Monday, December 24, 2012

The Real Meaning of Christmas

Linus says it well.

Christmas Spirit?

Imagine Macy's Santa Claus sending customers to Gimbels. But gentlemen, you cannot argue with success. Look at this: telegrams, messages, telephone calls -- the governor's wife, the mayor's wife. Over 500 thankful parents expressing undying gratitude to Macy's. Never in my entire career have I seen such a tremendous and immediate response to a merchandising policy,... and I'm positive, Frank, that if we expand our policy we'll expand our results as well. Therefore, from now on, not only will our Santa Claus continue in this manner, but I want every salesperson in this store to do precisely the same thing. If we haven't got exactly what the customer wants, we'll send him where he can get it. No high-pressuring and forcing a customer to take something he doesn't really want.
We'll be known as 'The Helpful Store.' 'The Friendly Store.' 'The Store With a Heart.' The store that places public service ahead of profits. And consequently we'll make more profits than ever before.
          -- Mr. Macy (Harry Antrim), Miracle on 34th Street.
Last week I saw Miracle on 34th Street all the way through for the first time. The movie is great feel good movie about generosity and faith. There are lots of good moments, but the above quote from Mr. Macy is an especially good one.

It brings up some interesting questions: Are firms being generous or profit maximizing when they provide a service you need, donate to charity, or promote Christmas spirit? Does it matter? Does it matter that Mr. Macy was partially or even primarily motivated by profits when promoting a new policy that benefited customers?

Well, if by "does it matter?" we mean: "is it more efficient?", then we can provide an answer. If Macy's is in a competitive market, then the answer is "it does not matter." Competitive markets efficiently allocate goods and services. The motive of each individual actor does not matter. In fact, in the movie, the fact that Macy's provided the service prompted Gimbels to also provide the service. Both business were in stiff competition with each other in order to attract customers. And how do you attract customers? You give them what they want.

One of the great things about a competitive market economy is that it is robust to greed. People get what they need and want even if the provider is personally a Scrooge. Providers don't have to be completely altruistic, or go out of their way to know what it is you want, or how much you value more of each good. In addition, consumers do not have to be relied upon to truthfully say how much they really need a little bit more, either. Prices sum up all this information about what people really need and want and what has to be given up for more to be provided in one little number. That is the magic of prices.

Wednesday, December 12, 2012

Microeconomics Exam

It's exam week at the University of Chicago. In that spirit, here are some economics "exam" questions. Answers below the break with interesting links.

1. True or False: The economic effects of a terrorist attack, a hurricane, or a destructive space alien attack make people better off on net because the extra work required to rebuild creates jobs.
2. Why is corn syrup used to sweeten Coke and not cane sugar? (Hint: cane sugar was used prior to 1984 and is still used to sweeten Coke in other countries.)

3. Why does Doctor Barbie cost twice as much as Chef Barbie?

4. True or False: Welfare programs that means-test for illiteracy can lead to less literacy.

5. True or False: Letting the 2001, 2003, and 2009 income tax cuts expire on schedule for everyone, letting the gift and estate tax provisions expire on schedule, and not indexing the alternative minimum tax (AMT) to inflation will lead to a balanced budget for the Federal government in the year 2020.

Tuesday, November 27, 2012

Assorted Thoughts & Links

1) This week I am covering moral hazard in my intermediate microeconomics class. Here's an article on the moral hazard of federal flood insurance and rebuilding after Sandy via the WSJ.

2) Speaking of hurricane economics, how do goods like gas get rationed in shortages when prices are prevented from rising (e.g. "price gauging" laws prevent fast increases in prices in some states like New Jersey)? Usually by waiting in line. But that is very costly as Tony makes clear

3) Microeconomic theorists (good ones!) at tech firms have a big impact. 
The desire to use theory to challenge conventional thinking is one reason economists are valuable to firms, says Susan Athey, of Stanford University and Microsoft.
They get better access to data to test theory, too!

4) For stimulus spending to work it needs to be temporary (otherwise it's not really stimulus!). John Taylor produces a graph that is further evidence the stimulus spending has become permanent. Note the "pro-growth" proposed path is what should have been the default path if the stimulus bill was a true temporary stimulus. The fact that stimulus spending has become permanent and increased government spending without Congress (really, the Senate) passing a budget in 3 years is a scandal. The fact that this never became a big story in the news is sad. 

5) Elect-a-Dictator game: There is one fair election, then the winner becomes dictator for life! This is worse for the decisive voter's welfare than regular elections with quality challengers because there is no electoral pressure on the dictator to behave or any ability for the people to throw out a particularly bad leader. Is Egypt playing the elect-a-dictator game?

Tuesday, November 20, 2012

No More Twinkies?

Hostess has declared its intent to go into Chapter 7 bankruptcy (liquidation of the company). Assuming the last minute negotiations between the company and the baker's union mediated by a federal judge fall through and the company is liquidated, does this mean that all 18,000+ jobs and 30 iconic American brands (including Twinkies!) will all just disappear?  Should the company be bailed out by the government in order to save the jobs of the bakers?

Thursday, November 8, 2012

Why Vote (in Local Elections)?

Because if you don't vote, and you find out your vote would have been pivotal, you feel bad. Really, really, really bad. (HT: Cheap Talk)

"I told her I didn't think one vote would matter." Well, he can still win the coin toss....

Saturday, November 3, 2012

Why Vote?

"Don’t boo – vote....Voting is the best revenge." -- Barack Obama

"I ask the American people to vote for love of country." -- Mitt Romney

A political back and forth from the campaign trail this weekend. I noticed neither one said, "Vote because your vote could be pivotal, break a tie, and decide the election!" If the election is close, well, I bet the campaigns would rather rely on a good lawyer than the actual median voter* siding with him.

* in Ohio

Tuesday, October 16, 2012

More on Market Design and the Nobel Prize

This morning the WSJ ran an editorial by David Henderson on the Nobel Prize. What is most interesting about this editorial is that after a very nice description of matching and market design, Henderson levels this charge:
There is a more fundamental solution to the kidney shortage. Don't "design" a market; simply allow one. A ban on selling kidneys is essentially a price control of zero and, like other price controls, causes a shortage. There are thousands of "demanders." There are also thousands of potential suppliers who, at a price of zero, are not willing to give up a spare kidney. A straightforward solution is to allow the sale of organs.
Now that the Nobel Peace Prize has been given to such an amorphous entity as the European Union, perhaps next year the Nobel in economics should go to the free market, which would do more than all the market designers to get kidneys to desperate people.
This kind of claim ("why not allow prices and transfers?") comes up all the time when research in market design and matching is discussed. It is a strong criticism because the price system and perfectly competitive markets allocate goods efficiently and are the gold standard against which other allocation methods must be measured. Roth has a couple of answers to this:

1) Some transactions are "repugnant" and a price-clearing market simply won't ever be allowed, but we should try to do the best we can anyway (e.g. Roth 2007 "Repugnance as a Constraint on Markets").

2) Market design is an "engineering approach" to solving economic problems; that is, it's "practical." When Roth is called in to "fix" a market, the solution needs to be arrived at quickly, and context of the market and politics surrounding the market matter (e.g. Roth 2002 "The Economist as Engineer"). Introducing prices, transfers, and perfectly competitive markets where they've never existed before might be too much to ask.

This Nobel Prize legitimizes the market design approach and is probably meant to quell some of these market-oriented criticisms. The prize will help give Roth more legitimacy and make it easier for him (and others) to take the market design approach to other problems. Economics is all about the allocation of scarce resources to satisfy competing ends. While economists usually turn to markets to do the job because of their efficiency properties, economics is not just the study of perfectly competitive markets. Economists can say something about allocating goods and improving efficiency outside of perfectly competitive markets, as well. And the Nobel Prize going to market design is a good reminder of that fact.

UPDATE: Tony writes about what Coase might think about market design and the Nobel Prize. Definitely worth a read. 

Monday, October 15, 2012

A Prize for Matching

Alvin Roth and Lloyd Shapley won the Nobel Prize today  "for the theory of stable allocations and the practice of market design." This is basically a prize validating non-transferable utility matching.

Roth and Shapley have written many articles establishing many new ideas in the field. Here is one seven-page paper that practically began the field of matching by Gale and Shapley: "College Admissions and the Stability of Marriage." Gale is no longer alive, so he was not eligible for the big prize today. What's amazing about this paper is how readable it is (especially considering the paper was published in a math journal!). The paper not only touches on interesting economics applications like the marriage market and the college admissions process (and explaining stability), but at the end the authors give a few thoughts on mathematics and teaching math. In the conclusion they ask, "What then... is mathematics?" and argue that their article is a great example of mathematical thinking that isn't "numerical or geometrical....The argument is not carried out in mathematical symbols, but ordinary English." Of course, history has shown that the paper is not just mathematics -- it's economics!

Here is Marginal Revolution's write-up on matching and market design.

Tuesday, September 25, 2012

Employer Provided Health Insurance?

Why doesn't State Farm's logo look like this?

You should be able to go to your local State Farm agent (or to whoever provides you with your individual insurance) and say, "I would like some health insurance along with my fire, auto, and life insurance, please." But you can't, really. Why not? 

Thursday, September 20, 2012

The Short Run

I think good monetary policy can go a long way to smoothing out the business cycle, and even easing financial crises in the short run. At the beginning of the 2008-09 financial crisis, I believe the Fed could have done more monetary stimulus than it chose to do. I believe the restraint on that front was due to political constraints. Instead, the government choose to engage in stimulus spending/borrowing. The Bush and Obama administrations both had similar perspectives on this, although the Obama administration was slightly more aggressive on certain fronts (e.g. auto bailouts). On the eve of QE3, though, here is a nice reminder that the short run is short. Really. (HT: MR)

Monday, September 10, 2012

Bad Incentives in Financial Aid

I blogged a bit last week about why artificially lowering the interest rate on financial aid for college or increasing grants to potential students may not help all students, but instead lead to rising tuition, higher taxes, or inefficient amounts of schooling.

Today the WSJ reports on bad incentives in the process for applying to financial aid (through both colleges and the government). Of course, the article isn't pitched as a call for changing the bad incentives, but as a guide for parents and students on how to maximize their aid.

Most of the bad incentives come from the following facts about aid:
1) A rule of thumb: a 10,000 dollar reduction in income leads to an increase of about 3000 dollars in aid.
2) The only year of income looked at is the year before the student enrolls in college.

Friday, September 7, 2012

Thoughts on the Big Speeches, DNC Night 3

Two overarching themes that deserve more thought:

1)  "Investment" is a code word for general spending or wealth transfers in far too many places in the speeches. Most of the "hard decisions" cited in the speeches involves some kind of "investment" for a particular interest group. Giving away "free" money is NEVER a hard decision. Nor is saying taxing the rich will pay for it -- even when it won't.

2) Equal Opportunity DOES NOT IMPLY Equal Outcomes. Unequal Outcomes DO NOT IMPLY there was Unequal Opportunity. Even people with the same background can make different choices. This issue was brought up a little bit in "Toward a Moral Economy" which I blogged about here. Can you look at the final score and if one team wins by too much, declare the rules unfair? I think the answer is no.

Thursday, September 6, 2012

Voice Vote and Bill Clinton

Some thoughts on DNC, Day 2:

1) Lately I have been thinking a little bit about what effect leaders have on altering the outcomes of the democratic process. In particular, how elected leaders may hamper the ability of voters to express control through voting (e.g. ballot box stuffing, corruption).

Yesterday at the DNC, the Obama administration instructed the platform committee to bring up an amendment to insert language mentioning God and stating Jerusalem is the capital of Israel back into the official platform after Democrats were getting flak for having removed those lines from 4 years ago. They needed 2/3 "ayes" to pass the amendment. Here is the video. I think the Chairman counted his vote as at least 1/6 of the total votes cast. The woman next to him clearly didn't think it passed (note she says the Chairman has to let the delegates do what they are going to do after the second attempt). 

Presidential Decision Making and Subsidizing Higher Education

This is a continuation of the previous post.

The second thing that stood out to me last night about the DNC speeches other than comments about Obamacare, was this explanation from the First Lady on how the President makes decisions:
And as President, you can get all kinds of advice from all kinds of people.
But at the end of the day, when it comes time to make that decision, as President, all you have to guide you are your values, and your vision, and the life experiences that make you who you are.
And later, an example:
And believe it or not, when we were first married, our combined monthly student loan bills were actually higher than our mortgage.
We were so young, so in love, and so in debt.
That's why Barack has fought so hard to increase student aid and keep interest rates down, because he wants every young person to fulfill their promise and be able to attend college without a mountain of debt.
So in the end, for Barack, these issues aren't political – they're personal.
His decisions are based on personal experience rather than evidence and logic -- and that's the problem. Economic decisions based exclusively on personal experience are almost surely going to lead to bad policies. As individuals, we have a really bad "feel" for how the economy as a whole really works, and as just one cog in a larger machine too often fail to appreciate how policies that look great if applied just to one of us look silly and can lead to disastrous outcomes if applied to everyone.

Wednesday, September 5, 2012

Obamacare at the DNC

Last night was the first night of the Democratic National Convention. I watched about an hour and a half of it. Two main points stuck out to me: a claim about the effects of Obamacare, and an explanation by Michelle Obama about how her husband makes decisions. I'll address the first here, and the second in the next post.

First, in Kathleen Sebelius's speech, she repeats a line that has been the cornerstone to the argument in favor of Obamacare:
[I]f you already have insurance you like, you can keep it.
This is a big Democratic talking point. (Actually, the whole speech is nothing but a list of talking points strung together, but that's another post.) The President has said it before, as well:
Let me be clear: If you like your doctor or healthcare provider, you can keep them. If you like your health care plan, you can keep that too. (President Obama, July 15, 2009)
This is the prime example of wishing the law did something it does not -- or if you believe the intent is more sinister, deliberately misleading the public. The claim is clearly not true because not all plans will legally qualify and there will be/have been behavioral responses to the law both by people and firms forcing people to change their coverage. For instance, see herehere, and here.

If it were true, and people could voluntarily keep everything about their health care and insurance the way it is now, the law would have had a good shot at being welfare improving by revealed preference. In consumer theory, if a person's choice set changes, and he can still choose the bundle he had before, then he must be better off because if he changes his consumption bundle, it's because he likes the new option better. Sadly, this is not the case for Obamacare, no matter how much Sebelius and the President wish it to be.

Thursday, August 30, 2012

Bad Incentives in Academia

It's really tough to incentivize the correct amount of "general research." This is research that advances technology or humanity in important ways but cannot be easily monetized because once it is known, "anyone" can apply it. Thus, there little incentive to do it since people can free-ride on others' hard work. Patents don't usually help because there is usually no product to protect. Prizes don't usually help because it's really hard to know the value of research and thus, what is the optimal prize amount. Since prizes and patents don't usually help, most general research is done in universities or governments using government funding or university money (and you thought Universities paid Professors to teach!). Sometimes it's even hard to determine after the fact whether research is important or valuable.

Because of this, academia has settled on using citations as a proxy for importance. The more papers written and citations received, the more important one's research is perceived to be. The idea is that you are doing a lot of work if you publish a lot of papers (or more papers in better journals), and that if lots of people have cited particular papers, those papers must have been important.

Tuesday, August 14, 2012

I've Been Out-Blogged

I was going to write up some more blog posts about the health care decision and the impact of the Affordable Care Act/Obamacare, but over the last month or so, John Cochrane has been writing some fantastic posts that pretty much sums up how I feel, too. So I didn't feel a need to duplicate the work he's already done. Instead, you should read the linked posts! Here is what Cochrane said:

1. On June 28th: "I think the court did the right thing....the mandate was never the weakest part of this law as a matter of economics....We should not rely on the court to determine economic policy or write laws."

2.  On June 30th: "There is in fact a huge difference between a tax on people without health insurance and a mandate enforced with a penalty."

3. On July 12th: On health care versus health insurance, competition and the price system, and alternatives to the ACA. In particular:
Health care is a complex service, in which each person’s needs are blurry, and the line between “need” and “want” blurrier still....If we don’t ration by price, we will ration directly....Where are the health-care equivalents of Southwest Airlines, Wal-Mart, and Apple -- innovating, dramatically lowering costs and bringing everyday low prices to health care? They have been kept out of the market by anti-competitive regulation....Insurance should be insurance, reserved for unpredictable and catastrophic expenses.

Cochrane's written up a bunch of quality posts lately, including Myths and Facts About the Gold StandardJust How Bad is the Economy?, and Subsidies for Economists?

In fact, you should just add Cochrane's Blog to your feed.

Friday, June 29, 2012

The Health Care Decision

I think one can learn a lot by reading the decisions of Supreme Court cases. The Supreme Court is the most meritocratic branch of government, so reading the opinions of the Justices is like reading the best papers in the field of law on a particular, policy-relevant topic. The Affordable Care Act (ACA) case is certainly one of the most important in at least a decade, and the Court doesn't disappoint, issuing three opinions that outline three separate approaches to the Supreme Court and the role of the Court. The pdfs can be found here. If you read anything at all, be sure to read Chief Justice Roberts's explanation of his judicial philosophy, pages 7-12 in the pdf. It's the opinion of the Court that won, and among the three decisions, the most detailed judicial philosophy. (For the rest of the post, page numbers will refer to the pages of the opinions, not the page in the pdf).

The opinions can be divided into three separate categories, and I will outline those categories and what I feel the differences in judicial philosophy are. In future posts, I will talk more about differences in decisions and the specific economic implications of the ACA itself. This is an important point: just because a law is Constitutional or legal does not make it good policy. Roberts makes this point numerous times throughout his opinion. For instance:
We do not consider whether the Act embodies sound policies. That judgment is entrusted to the Nation’s elected leaders. We ask only whether Congress has the power under the Constitution to enact the challenged provisions (Roberts, p. 2).
Members of this Court are vested with the authority to interpret the law; we possess neither the expertise nor the prerogative to make policy judgments. Those decisions are entrusted to our Nation’s elected leaders, who can be thrown out of office if the people disagree with them. It is not our job to protect the people from the consequences of their political choices (Ibid. 6).
A word of warning: My opinions are based on one reading of the opinions, and I may have missed some of the legal details in my reading (they are 200 pages long!) and the "score-keeping."

Wednesday, June 20, 2012

When a Vote Ends in a Tie

Some economists have trouble answering the question "why do people vote?". The problem comes from the fact that the chance that one person's vote is pivotal to an election is so small that if there is any cost at all to voting, most people shouldn't bother going out to vote, but if voting is costless, everyone should vote. Of course, the easy way out is to assume people just get utility from the act of voting. I particularly like the idea of the "swing voter's curse" (e.g. Feddersen and Pesendorfer). The idea is that if some part of the population is "partisan" and votes no matter what, uninformed independents should cast ballots in order to just cancel out the partisan vote and the rest should abstain in order to give the informed independents a better chance of deciding the election. This type of model predicts strategic abstention, decent sized voter turnout (but still not really large enough unless you assume a whole lot of partisans), and can yield more voting in national contests and more abstention in local down-ballot contests even when voting is costless.

However, sometimes it's nice to remember that just because a single voter is almost never pivotal does not mean there are never elections decided by one vote. This morning the Wall Street Journal published a front page article titled "Elections are a Crap Shoot in Texas, Where a Roll of the Dice Can Win." It is all about recent elections in Texas that ended in ties. Sure, the elections were local, and voter turnout was very low, but it's still neat to see these examples. It would be interesting to see statistics on how many elections end in an official tie and have to go to some tie-breaking rule. If the Journal found several examples in Texas this year, there are bound to be more.

According to the article, it seems that in Texas both candidates need to agree to a game of chance or a run-off/second election needs to be held. My first thought when reading the article was "If you really think you're the better candidate, why risk losing on a flip of the coin? Why not just demand a second election?" But then, of course, you just had an election and tied. In addition, run-off elections are costly (even for a very small town a cost of 10,000 dollars is cited, not to mention the extra campaigning time which is costly to the candidates, as well) and I can see an equilibrium where voters punish candidates who request run-offs by voting for a different/the other candidate if the marginal benefit of picking the "right" candidate does not exceed the cost. Thus, candidates actually could have a weakly better chance of winning by agreeing to put their future job in the hands of chance; thus, we should see both candidates readily agree to roll the dice.

Sunday, June 10, 2012

Law and Economics, Chicago-style

Q: How many Chicago School economists does it take to change a light bulb?
A: None. If the light bulb needed changing, the market would have done it by now.

... Ronald Coase—still writing in the field at the age of 101. “Coase is a god in China,” says Omri Ben-Shahar.

Chicago Law isn’t all about law and economics. President Barack Obama, after all, taught there from 1992 to 2004.
More zingers in "Will Success Spoil the Chicago School?" I think I am going to have to keep that light bulb joke in my back pocket.

Friday, June 1, 2012

"Toward a Moral Economy"

On Thursday, the Lumen Christi Institute hosted a public symposium, "Toward a Moral Economy: Policies and Values for the 21st Century." The keynote speech was given by the Archbishop of Munich, Reinhard Cardinal Marx, and responses were given by Professors Roger Myerson and Kevin Murphy (both UChicago) and Russell Hittinger (University of Tulsa).


The Archbishop's keynote framed the debate around his interpretation of current Catholic social doctrine which calls for a "global social market economy" regulated by a "global subsidiary government" based on "values and the common good." (For definitions, see below.)

In their responses, both Professors Myerson and Murphy emphasized the importance of managing "the rules of the game" versus managing "the outcome of the game." Myerson focused on how rules influence welfare and the importance of political structures and reputation in working toward a moral economy. Murphy focused on growth as the most important goal of policy. In addition, he emphasized that managing/regulating the fundamental rules of competition rather than economic outcomes of it actually better achieve the moral ends for which the Archbishop advocated. Inputs versus outputs approach.

Hittinger focused on whether a subsidiary world government is even a possibility.

Tuesday, May 22, 2012

Financial Food for Thought

Here is some financial food for thought based on terms I've never heard before this week:

1) Syriza: Coalition of the Radical Left. A coalition of leftist political parties in Greece. They quadrupled their number of Parliamentary seats in the last election in May at the expense of the two central parties which had negotiated the Greek bailouts (which in a nutshell requires Greece to reign in out of control spending in exchange for money from the rest of the euro zone; i.e. Germany). But, because Syriza refuses to form a governing coalition with other parties, new elections are being held in June.

Their platform? Hold Europe hostage. That is, cancel planned reductions in spending while still demanding the bailout money. Why do so many Greeks think this is a real solution? The longer fundamental structural problems are ignored, the worse the outcome is at the end. And the outcome is already looking to be pretty bad.

2) Bank Jog: What a pundit calls a bank run that he hopes ends quickly and with minimum damage. (I think. A definition is hard to come by.)

I know bank runs are disastrous, but isn't it even worse to not admit one is happening? If one acknowledges it is happening, then isn't there a better chance of stopping it by solving the problems causing the bank run? By the way, how much money has to be withdrawn from banks (and how quickly does it have to be withdrawn?) in order to be considered a bank jog, sprint, or run? Are only "runs" bad?

3) Empty Voting: When agents with negative economic interests in a corporation have voting control. May lead to controlling agents voting against the interests of the company and other stock holders. 

Evidently, empty voting is becoming a big concern in some circles because voting rights and financial positions in the company have become increasingly decoupled leading to situations where incentives may be misaligned. How does this happen? An agent buys voting stock in a company then perfectly hedges. This has become easier to do with the plethora of new types of markets available. By perfectly hedging, the agent has voting power in the company, but is not impacted financially at all. Perfectly hedging is not quite as simple as it sounds, though. JPMorgan lost several billion dollars in the last few weeks due to a miscalculation in their attempt to hedge.

But, is empty voting necessarily bad? Is it possible for empty voting to be efficient? On Monday in the Applications Seminar, Scott Kominers argued empty voting may be efficient because it is possible for empty voting to be in the core. (He constructed an example to show this is the case.) The bigger picture seemed to be that the core and not competitive equilibrium is the correct solution concept for thinking about financial markets.

Friday, May 18, 2012

Food for Thought

The NATO meetings are in Chicago this weekend, so in that spirit, here is some foreign policy and political economy food for thought:

From the WSJ opinion pages today:
We do not get to choose if a freedom revolution should begin or end in the Middle East or elsewhere. We only get to choose what side we are on.... [I]f America does not support the advance of democratic institutions and values, who will? (George W. Bush)
This op-ed clearly shows that President Bush supports actively promoting American ideals (democracy and freedom) over stability through foreign policy (esp. in the Middle East). To me, this attitude shift was the biggest change in US foreign policy after 9/11 and the defining feature of the Bush Doctrine -- even more so than "preemptive strike."

From the NYT opinion pages today:
People used to believe that human depravity was self-evident and democratic self-government was fragile. Now they think depravity is nonexistent and they take self-government for granted. (David Brooks)
I liked this piece because he quotes Madison in Federalist 55:
As there is a degree of depravity in mankind, which requires a certain degree of circumspection and distrust, so there are other qualities in human nature, which justify a certain portion of esteem and confidence.
Also, Madison in Federalist 10 warned against the tyranny of the majority ("majority factions") and took the time to explain how he believed a republic with separation of powers, not a pure democracy, would better serve the "public good."

Sunday, May 6, 2012

The Biological Basis of Economic Preferences and Behavior

The Becker Friedman Institute sponsored an interdisciplinary conference Friday and Saturday titled "The Biological Basis of Economic Preferences and Behavior."

I went to all the talks and some were better than others. Here are some of the highlights and some things I learned (listed by presenter):

Saturday, May 5, 2012

Observational Studies

[O]bservational studies, researchers say, are especially prone to methodological and statistical biases that can render the results unreliable. Their findings are much less replicable than those drawn from controlled research. Worse, few of the flawed findings are spotted -- or corrected -- in the published literature.
That's from a WSJ front page article, "Analytical Trend Troubles Scientists," published Thursday, May 3rd, criticizing the increased use of observational studies (over true experiments) in the hard sciences over the last dozen years. The whole article is really good. I am glad the WSJ devoted a front page article to this issue.

What can go wrong with interpreting data from observational studies? Lots. For example, when running an experiment, the scientist gets to control all the variables of interest, and by varying one of them can get a clear picture of how that variable interacts with the outcome of interest (usually the biggest analytical issues with experimental data is measurement error). In an observational study, many things change at once which makes it much harder to construct correct correlations (is A correlated with B because A causes B, B causes A, or C causes A and B?). 

In addition, yesterday at the Becker Freedman Institute Conference on the Biological Basis of Economic Preferences and Behavior, David Cesarini, one of the presenters, spent some time talking about this issue as it relates to the molecular genetics literature (a literature that in large part tries to determine which genes do what). This another sub-field where there are concerns about the veracity of much of the research. Basically his argument boiled down to another common concern with observational studies: data mining. Even with small p-values, when running hundreds of thousands of regressions of an outcome on a SNP (single nucleotide polymorphism), one is bound to find spurious correlation, especially since the regressions have such low power (he cited an average R-squared of .004). So, what was his advice to economists and other scientists who want to use genetic data in their work? "Stop recapitulating the mistakes of medical genetics and set high standards."

Economists really do have a comparative advantage here over other hard scientists. Economists have had to deal with the lack of experiments since the invention of the field. As a result, we are trained to always be on the look out for what could go wrong when interpreting survey and observational data (or even when we don't have the data we need at all), and we learn a lot of statistical techniques and econometric methods to deal with the problems that creep up all the time in observational studies. Most medical researchers and other hard scientists haven't had this training because all their data work has come from experiments where all the manipulated and controlled variables are known. Because of this, they are bound to make lots of mistakes.

Saturday, April 21, 2012

Is the Rural Hospital Problem Really a Problem?

Many medical markets use a version of the deferred acceptance algorithm (Gale Shapley (1962)) to match doctors to residencies or internships (e.g. Roth (1984), Roth and Peranson (1999)). The deferred acceptance algorithm takes in rank order lists of preferences of doctors (over hospitals) and hospitals (over doctors) and outputs a stable match that assigns doctors to hospitals.

It is possible that in a given stable match, some positions (say at undesirable rural hospitals) go unfilled. Because of this, it is sometimes argued that there is a “problem” with rural hospitals being understaffed and thus under-serving rural areas. Maybe there is another stable match that, while worse for some doctors, is better for rural hospitals? It turns out that the answer to that question is no. In a stable match, if a hospital is matched to a set of doctors that does not fill all of its positions, the hospital is matched to the same set of doctors in every stable match (e.g. Roth (1986)). Is there another way to increase the number of doctors that are assigned to rural hospitals? Or, is this even a question worth asking?

Japan recently implemented a program of “regional caps” which restrict the total number of applicants which are allowed to be matched with hospitals in each region. This is an attempt to “match” more doctors to rural areas by limiting the number that can be matched in urban areas. Kamada and Kojima (2011) construct a new mechanism that is stable, strategy-proof and more efficient (from the doctor’s perspective) than the currently implemented one. Basically, they are more flexible in determining which hospitals receive fewer doctors if hospitals in a region exceed the cap (the mechanism in place reduced the number of doctors at each hospital proportionally if the region exceeded the cap).

But is this really better than the original uncapped deferred acceptance algorithm? By entertaining the notation that regional caps are a hard and fast political constraint and calling their solution (constrained) efficient even when the outcome could on net hurt the hospitals (profits, the level of care they provide, etc.) which could lead to an overall socially worse outcome, Kamada and Kojima give the impression that by adopting their solution, the Japanese medical residency market will be “fixed.” In fact, the outcome may be strictly worse than before the regional caps policy was implemented since regional caps are just a type of quota system, and quotas are inefficient. Even if the hospitals are not hurt, doctors that are assigned to less preferable hospitals because of the regional caps bear the costs of the policy. It is hard to tell what the costs are, though. Rank order lists contain only ordinal information, so we don’t know how much doctors and urban hospitals are hurt or how much rural hospitals are helped (welfare comparisons are generally more difficult in matching than standard price theory). 

A contract between a hospital and an applicant usually includes some kind of wage or other benefit. It seems like if a rural hospital is truly underserved it should increase its wage (if the marginal benefit of having the position filled exceeds its cost, then it would be beneficial to the hospital to increase its wage offered with the position in hopes of encouraging more doctors to rate its positions higher). However, year after year, these hospitals seem to prefer to leave the position left unfilled than to increase the wage or any other benefits that would make the position more attractive to potential applicants.

This begs the question, is there even a real problem? If there is, it would have to be because paying more is infeasible or there are externalities not being taken into account. But it may be that the rural hospital problem is just an example of one group extracting rents from another by successfully complaining to a centralized authority. 

Market designers typically take constraints like caps as given and then see how well we can do given the constraints. But I think sometimes it is more important to really question whether these constraints really deserve lexicographic preference over other objectives. What are the real or important constraints is itself an interesting question relevant to design.

Health Insurance and the Supreme Court

Alan Blinder (an economist at Princeton) wrote an op-ed which appeared in the Wall Street Journal on Friday: Life, Liberty, and the Pursuit of Insurance. He argues forcefully for keeping the Affordable Care Act in place as is because it represents a "bargain made in 2010." In particular, he does not want the Supreme Court to overturn the law nor Republicans to repeal it in the future.

Professor Blinder makes some important points about the horribleness of the previous health care system:
For one, the tax code incents employers to pay part of workers' wages in the form of health insurance, which is why insurance became tied to employment in the first place. For another, we have somehow decided that the state should provide anyone age 65 or older with health insurance, while everyone younger should fend for themselves.
He also points out there is adverse selection in the insurance market and rightly points out that the individual mandate (if actually correctly enforced) would eliminate this particular problem. The ability to purchase "insurance" for pre-existing conditions also is tied to the mandate (insurance is in scare quotes because it isn't really insurance if there is no uncertainty). However, he does not address the fact that even if the law were to survive, the mandate isn't sufficiently enforced. The penalty is so low that it remains optimal for young, healthy people to remain uninsured and buy insurance at a low rate only when something happens (the low rate is guaranteed by the no pre-existing conditions clause) which still leads to the unraveling Professor Blinder hopes to avoid. In addition, he does not discuss how moral hazard plays into the insurance market and how these concerns would be increased relative to the old system if the mandate remains (when people are perfectly insured, they demand more goods and health services than is socially optimal, or they may fail to take costly preventative care measures that result in large health costs (for others, since the individual doesn't pay them) down the line, etc.).

He also goes on and on about how the Supreme Court should not "decide what sort of health-care payment system the nation should have" and we should all accept the "bargain" Congress struck. This strikes me as a strange argument. First, there are clearly more than two choices (the ACA or the old system) so it is hard to see how striking the law down is the same as "judges making economic policy." In addition, while I agree law and economics are different, I think constitutionality, separation of powers, etc. matter in economically important ways (hopefully more on this in the future), and saying the Supreme Court shouldn't have the power to undo unconstitutional acts of Congress is a very strong claim and should be more carefully thought through.

Monday, April 16, 2012

Strategic Voting (Reality TV Edition)

From Cheap Talk:
The problem in a nutshell is that American Idol voters are deciding whom to eliminate but instead of directly voting for the one they want to eliminate, they are asked to vote for the person they don’t want eliminated.  This creates highly problematic strategic incentives which can easily lead to a strong favorite being eliminated.
 I am sure the producers of American Idol simply thought viewers would vote honestly. But if a question has actual consequences (seemingly no matter how trivial), the answers people give can depend more on the reason for asking a question than the question actually being asked. Also,
Jessica Sanchez was “voted off” and only survived because the judges kept her alive by using their one intervention of the season
If the clear favorite can be saved by the judges, you have less incentive to vote for her, further increasing the element of strategic voting. From what I understand, the judges save is a recent addition to the show which may be why there wasn't as much strategic voting in earlier seasons of the show.

Saturday, April 14, 2012

The Milwaukee Voucher Program

In the last post, I noted that what we really care about when evaluating the effectiveness of voucher programs is how the voucher students would have done if they had remained in public schools, and how public school students would have done if the voucher students had remained in public schools. One can make a stab at this first counter-factual by exploiting the mechanism in which vouchers are awarded: by lottery (a random assignment). Some students of similar backgrounds and schools get vouchers while others must remain in public schools. By comparing the outcomes of the students who got the vouchers to those who applied but did not get the vouchers, we can get an estimate of how the voucher students would have done had they remained in public schools.

The real debate over the effectiveness of the Milwaukee program (esp. on math and reading test scores) looked something like this:
  • 1991: Milwaukee program adopted
  • 1994/5: John Witte of Wisconsin's political science department publishes the first official review using basic techniques; finds zero or small negative effects of the voucher program (Witte publishes updates on the program regularly and generally finds mixed results).
  • 1995: Paul Peterson of Harvard reanalyzes Witte's data and compares attenders of voucher schools to other applicants and finds big, positive effects. A problem with his analysis is that the attenders are not a random sample of the winners of the vouchers which may bias results in the positive direction. Peterson's research objectivity does come into question in subsequent years as he keeps publishing -- he only publishes when he finds large positive effects and others do not, and not always in refereed venues. Witte begins to call attention to "characteristics of pseudo-scientific right-wing trash" in some of his presentations.
  • 1998: Cecilia Rouse publishes a more correct analysis in the QJE. She compares those selected to attend a private school to those who were not selected (which I posited was the correct way, above), which avoids the potential bias in Peterson's work. She finds positive effects for math and no effect for reading.

There are similar papers for just about every other voucher program out there (Cleveland, Michigan, NYC, DC, Columbia, Chile, etc.), and papers that look at effects outside of math and reading scores (increase in years of schooling/graduation rates, college attendance rates, cohabitation/pregnancy rates, etc.), but these are topics for other posts.

The general consensus is that voucher students do slightly better (or in some cases no worse) on various measures of short term achievement than their public school counterparts.

But what about that other question: how do the public school students do when there are voucher programs? Because voucher programs are usually tied with the implementation of charter schools, this also raises the question of how competition affects education outcomes. If competition improves education all around, then the "no difference" effects we see in the above papers can be explained by the charter schools and threat of vouchers forcing public schools to improve and lifting all boats, so to speak. And this has sparked even hotter debates than the one cited above, in particular, in relation to Hoxby's "rivers" paper, but that's another post.

You don't want to read the papers? That's fine. You can watch the movie (it's also on Netflix). It's good and worth watching, but be warned: the movie is almost never as good as the book. "Waiting for Superman" focuses on the plight of a few select students, how problematic/prevalent failing schools really are, the difference between teachers and teachers' unions, and the lottery system. It is very light on actual numbers and why vouchers and charters actually would fix the problem of failing schools.

Vouchers in the South

The Wall Street Journal printed an article ("School Vouchers Gain Ground") on Thursday noting that Louisiana is going to expand its voucher program to include the ability to pay for apprenticeships at local businesses, college courses, and online classes. The state is also planning on expanding charter schools and introducing "parent triggers" which allow parents to effectively convert the schools to charters. This in interesting because voucher programs are usually (always?) targeted at disadvantaged, low-income students, but by paying for college classes and online classes for public school children, it is opened up to be used by more middle class/wealthy students who are doing just fine in school, as well. It will be interesting to see what the effects of this program are. At the very least, the program is going to be more popular if more people can use the government's money to improve their children's education.

The article is pretty good, but the WSJ really falls down when it cites conflicting evidence on the benefits of voucher programs:
In Milwaukee, the nation's oldest voucher program, results from the 2010 state exam showed voucher students performed worse in math and reading than students in the city's public schools. But a study by Patrick Wolf, a professor at the Department of Education Reform at the University of Arkansas, found voucher students made more progress in reading than counterparts in the Milwaukee system over a four-year period. There was no difference in math.
Well, of course if you look at the test scores of the average voucher student versus the test scores of the average public school student, the voucher student will do worse: the whole reason they are voucher eligible is because they have a disadvantaged background and are in failing schools, thus are likely to do very poorly. What we really care about is how the voucher students would have done if they had remained in public schools, and maybe how public school students would have done if the voucher students had remained in public schools (sometimes it is argued that giving some students vouchers hurts those they leave behind).

In my next post I will relate what I know about the history of the evidence on the effectiveness of the Milwaukee program and voucher programs in general.

Sunday, April 8, 2012

Happy Easter

For God so loved the world that he gave his one and only Son, that whoever believes in him shall not perish but have eternal life. (John 3:16, NIV)
Martin Luther called this verse the Gospel in miniature. Happy Easter!

Saturday, April 7, 2012

Strategic Voting

Given that a person votes, will he vote honestly or strategically? It seems like in one corner of the dating world, people vote strategically: the procedure the dating site uses to decide whether to allow a person to join had to be adapted to better prevent strategic voting (via PRNewswire):
Entry to is only possible after passing a democratic rating process, where existing members of the opposite sex vote on new applicants based on photographs and a brief profile submitted by new applicants.
The community only allows opposite sex voting, as it was quickly realized on first launching the site in 2002, that members voting on same sex applicants would vote strategically and vote other beautiful applicants out. This strategic voting was most prevalent amongst the women.

Monday, April 2, 2012

When do Incentives Coerce?

The current mantra among economists is that incentives matter. Incentives matter a lot. But, can incentives matter so much that using them to nudge behavior actually becomes unconstitutional? That seems to be the question the states wanted the Supreme Court to consider when they presented their argument against the Medicaid expansion contained in the health care law.

Consider the following situation (model follows the break): 

Sunday, April 1, 2012

Enumerated Powers & the Commerce Clause

The health care law debate in front of the Supreme Court was a treasure trove of interesting things to think about from health care economics to political economy and politics and even ethics. Economists have been posting their thoughts on other blogs recently, and its interesting to see where other economists come down on certain issues.

In this post on Cheap Talk, Sandeep Baliga argues:
... Justice Scalia, Roberts etc can be forced to buy broccoli by law.
What is then the limiting principle? The commerce clause has no limiting principle, according to me, a non-lawyer. The limiting principle is the imposed by politics: any politician who seeks to regulate the broccoli market must run for election. This politician will reach the limit of his political career.
There are two issues in this statement, and in this post I want to deal with the first: Does the commerce clause give Congress unlimited power? I disagree with Sandeep and think that only a lawyer can come to the conclusion that the answer to this question is yes.

When reading a book, article, etc., one always keeps in mind the main message or point. Language is limited and it cannot be that one unclear phrase or part of a sentence can rewrite the entire meaning of the text when many clear sentences and phrases are present elsewhere (for clarification of this principle, see How to Read a Book: The Classic Guide to Intelligent Reading by M.J. Adler and C. Van Doren). For some reason this general "reading principle" seems to be most ignored by people when reading important texts. In the Constitution's case, the whole point is to give the central government limited powers which are then enumerated. Any reading of any particular clause to mean "the central government can do anything" must be incorrect. 

Madison even argues this point in Federalist 41 in response to a similar criticism of the Constitution in his day: that the taxing power of Article I Section 8 gives the government unlimited power:
It has been urged and echoed that the power "to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States," amounts to an unlimited commission to exercise every power which may be alleged to be necessary ... If the different parts of the same instrument ought to be so expounded as to give meaning to every part which will bear it, shall one part of the same sentence be excluded altogether from a share in the meaning; and shall the more doubtful and indefinite terms be retained in their full extent, and the clear and precise expressions be denied any signification whatsoever? For what purpose could the enumeration of particular powers be inserted, if these and all others were meant to be included in the preceding general power?
Madison goes on to note the particular phrase "their common defense, security of their liberties, and mutual and general welfare" appeared in the Articles of Confederation, and no one was arguing that the central government was all-powerful there. 

In commenting on the commerce clause specifically, Madison in Federalist 42 clearly states that the phrase "and among the several States" was included just to make the power of regulating commerce between nations complete by protecting states from "improper contributions levied" on goods passing through other states on its way to the world market. In some sense, it was just meant to be a free trade agreement among the States. Unfortunately, the Supreme Court in the past has expanded the commerce clause way beyond this original intent. I am with John Cochrane in hoping the ruling on the health care law reigns in this over-reading of the commerce clause.

Supreme Court & the Health Care Law

On Monday, Tuesday, and Wednesday of last week, the Supreme Court held oral arguments on the constitutionality of several parts of the Patient Protection and Affordable Care Act.

The oral arguments can be found on C-SPAN here. The video links are on the right hand side of the page. The briefs can be found here. The merit briefs lay out each side's case in full.

Believe it or not, it was riveting stuff! Take the time to listen to the second day (individual mandate) and third day (esp. Medicaid) since they seemed to be the core of the case. The oral arguments themselves were basically the Justices "asking questions" rather than each side presenting its argument in full, which I found entertaining.

In the next couple of posts, I will share some thoughts relating to this case.

Saturday, March 31, 2012

Why This Blog?

There are three main reasons why I am starting a blog.

1. I feel that one of my primary duties as a graduate student is to think and to write. Ideally, this refers to thinking brand-new, world-view-shifting-because-they're-so-insightful, society-improving ideas and writing publishable papers in top of the line econ journals, but not all my thoughts are of such high quality. This blog is an outlet for writing down some of those other ideas: quick thoughts, interesting observations, and cool results from published academic papers (new and old) I come across.  

2. For some reason, other people want to know what or how I think about certain things (or at least, I think there exists others who do). This blog is a place for those thoughts.

3. It's fun! I don't always think about economics, and this blog is a place to write up miscellaneous musings or comments on topics that interest me.

Why Beta?

I am trying to get right into writing this blog without worrying about details like a catchy title, modern layout, gadgets, posting style or frequency, or other seemingly necessary features. So, this blog is subject to unannounced changes or termination. Hey, if Google can do it, so can I!