could be good as well, but I worry. could be quite bad for the people who need help the most.

Even a Stopped Clock is Nouriel Roubini

I’m a little bugged by all the attention and credit Nouriel Roubini has been getting for predicting the crash. I normally like contrarians, but I’m also generally an optimist, and pessimistic Bears bug me. I was always annoyed by the credit the Morgan Stanley economist, Stephen Roach, got for predicting the end of the dot-com boom in 2001.

The problem is that the fact of business cycles means that every expansion will end in recession. And people like Roach and Roubini started predicting the crash many years before the crash actually happened.

If I start predicting that there will be another crash, I will be right eventually. It doesn’t mean it’s useful.

There’s an expression, even a stopped clock is right twice a day. Just because a clock that happened to have stopped at 7:56 is accurate when it is 7:56 doesn’t mean it is useful.

I have the same problem with people who complain that there was someone at the FBI who predicted 9/11 before it happened. In an organization with 30,000 people, you probably have 30,000 predictions being made every single day. Anything that could possibly happen is probably predicted by one of them. It doesn’t mean there was anything useful about that prediction, any more than a stopped clock.

Neel Kashkari: the $700 billion man, and bailout czar

Interesting. This is the guy i used to wrestle with at the white house over the details of the white house energy policy of 2007. I think we were probably the only ones who really saw all the details. and we often clashed on them. He's a smart competent smooth talking guy, though there were times he played things a bit fast and loose.

The stock photo all the news articles are using is kinda funny.

nytimes article

usa today article

Capping CEO Pay - why Golden Parachutes save firms money.

There's been a lot of talk about capping CEO pay--which is included in the last bailout bill--and pretty much all of it has been ideological; no one has asked an economist what it all means.

So yes, from an "optics" view as they say in Washington, paying CEO's huge bonuses when they are forced to leave a failing company looks awful.

But from an economic point of view, the point of Golden Parachutes is to transfer risk from the risk averse potential CEO to the risk neutral firm. It is not something you give to reward a CEO for leaving, it is something to promise at the beginning to get him to join. What basic contract theory says is that by reducing the risk to the CEO for taking the job, you actually have to pay him/her less overall. Thus a ban on Golden Parachutes should lead to increased overall CEO compensation.

Of course a more likely and better outcome is that if a ban is in place, companies will come up with contracts to replicate golden parachutes, but don't look like golden parachutes. Perhaps a loan that is paid out of future wages. (Which I guess is already done and still looks bad, but less bad.)

NyTimes Op-ed: Drill Baby Drill

Not related to the financial crisis, but have been meaning to post this nytimes op-ed.

I made this point in a debate I did for the incoming freshman class at Cornell. Nice to see the same point find a larger audience.

Basically, silly that there's so much debate on off-shoring drilling. It is basically a no-brainer.

To be clear, it will not reduce gas prices in any significant way. Oil is a global market, and the US while big cannot move it by itself.

But it will add $1.7 trillion to the economy. Must of it to government coffers. (Easily paying for any costs of the proposed bail out.)

This holds even after taking into account costs due to greenhouse gas emissions.

Green advocates like Thomas Friedman who oppose offshore drilling like to point to Brazil and Denmark as paragons who are energy independent (a stupid goal btw). And while it is true that Brazil and Denmark do have programs for alternative fuels like ethanol, they both get most of their domestic fuel from offshore drilling, a fact green advocates conveniently like to ignore.

Obama and McCain have both reached the same policy conclusion on this (given it is a no-brainer).

My opponent in the debate asked, if it is such a no-brainer, why is there still so much opposition. My (perhaps too flip answer) was to quote Hillary Clinton and Barack Obama. When they were both asked why they supported policies that essentaily all economists thought were a bad idea (Clinton on ABC News re: tax holiday; Obama on NPR re: windfall taxes), they both replied that listening to economists is Elitist.

Nice to see reporters on the ball in these cases. Frustrates me to no end when economic consensus is ignored.

It's fine to ignore economists on subjects on which the profession is essentially clueless (like the sub-prime bailout) but on basics like optimal taxes, economists have a pretty good consensus idea of what's right.

Finance Schadenfreude

About the only time I ever feel like I need more money is when reading the New York Times Magazine architecture issue. Typically my wants are such that money is not a problem, but in that issue, every ad is for beautiful yet reasonable apartments, with sub-titles like "Studios starting at just $2 million!" At those times, I ponder what could have been had I stayed in finance, instead of dropping out for grad school. As I saw friends and friends of friends, rolling the hedge fund life style, with 7-figure incomes within reach, I often thought that could have been me. I have no regrets at my choices, but still it makes you stop to think.

The economist in me also always knew the salaries in finance couldn't last. At least that's what I used to tell myself. In efficient labor markets, all jobs that require the same level of skills/abilities and the same level of risk should pay roughly the same salaries (more or less). Sure, some factors like market imperfections and compensating differentials may justify some differences, but not the factor of ten difference seen between finance and other fields. That should not be sustainable.

And sure enough, it seems like that era is coming to an end. Risk and regulation are conspiring to realign salaries. And so while the financial realignment sucks, not just for those in finance but for all of us, who will face a slower growing economy as a result, it does make me feel better about my own career choices, in a perverse way.

Political Bias

I have been reading lots of polemical political articles, mostly anti-republican, because I get most of my news from liberal sources like NPR and NYTimes, I hear tons of outrage and condescension dripping from every word. And for each and every fault of the Republicans they list, I automatically can name two or more equivalent faults of the Democrats.

Half of republicans think Obama may be Muslim?
(First, not entirely crazy, by definition, his father is Muslim which makes him Muslim. And he did attend Muslim schools in Indoensia.)
But agreed, it is mostly crazy. But half of democrats hold the crazier idea that Bush may have helped plan 9/11.

Sexual impropriety and potential tit-for-tat at the Dept of Interior?
But wasn't that the same behavior happily overlooked in the Clinton White House. It also annoys me that most of the mistakes that led to billion dollar windfalls for Big Oil occurred in 1998 during the Clinton administration, a fact neglected in every nytimes article on the subject.

Poor grades by Palin and McCain?
But Kerry and and Gore had worse grades than even George W Bush, but nobody cared then. (Gore failed out of grad school twice, getting F's in a majority of his classes the first time)

Anyway, I can go on. But makes me wonder if anyone really can hold an unbiased view. The most important paper I've ever read was by Lord Ross and Lepper which found that people are really good at seeing the flaws in arguments that go against their preconceived beliefs, but tend to overlook the flaws in arguments that support their own. Hence the value of adversarial systems.

So, just as the flaws in the NYTimes are so clear to me, a bit further reflection makes me know that there are probably just as many flaws in my own thinking.

Which I suppose just implies a need for greater humility (and why I think people really aren't qualified to judge candidates). Greater dialog. Greater openness and greater respect.

Globalization and the Olympics

Kinda neat the intermingling of nationalities on display at the olympics. Also heartening to see the mixing on the US team. Shows that the US is still capable of attracting the best talent and hopefully in integrating it. For example:

• gymnastics, women. winner looks the all-american texas girl, but was born in moscow. 2nd place from iowa has a chinese coach
  
• men's gymnastic team, us captain looks Chinese. and the team also has the first south-asian athlete i've seen outside of cricket at an international event
  
• us volleyball head coach is a chinese woman
  
• in swimming, less so, from what I see. except that it seems that athletes from around the world (like Zimbabwe) all trained in the US. one black swimmer.
  
• the distance runner from kenya
  

Also, nice public diplomacy (the euphemism for propaganda) for the US. Despite the anti-immigrant sentiments that politicians bandy about.

The related amusingstat is that 70 of the competitors in ping pong are either Chinese or Chinese hua-qiao (of the Chinese diaspora)

Though probably the Brazilians play volleyball for Georgia is a bit much, if it is true that they've only spent 2 days in Georgia before hand.

Notes to a High School Senior

I did a career day recently for a high school summer program I did eons ago. I got the question afterward, about what major to pick for someone interested in "mainly math, physics/chemistry, and economics" and interested in graduate studies maybe in economics. I hadn't thought about picking majors in a long time. These were my thoughts, but if anyone else has thoughts...

At the end of the day, it doesn't matter too much what you major in, and you really don't need to know what you will major in, until sophomore or even junior year.

I do think that math is probably a good baseline though, as it gives you a lot of flexibility in the future. Esp if you want to do graduate studies in economics, a math degree with a few econ classes, is probably a good solid flexible preparation (you can take that in a lot of directions, including law school even or finance, which is a typical route people find themselves taking to make a lot of money). But major doesn't really matter.

To do grad studies in economics, you just need a few econ classes and a strong math background (either from a math minor, or a physics degree, or an engineering degree), and then your major can be whatever you discover you like. In high school, it is really hard to know. College is a good time to explore, and consider weird things like cultural studies, anthropology, political science, philosophy, sociology, history, education, etc. I think if you do wind up pursuing economics, or whatever, it's nice to have a solid foundation of different ideas for inspiration.

As for which programs, that's hard to say. I think what you'll learn will be pretty comparable anywhere you go. Heck, all the professors went to the same few grad schools. So I would pick that based on ranking (I do think ranking matters in that it affects the quality of your peers), geography, size of school, etc.

College visit might be important, but don't put too much weight on your gut feeling. There is some evidence out there that the weather the day of your college tour is a big determinant of how much you like it there. People like schools much more on sunny days than on rainy days. So things like weather could easily bias your decision.

Hope that helps.

More Energy Insanity: this time from Thomas Friedman

Friedman, never one to let facts get in the way of his argument, says in his latest column the US should follow the example of Denmark, who is energy independent, and has high taxes (sometimes a good idea but probably excessive here) and a lot of senseless regulation (no driving on Sundays, at least once upon a time). (He's also easily impressed by the two button toilets, which I've had in my bathroom for the past year or two).

He says we should follow their example, instead of pursuing dumb ideas like drilling for offshore oil.

Of course, what he neglects to mention is that Denmark produces about 5 times more oil per person than the US, nearly all of it from off shore drilling. If the US had the same amount of off shore oil drilling per capita, it could supply the oil needs for roughly half the world.

Similarly, in Brazil, held up by NPR as the model of using biofuels for energy independence, still produces 7 times more oil than ethanol, and has achieved energy independence largely because of new offshore oil discoveries. (The story also mistakingly fails to account for the energy content of ethanol.)