Originally posted on October 27, 2010.   Thanks to those who attended Wednesday’s webinar.  The Power Points from yesterday’s presentation are here.   Here are the Dynamic Power Points for Modern Principles: Macroeconomics that accompany Chapter 10Unemployment and Labor Force Participation.  Be sure to view in slideshow mode, particularly the animated unemployment graphs constructed on slides 22 and 23.   Also posted here is added coverage from our Cowen IM_CH10.   Finally, an additional brief data driven PowerPoint example is here (Chapter 10_Unemployment and Labor Force Participation Rates). ... View more

Originally posted on August 5, 2009.   Here is a clever new idea from Henderson, Storeygard, and Weil: GDP growth is often measured poorly for countries and rarely measured at all for cities. We propose a readily available proxy: satellite data on lights at night. Our statistical framework uses light growth to supplement existing income growth measures. The framework is applied to countries with the lowest quality income data, resulting in estimates of growth that differ substantially from established estimates. We then consider a longstanding debate: do increases in local agricultural productivity increase city incomes? For African cities, we find that exogenous agricultural productivity shocks (high rainfall years) have substantial effects on local urban economic activity. WSJ blogs added: They also noted how data from night lights can be focused to provide data on a local level. In Southern Madagascar large deposits of rubies and sapphires were discovered in late 1998 near the towns of Ilakaka and Sakaraha, leading to an economic boom. But the data from the satellites tell the story of where the benefits were felt most deeply. “Over the next five years there was a sharp growth in the number of pixels for which light is visible at all, and in the intensity of light per pixel,” the economists said. “The other town visible in the figure, Ihosy, shows no such growth. If anything, Ihosy’s light gets smaller and weaker, as it suffers in the competition across local cities for population.” ... View more

Originally posted on April 30, 2010.   Here are my PowerPoints about The Great Recession from a recent talk Alex and I gave at the University of Kentucky.  Alex’s PowerPoints on Seeing the Invisible Hand can be found here. ... View more

Originally posted on September 28, 2009.   Adam Smith, a loyal MR reader (yes that is his name), writes to me: I had a very MResque thought today I wanted to share with you.  Why are the typical lengths of albums across different music genres so different?  In particular, I was thinking most of my rap albums are at least over the hour mark and many run all the way up to the 80-minute maximum.  They're usually packed with intros, skits, and lots of 5 minute tracks that have extended intro and outro instrumental beat only sequences.  My metal albums, on the other hand, have an average run length of  no more than 40 mins.  Most albums are between 8 and 10 tracks with little in the way of tangential material.  These different run-times show up in other places too.  For example, my older jazz albums (i.e. Kind of Blue, Time Out, Blue Train) typically run around 45 mins with a half dozen or so tracks yet my newer jazz albums like MMW's The Dropper run almost the whole 80 mins.  Also, prog. rock bands tend to produce much longer albums than garage rock bands.  Even adjusting for the fact that prog bands emphasize longer musical passages, they could compensate by just having fewer songs or garage rock bands could just have twice as many (like the White Stripes did on their first album).   Is there a relative price argument for these differences?  Or even signaling?  Perhaps there is a rat race among rappers to signal they're capable of coming up with enough material to fill out the maximum length, even if it includes lots of filler.  Perhaps the recording costs are lower as instrumentation relies so heavily on sampling.  Maybe metal runs into diminishing returns after 30 mins or so where the listener becomes numb to the intensity.   I'll offer a few points:   1. The average career of a rapper is short.  A long CD increases the chance that something will "stick" and the rapper won't get too many other chances to try.   2. Some metal bands develop great loyalty among their followers and achieve durable franchises.  That gives them a lower discount rate and they are more inclined to save up material for the future.  Plus they are marketing an overall sound -- rather than clever particular innovations -- and if the first forty (five?) minutes don't convince you nothing will.  Rap songs probably have a higher individual variance.   3. Many older albums are short for technological reasons, plus the albums were due in relatively rapid succession for contractual reasons.  In the 1960s there was lots of technological advance in music, so if you sat on the sidelines for a few years you could become obsolete.   4. It is relatively easy for a contemporary jazz artist to tack on additional improvisations and he can choose standard compositions if necessary.  Other forms of popular music cannot expand quantity so easily without hitting a wall in terms of quality.  One prediction here is that "compositional jazz" albums should be shorter in average length than albums of jazz improvisation, contemporary that is.   5. If you wanted a somewhat strained explanation, you could argue that the longer CD is a more bundled product andit will make economic sense as a form of price discrimination, the more varied the valuations of the audience.  This would require that rap CD buyers have a higher variance of marginal valuation. ... View more

Originally posted on October 12, 2009.   That's his greatest contribution (see Alex on this same point, and Jeff Ely).  Let's say you privatize a water system in Africa and write a 30-year contract with a private French company to run the thing.  As the contract nears its end, and if renewal is not obvious, the company has an incentive to "asset strip," or at the very least not maintain the value of the pipes.  Alternatively, the government might signal, in advance, that it has every intention of renewing the contract.  The company then has the incentive to lower quality to consumers, since it expects renewal a and faces weaker competitive constraints.   In other words, franchise bidding, or "ex ante" competition for the market doesn't always resolve monopoly issues  The key problem is the existence of a fixed investment in the pipes and that the value of the pipes depends on investments from both the government and the company.  It can be hard to write a contract for a good solution, since any allocation of the residual rights creates some distortion or another.  This has in fact been a very real problem with privatization around the world in many settings.  Oliver Williamson outlined these arguments in his debate with Harold Demsetz over privatizing cable TV.  Much of the literature on "mechanism design," such as David Baron's pieces, picks up on this problem and extends Williamson's work.   Williamson is a truly important economist.  If you read him, especially in his later work, he also has lots of taxonomy and verbiage.  The key is to cut through to the substance, which is plentiful.   Here is John Nye on the Prize. ... View more

Originally posted on August 15, 2009.   Perhaps Turkmenistan takes the prize: In 2003, "President for Life" Saparmurat Niyazov decided that poor, landlocked Turkmenistan's medical costs were too high and that its healthcare system urgently needed reform. The country had already suffered from a shortage of doctors, and the only qualified ones were in cities, Niyazov said on a public radio address.   So, in a frankly insane healthcare reform effort, he restricted the public's access to care by replacing up to 15,000 doctors and nurses with unqualified military conscripts. The next year, he ordered hospitals and clinics outside of the capital, Ashgabat, to close -- even though the vast proportion of Turkmenistan's population lives in rural areas. The BBC quoted him as saying, "Why do we need such hospitals? If people are ill, they can come to Ashgabat." He also implemented fees and created an "unofficial" ban on the diagnosis of certain communicable diseases, like hepatitis.   As a result, an epidemic of the bubonic plague reportedly broke out (Turkmenistan's highly secretive government does not allow in organizations like the WHO) and existing rashes of AIDS, hepatitis, and tuberculosis worsened. At the time of Niyazov's death from a cardiac infarction in 2006, Turkmenistan had one of the lowest life expectancies in Asia -- less than 60 years. The full story is here and it lists some other very bad health care reforms. ... View more

Originally posted on August 8, 2009.   A number of progressive bloggers have been making the point that most Americans approve of the postal service, or that they personally have had good experiences there.  They then seem to be concluding that the quasi-monopoly arrangement in that sector is likely efficient and the example of the post office should not be cited as evidence for government failure. I do not find these arguments persuasive. The following argument might work: "With competition in postal delivery, the natural market structure is duopoly (think UPS and FedEx), so price wouldn't fall much, coordination problems across dual networks would occur, and some rural users would be worse off.  So the current quasi-monopoly works about as well as we can hope for." That is the argument which best defends the current structure of the post office as a privileged quasi-monopoly. The real costs of the quasi-monopoly are the innovations and cost reductions we might have had but didn't, whether those are large or small (or negative possibly).  I doubt that the public is estimating that path when expressing their approval of the post office. For obvious reasons, an inefficient quasi-monopolist might run high costs and overinvest in public relations.  Some of the world's worst post offices have pretty stamps and the guy behind the counter really does smile like grandpa. From the comments: "After you consider the miracle of 40-50 cent Kiwi, does $.44 for first class mail sound like a bargain?"  The Kiwi fruit, of course, probably comes from Italy or New Zealand and it has to be grown and protected from bruising and shipped a long way.  It's a tricky comparison, however, read the comments here. ... View more

Originally posted on October 21, 2010.   Joel, a loyal MR reader, asks me: I am an undergraduate economics student curious about which of the classical economists and books you find most valuable. Classical not just meaning Ricardian but in terms of significant non purely quantitative works that influenced economics as a whole. If one were to put together a reading list of twenty or so of the most influential or important books, what would you recommend? The Wealth of Nations and General Theory of Employment, Interest, and Money seem logical starting points, beyond them though it’s hard to wade through the range of choices (Ricardo or Hayek? Schumpeter or Jean Baptiste Say?) For now I’ll stick with classical economics in the narrow sense, as it ends in 1871.  If you can read only a few works, I recommend these: 1. Adam Smith, Wealth of Nations.  Duh.   2. David Hume, Economic essays.  He lacks some of Smith’s profundity as an economist, but he is more precise analytically and as always a beautiful writer.   3. David Ricardo, Principles of Political Economy, the first six chapters.  Rigor arrives, though at the expense of truth.  Still there is something to it.  Supplement with Mark Blaug on Ricardo, if you want the model spelt out mathematically.   4. The early marginalists: I’ll recommend Samuel Bailey on value and Mountifort Longfield on price theory.  Yet still it was a (temporary) dead end and you should read them with that puzzle in mind.  At what level of technical sophistication do the contributions of marginalism suddenly seem impressive?   5. Thomas Robert Malthus, on population (don’t ask which edition) and Principles of Political Economy.  He understood supply and demand, elasticity, a version of the Keynesian model, and environmental economics, and yet he is mainly criticized for being wrong about population.  He is one of the strongest and most profound and most underrated economists of all time.  Also read Keynes’s biographical essay on him.   6. Edinburgh Review.  The econ blogosphere of its day.  Read the economic essays published in that outlet, by Malthus and many others, especially on monetary theory.  I don’t know any easy way to track this stuff down, but if you do please tell us in the comments.   7. John Stuart Mill: Autobiography (yes, for economics) and his Some Essays on Unsettled Questions in Political Economy (Kindle edition is free).  Mill has underrated depth as an economic thinker and he encompassed virtually all of the interesting trends of his time.  That was both his greatest strength and his biggest weakness.   8. Marx: The 1844 manuscripts.  More generally, read the Romantics as critics of classical political economy.  Coleridge and Carlyle are good places to start. What about the French?:  I find Say boring, Bastiat fun, Cournot incredible but there is no reason to read the original.  Try someone weird like Comte or LePlay to get a sense of what economic discourse actually was like back then. ... View more

Originally posted on October 14, 2009.   Here are some recent results: In the first study of its kind, Chhatre and Arun Agrawal of the University of Michigan in Ann Arbor compared forest ownership with data on carbon sequestration, which is estimated from the size and number of trees in a forest. Hectare-for-hectare, they found that tropical forest under local management stored more carbon than government-owned forests. There are exceptions, says Chhatre, "but our findings show that we can increase carbon sequestration simply by transferring ownership of forests from governments to communities". One reason may be that locals protect forests best if they own them, because they have a long-term interest in ensuring the forests' survival. While governments, whatever their intentions, usually license destructive logging, or preside over a free-for-all in which everyone grabs what they can because nobody believes the forest will last (Proceedings of the National Academy of Sciences, DOI: 10.1073/pnas.0905308106). The authors suggest that locals would also make a better job of managing common pastures, coastal fisheries and water supplies. They argue that their findings contradict a long-standing environmental idea, called the "tragedy of the commons", which says that natural resources left to communal control get trashed. In fact, says Agrawal, "communities are perfectly capable of managing their resources sustainably". If you turn to the first page of the paper itself, the header reads: Edited by Elinor Ostrom, Indiana University, Bloomington, IN, and approved September 4, 2009 (received for review July 22, 2009) Of course this sort of result is inspired by her work as well.  For the pointer I thank Andrew Grant. ... View more

Originally posted on September 20, 2009.   The ever-excellent Mark Steckbeck offers up a quotation from Yahoo: The 78 percent number (i.e., 78% of NFL players go bankrupt within two years of retirement) is buoyed by the fact that the average NFL career lasts just three years. So, figure a player gets drafted in 2009, signs for the minimum and lasts three years in the league: He will have earned about $1.2 million in salary. Factor in taxes, cost of living and the misguided belief that there will be more years and bigger paydays down the road, and it becomes a lot easier to see how so many players struggle with money after their careers end. ... View more

Originally posted on August 14, 2009.   Bruce Bartlett sends me a link to this interesting paper: How large are the economies of scale of living together? And how do partners share their resources? The first question is usually answered by equivalence scales. Traditional estimation and application of equivalence scales assumes equal sharing of income within the household. This paper uses data on financial satisfaction to simultaneously estimate the sharing rule and the economy of scale parameter in a collective household model. The estimates indicate substantial scale economies of living together, especially for couples who have lived together for some time. On average, wives receive almost 50% of household resources, but there is heterogeneity with respect to the wives’ contribution to household income and the duration of the relationship. The data are from Switzerland, in case you are wondering, not the United States. ... View more

Originally posted on October 13, 2009. Our estimates imply that every death of a helmetless motorcyclist prevents or delays as many as 0.33 deaths among individuals on organ transplant waiting lists.   Here is the paper and I thank Brent Wheeler for the pointer.  So should we mandate or tax the use of such helmets? ... View more

Originally posted on December 3, 2009.   According to the Census Bureau, New Yorkers are now more bothered by false car anti-theft alarms than by any other feature of city life, including crime or bad public schools. If you ask me, it is the whooping ones that are worst of all, it is hard to stay overnight in Manhattan without hearing one. It also appears that the alarms do not hinder theft. First, most are false alarms and everyone now ignores them. Second, thieves have learned how to disable the alarms quickly.   False alarms also can make a community more dangerous, by signaling to everyone either that a) theft is common, or b) no one cares, or both. It becomes common knowledge that the community has poorly defined property rights. Here is the full story on this aspect of the problem.   Alternative technologies (see also this paper on positive externalities created by Lojack by Steve Levitt and Ian Ayres) do a much better job of stopping car theft. You can buy a silent pager that communicates the theft only to the car owner. This one works only for tough guys, though, if I knew that my (insured) car was being stolen, I would run the other way. Better is the “silent engine immobilizer,” which simply shuts down the engine when a thief is tampering with the ignition. General Motors and Ford are now using this technology. ... View more

Originally posted on August 21, 2009.   Brian Skinner writes:   Optimizing the performance of a basketball offense may be viewed as a network problem, wherein each play represents a "pathway" through which the ball and players may move from origin (the in-bounds pass) to goal (the basket). Effective field goal percentages from the resulting shot attempts can be used to characterize the efficiency of each pathway. Inspired by recent discussions of the "price of anarchy" in traffic networks, this paper makes a formal analogy between a basketball offense and a simplified traffic network. The analysis suggests that there may be a significant difference between taking the highest-percentage shot each time down the court and playing the most efficient possible game.   Here is some additional explanation.  I thank Michelle Dawson for the pointer. ... View more

Originally posted on March 24, 2012.   Nick Rowe has a good method for introducing the concept of PPP: 1. I ask the class for a student volunteer. The student has to come from a country I know next to nothing about, and that has its own currency. 2. I ask the student for the name of the currency used in his home country, and he answers (say) “shillings”. 3. I then try to guess the exchange rate between the shilling and the Canadian dollar. I don’t have a clue. Nor does anyone in the class, except the volunteer. (Any student who is from the same country, or has visited it recently etc., is not allowed to guess). 4. I then ask the volunteer to tell me the price of a dozen eggs (or a cup of coffee, or whatever) in his home country. He tells me. 5. I remind the students that a dozen eggs costs about $2.50 in Canada. We then all have a second attempt to guess the exchange rate. For example, if the student says that a dozen eggs costs 10 shillings back home, I guess that the exchange rate is 4 shillings to one dollar. 6. The student then tells us the exchange rate, and we see how close our second guess is. It usually works quite well. Because: 1. About half the students figure out PPP by themselves, and can explain it to the other half. 2. They learn that a theory can be false, but still useful. Our second guess using PPP is never exactly right, but it’s a lot better than our wild first guesses. 3. They learn the difference between a conditional forecast (the second guess) and an unconditional forecast (the first guess). 4. If our guess based on PPP is wrong (which it always will be, to some extent) I ask the student (rhetorically) why he doesn’t buy eggs where they are cheap, load up his suitcase with eggs, and sell them where they are dear, whenever he flies between Canada and home. That teaches students both the equilibrating mechanism behind PPP, and the limitations of PPP in a world with transportation costs and other restrictions on trade. (Last time I tried it, my second guess failed badly. But a couple of other students Googled the price of eggs in the home country, and said it was very close to PPP, and much lower than what the student said. Maybe he rarely bought eggs himself. Maybe I should try another good that students frequently buy. I could use the Big Mac Index, but I don’t think that works as well pedagogically. After all, McDonalds is one company, and maybe they just choose to price that way.) ... View more