Bang for the Buck

From Mark Zandi's report on economy.com.

Maybe we should look at his record?

Thank goodness for a voice of reason regarding Lawrence Summers.  Sheryl Sandburg, COO of Facebook, lays out his record on working for women's equality in education and the sciences while at Harvard and the World Bank, as well as family-friendly government policies while at the Treasury Department. 

I agree, his gaffe was bad, and completely inappropriate from the President of Harvard.  But put in context, it was an academic thought exercise aimed at identifying the causes of the paucity of women in science, in order to address the issue, not excuse it.  That gaffe alone should not disqualify him from a post at the Treasury Department.

plus ça change, plus c'est la même...

Justin Wolfers asks if there is anything to add to Stigler's 1977 list of workshop criticisms. Questioning the quality of the instrument is the biggest one not already on the list.  After that, there is the "Why is this important?" or the even less subtle, "That's true, but not very interesting."  [Both noted in the comments.]

The Subprime Primer

Business Pundit has an entertaining slide show explaining the origins of the sub-prime mortgage crisis.

If Sexism were Racism

Dr. Violet Socks over at The Reclusive Leftist has an interesting rant about Obama. I can't agree with her conclusion to not ever vote for Obama, because McCain has promised more supreme court justices like Roberts and Alito (would that be Catholic men?). But the bit which rewrites the media's sexist treatment of Clinton in reverse, so that Obama receives the racist media treatment, highlights how sexism is invisible to most men and women. Sexism flies under the radar, so it never gets rooted out.

Page 123 Meme

I always was late handing in assignments, so of course I'm late with this meme. Here's the first five sentences from page 123 of the nearest book with more than 123 pages. (Taken from Red Queen and Chanson.) No tags, cause everybody's already done it, but feel free to leave a comment with yours, especially if you don't have a blog!

"You can actually calculate the average bubble factor for any point in a super-satellite using the following formula:
(Players left -1)/(Eliminations left)
So with 15 players left in a 10-prize satellite, the average bubble factor is (15 - 1)/(5) = 2.8.
Remember that this is the average bubble factor around the table. Big stack clashes have much higher numbers."

Yeah, that would be a poker strategy book belonging to JSM. Looking around for the nearest book that belongs to me, (and cheating slightly because I'm in the study and went looking for the nearest book that belongs to me that wasn't in the bookcases in the study) we find:

"Leland noted, "Consumers are asking others to help themselves develop self-control because so many companies are not showing any restraint."
Bloggging about overspending is important and useful, but as we saw in the last chapter, on emotions, what we truly need is a method to curb our consumption at the moment of temptation, rather than a way to complain about it after the fact.
What could we do? Could we create something that replicated the conditions of Gaurav's class, with some freedom of choice but built-in boundaries as well? I began to imagine a credit card of a different kind--a self-control credit card that would let people restrict their own spending behavior."

That's from Dan Ariely's Predictably Irrational, chapter 6, "The Problem of Procrastination and Self-Control."

That's our interests in a nutshell. Poker and Strategy, and Behavioral Economics. Remarkably precise.

No Answer

It's very annoying. Justin Wolfers replied to Freakonomics readers about the "likely economic consequences" of this year's tax rebates, but the papers he cites only discuss whether people spend the money, and if so, on what.

There's a microeconomist for you. I suspect when most people ask about the economic consequences they really mean, "Tell me, really, is this actually going to cut short the recession?"

It reminds me of the only math joke I know. A math professor is working away at his desk when the contents of his wastebasket spontaneously combust. He picks up the flaming trash bin, waves at it rather uselessly, then drops it on his desk and runs for a fire extinguisher. He then proceeds to put the fire out with the fire extinguisher.

The next day, the professor is again working away at his desk when the contents of his trash bin burst into flame again. The professor reaches over, picks up the trash bin, places it on his desk, and returns to work.

[Yeah, I know, not very funny unless you are a mathematician. In case you didn't get it, the joke is that the prof has proved he can put the fire out when the trash can is on his desk, so all he needs to do is place the trash can on the desk and the rest follows. QED.]

In other words, the papers Wolfer cites address the micro question of whether consumers will spend the money on extra consumption or pay off debt, but don't answer the macro question of how extra spending might get the economy moving again, and what might be the size of the effect.

Not that I'm going to tell you. I'm a microeconomist too. ;)

And Then I Took Away His Feminist Card

These links are for JSM, who has been too busy working to pay attention to political matters that matter to only half the population (i.e. the Lily Ledbetter Fair Pay Act), and then made the mistake of trying to act like a on centrist on John McCain, (and I quote!) saying "He's not bad for a Republican. He doesn't toe the party line -- he's a maverick."

Dahlia Lithwick provides an excellent discussion of the Lily Ledbetter case and the Fair Pay Act.

Jezebel has a nice summary, with a lovely quote from Harry Reid at the end. And by the way, I will not abide any more claims that McCain is a maverick, when he won't show up to do the right thing when it means crossing party lines.

Momocrats puts the asinine McCain quote right at the top, where he frets that providing legal recourse against discrimination will lead to...wait for it...lawsuits!

And Bitch Ph.D. provides a link to the senate voting on the Lily Ledbetter Fair Pay Act.

Ensuring the Collective Interests

Shankar Vedantam has an excellent Department of Human Behavior column in the Washington Post today, comparing the Democratic primary to a tragedy of the commons. A quote from political scientist Edella Schlager summarizes: "Rational individuals are trapped. To act rationally, to pursue one's self-interest, leads to collective ruin. To act irrationally, to place the collective interest above one's self-interest, exposes one to exploitation."

The article lists two solutions to the tragedy of the commons. The first is to create structures that reward behavior that favors the long-term welfare of the collective. The second is to have a regulatory body enforce limits. Vedantam suggests that the latter, having the Democratic party step in and call the game, is probably necessary to win the election.

The first solution, however, will keep more Democratic voters happy -- or less unhappy -- and motivated. And the way to do that is to link the two candidates' success. If both candidates commit that the ticket will be Clinton/Obama or Obama/Clinton, then the candidates have an incentive to campaign in a way that builds the Democratic party's likelihood of success come November.

Remember that Clinton offered Obama the VP post before she took the gloves off. Obama brushed her off, but the correct response would have been to offer her the VP post. By refusing to link their outcomes, Obama opened the door for the down-and-dirty contest that the primary has become.

Principles of Economics, Translated

by the Stand-up Economist

This is too funny not to post.

The Subtleties of Discrimination, or Why Women Don't Ask

There is an absolutely fascinating article in tomorrow's Washington Post, "Salary, Gender, and the Social Cost of Haggling." Linda Babcock, an economist at Carnegie Mellon University, became interested in how men and women negotiate differently when female graduate students came to her and pointed out that the male students were teaching their own courses while the female students were acting as teaching assistants. Upon investigation she learned that the male students had each approached the dean and requested to teach their own course. JSM used the book Babcock wrote based on her research, "Women Don't Ask," in his negotiation course back when he was a professor at a b-school, and I highly recommend it. Her research goes a long way toward explaining the residual salary differences between women and men once education, experience, and job tenure are taken into account.

But the really interesting part of the article is the follow-up research, addressing the question of why women don't negotiate. It turns out that "across all the studies...men were always less willing to work with a woman who had attempted to negotiate than with a woman who did not. They always preferred to work with a woman who stayed mum. But it made no difference to the men whether a guy had chosen to negotiate or not." Some studies found that when women thought a woman would be making the hiring decisions they were much more likely to negotiate.

In other words, women don't negotiate because they don't get the same results as men do. They may even harm their career by attempting to negotiate their salary.

Women may be playing the game optimally, but that doesn't mean the game is fair.

Life is much more beautiful than dogma will allow.

In 2003 U.S. Congress passed the so-called "Partial Birth Abortion Act," which banned a specific medical procedure used to end a late-term pregnancy in tragic situations, frequently when the fetus has a deformity that will result in its death before or at birth. This law did not include an exception for the health of the woman, only an exception if her life was at risk.

The Supreme Court, packed now with five Catholics and only one woman, held that the law was Constitutional without an exception for health. Both O'Connor and Ginsburg have agreed that women bring a different viewpoint to the table, but perhaps the men would have reached another conclusion if they had experienced the choice this man faced.

Summer Break

In case it wasn't already clear, I'm taking a little hiatus from this so-called blog. I will be back, tanned and I hope refreshed, sometime in the second half of August. Probably closer to the end of August.

My vacation reading list:
Nancy Folbre's "The Invisible Heart"
Jared Diamond's "Guns, Germs, and Steel"
Katha Pollitt's "Virginity or Death!: And Other Social and Political Issues of Our Time"

No, I don't read fiction very often. I'm too literal. Direct. Tactless. Earnest.

I still haven't managed to write on "Stumbling On Happiness" by Daniel Gilbert, or "Get to Work," a delightful polemic by Linda Hirschman which caused all sorts of unpleasantness in our household last week as a result of consciousness re-raising. (Sample comment: "I'll take away your economist's license if you try to tell me that you making all the money doesn't change the bargaining power in this marriage!")

But I'll get to them. And Nancy Folbre's book promises a more satisfying analysis of Hirschman's advice. So much to say. So little time.

Immigration and Political Biases in Economics

This week’s New York Times Magazine attempts to introduce real economic analysis into the immigration debate (available free until Sunday, email me after that). The article is a lovely introduction to the basic theory, however the main focus is the split between George Borjas of the Kennedy School and David Card of Berkeley, which is threatening to turn ugly.* It’s a reminder that personal political biases are pervasive.

The author, Roger Lowenstein, notes, “You can find economists to substantiate the position of either chamber, but the consensus of most is that, on balance, immigration is good for the country.” The interesting thing about the debate within labor economics is the lack of distance between the camps. Everybody agrees on the theory, and the signs on the different economic analyses are all the same. As Lowenstein says, “The debate among economists is whether low-income workers are hurt a lot or just a little.” How economists come down on that question depends on their political and economic biases. Lowenstein seems to impugn Borjas the most for his anti-immigration bias, but I think Lowenstein’s own bias is towards free-market economics, as is David Card’s. Most economists are biased towards free markets (which I think is a pretty good bias to start from), but this leads them to downplay the social significance of immigration’s impact on low-income workers.

As a Native American, my own bias is strong. You might even say that I get rather pissy when I hear anti-immigration rhetoric. What, you mean the borders are closed now?** I have no love for an American culture that doesn’t welcome the striving and the downtrodden alike.

In the end the debate over immigration is a distraction from the real issue: how are we treating low-income workers in our country? Are we ensuring that they have a real opportunity to better their situation? Are we ensuring that their children have the ability move up in the world? If we address inequality of opportunity in this country—I might suggest through universal health care and better funding for education—then immigration becomes a much less important issue. The American economy has an astonishing ability to absorb immigrants, and, in my ever humble opinion, a moral imperative to do so.


*Is it only me that loves to see two labor economists have at it?
**See also the Op-Ed Contributor from July 9, on the Hispanic history of America and the “poetic justice that now the Hispanic world should return.”

Thinking Positively

The three of us--JSM, me, and the littlest one--took a road trip this last weekend. As Bob Marley was singing on the ipod, “Get up, stand up; stand up for your rights,” I took a phone call. As I finished, JSM said, “Play it again, he’s singing.” So I played it again, and from the back we heard, “Get up, stand up. Stand up for your wife.”

Apparently he doesn’t know his rights. (He just turned 3, and I’d never heard him use the word ‘wife’ before, either.) Neither did I, and since Angelina Jolie recently exhorted me to know my rights, I looked them up.

The Universal Declaration of Human Rights

Do check them out. I am pleased with the advancement of humanity, at least in theory. I can’t wait until my country catches up with the rest of the western world.

Leveraging Philanthropy

The cover of this week’s Economist features Bill Gates holding what appears to be a very healthy third-world child, with the headline, “Billanthropy.” The two articles inside discuss Warren Buffett’s decision to donate over $30 billion to the Bill and Melinda Gates foundation, which roughly doubles the Gates Foundation endowment.

Mr. Buffett followed his own investment advice in choosing to donate to the Gates Foundation, allocating his money to the foundation that gives the biggest bang for the buck. It doesn’t surprise me. If I had $30 billion to donate to charity, I’d give it to the Gates Foundation, too, and I didn’t need Mr. Buffett to tell me what was the most effective charitable foundation around. I knew it from the first 1998 announcement that the Gates Foundation was donating $100 million to fund vaccine distribution in developing countries.

I wasn’t always a Bill Gates fan. I went to college in a town where WordPerfect and Novell were big employers, and Microsoft was the enemy, the big bad monopolizer throwing its weight around and killing the competition. For me, Bill Gates personified scheming greed, more than Gordon Gekko in "Wall Street." All that was wiped away the day I read in the paper about that first donation.

It was one of those moments that you remember, for the rest of your life, exactly where you were when you heard—or in this case read—the news. The timing was weird, as the newspapers took pains to point out. The New York Times stated, “The donation…comes as he is battling Government antitrust charges in Federal District Court in Washington,” implying that this might be just a big public relations effort. But I needed no persuading. I walked around in a daze, with the newspaper tucked under my arm and tears of wonder dotting my eyes. *

I have never seen in print the precise reasons that so overwhelmed me, so I share them with you now. They were fresh I my mind, as I had just taken a course by Gary Becker in “Human Capital and Development.” Human capital has been described as “personal productive capacity,” or “human competence.” It is the education, training, or even physical health which individuals use to produce or earn a living. It cannot be transferred or used by anyone else, because it resides in one’s own person. Gary Becker wrote the book on it, as well as “A Treatise on the Family,” an economic analysis of the family, and some papers describing the implications of both for developing countries.

By investing in vaccinations for children, and in research on eradicating major causes of death in developing countries (as Gates has since done), one raises life expectancy in these countries. It saves lives, which is always mentioned in the papers, but they don’t mention the ways the increase in life expectancy multiplies throughout the economy. When children are more likely to survive to adulthood, parents choose to have fewer children, and invest more in each one. As a result children receive better nutrition and more education. This effect continues into adulthood: the longer you expect to live, the bigger the payoff for investing in your own human capital. Education becomes much more important to everyone. Furthermore, the increase in life expectancy raises the importance (the returns) of all sorts of investments in developing countries; from local wells to national elections, the local population has a higher incentive to care about and reinforce the investments being made in their country.

All of these effects compound each other, moving a country from a stagnating third-world nation to a new dynamic state of a robust, growing economy. That’s the theory. The weak link here, of course, is the ability to develop stable government institutions in places wracked with violence. Yet increased life expectancy still has the right effect. It makes war and violence much more costly all around, by raising the value of the alternative.

These are the things I reflected on when I heard about that first vaccination donation. I had never thought about how to give away money, but it was clear that Bill and Melinda Gates had. They had spent at least six years studying, giving away relatively tiny amounts to local causes before going global health, and have been scaling it up every year since. It’s just what you would expect from the world’s richest capitalist. He wasn’t just going to give away more money than any industrial titan in history. He was going to leverage it, and by so doing improve the world more than anyone else in history.

*Yeah, so I'm sensitive. What of it? It's not very often these days that I feel like the world is getting to be a better place.

Pseudorandom Quote

"Go-kart sittin' in the shade: you don't need a ticket to ride, it's summertime, summertime, slip down a water slide. Little kid dancin' in the grass, legs like a rubber band. It's summertime, summertime. There's a line at the candy stand."

Paul Simon, Beautiful

Two Small Points of Light

I met a free-lance writer last weekend, the wife of one of our friends from graduate school. I started talking about public policy issues, as I do obsessively these days, and she asked my political leanings. I replied that it’s a two-party system, so I’m a Democrat by default these days, as the Republicans have all the power and are completely unchecked in abusing it.

Then I came home and looked at my blog and laughed. Look at how extreme I am! One can’t be a centrist anymore. After all somebody—not Dante—said, “The hottest fires in hell are reserved for those who remain neutral in times of moral crisis.” (“I don’t know; I’m just saying it’s not Dante.” Why yes, I did see 'The Lieutenant of Inishmore' last weekend.)

It used to be that JSM was far left of me on the political spectrum, so it stopped me short last night to hear him call the American Antitrust Institute the most reliable of the left-of-center antitrust advocacy organizations, with only the occasional left-wingnut. JSM hasn’t moved position. I’m the one who has swung around him.

JSM once told me about a frequent dream he used to have as a child, where he flew around his neighborhood. It seemed so real, he decided to test it to see if he was really flying around his neighborhood. The next time he had the dream, he looked carefully at the wall in the neighbor’s garage, memorizing the tools so he could check them when he awoke. But when he woke up, he realized that it was all wrong: his house was reversed, rooms were missing, and distances were off.

I feel like I’m living in a dream world, and only occasionally looking at specifics that remind me that the entire perception is slightly off. It’s not a bad representation of reality. It could fool you when you’re not thinking critically. But people are by nature biased, and view the world through the lens of those biases. They are also oppositional by nature, moving further afield in response to “the other” group. Unfortunately, the biased dream world doesn’t yield an accurate map for public policies. This is why centrist policy tends to be the best policy. It forces the biased sides to integrate their views and find the common ground—which is much more likely to be the actual ground.

The American Antitrust Institute mission is posted on their website:

“Our mission is to increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy. We are, broadly, post-Chicago centrists dedicated to the vigorous use of antitrust as a vital component of national and international competition policy.”

Yesterday the American Antitrust Institute held their annual conference, and gave their Antitrust Achievement Award to two senators, Senator Mike DeWine (R-OH) and Senator Herb Kohl (D-WI). The senators have a long history of working together on the Antitrust, Competition Policy, and Consumer Rights subcommittee to enforce appropriate antitrust policy. I don’t agree with many of their votes in other areas, but if the AAI wants to recognize them for cross-party efforts to implement vigorous antitrust policy, I will lift my glass and say, “Here’s to the future.”

Class Warfare and Country Music

I know I said I don’t listen to country music anymore, not since I heard the Gretchen Wilson song, “Politically Uncorrect.” Check out the lyrics to the song, which I hope is the high-water mark of right-wing musical propaganda. The song reinforces the Republican self-image as the hard-working underdog and by extension the view of the Democrats as freeloading welfare hags and overeducated politically-correct atheist liberal flag-burners. This is nauseatingly absurd, because dated Republican economic ideology and policy are combining with the forces of globalization to create a more economically divided country, the haves and the have-nots, with decreasing economic mobility. Their policies are actually reinforcing the divide between the educated elite and the working-class poor, and the working-class poor are cheering.

Welfare welfare welfare government handouts handouts handouts. That’s the record that has been playing for thirty years. Economists have moved on. It’s time to move party ideology on.

But I digress. I didn’t actually replace the local country station on my car radio presets. I flip between channels when commercials come on, so sometimes I end up listening to the country station before my disgust cues me to change the channel. Which is how I happened to be listening to the country station morning show the week after Stephen Colbert bombed at the White House Correspondents’ Dinner. Two nights previously, as a tribute, The Daily Show had featured a “Classic Colbert” bit in which Stephen Colbert attended the Connecticut School of Broadcasting. Back at the country morning show, I was only half-listening to the banter, which ended in some joke about the Columbia School of Broadcasting, when the lesser DJ added, “No, the Connecticut School of Broadcasting.” That got my attention. It was a secret handshake, a code word which only Daily Show viewers understood. A small cry for solidarity in this crazy, mixed-up world.

So you see, I couldn’t get rid of my preset at that point. They needed me, those poor DJs who couldn’t get a job at a pop station. Which is completely understandable. I like the morning DJs at the pop station better, too.

All of which explains how I happened to be listening to the country station this afternoon when they played [drum roll, please] a Dixie Chicks song. An old one, “Ready to Run,” off their second album. All casual like, no fanfare, just an ordinary song credit, as if the world had never tilted into bizarro-land. They just slipped it in there, so as not to ruffle any feathers on people who aren’t paying attention.

I like my local country radio station. I may be just over the border in Jesusland, but they straddle the demilitarized zone. I can’t tell if they are circumspectly avoiding land mines on either side, or carefully packaging the true Voice of America as part of the resistance.

Just for the record, I have no idea how they treated The Incident. I was living in France at the time, occasionally listening to a country radio station from Texas over the Internet. Now that was truly bizarro.

"Starve the Beast" is a Bankrupt Idea

Jonathan Rauch of the Brookings Institute has an interesting comment on the use of tax cuts to “starve the beast,” in the June 2006 issue of The Atlantic Monthly. He visits William Niskanen, chairman of the Cato Institute, a libertarian think-tank, for some numbers. Niskanen does a statistical regression of spending on taxes from 1981 to 2005, controlling for unemployment, and shows that tax cuts actually “stoke the beast.”

“A tax cut of 1% of GDP increases the rate of spending growth by about 0.15 percent of GDP a year. A comparable tax hike reduces spending growth by the same amount.”

Niskanen found that the level of taxes that neither reduce nor grow spending is about 19% of GDP.

Niskanen has an interesting little story explaining this. If the government spends 25% more than it receives in taxes, this feels like a 20% discount to voters on the price of government. And as the law of demand says, when the price of something goes down, people purchase more of it.

That story leaves a bad taste in my mouth.

Okay, maybe that story went over well with you, the lay reader. But that little story has so many things wrong with it that no economist worth their salt can walk by without doing a double take. Since Niskanen went to the same school as I did, I’m going to give him the benefit of the doubt and assume that he didn’t want to overwhelm Rauch with a more accurate model. But really, he should be more careful, because a more accurate model better describes reality, and most of us here prefer to live in reality.

Here’s what’s wrong with the story: voters don’t choose government spending. Politicians choose government spending. Politicians choose tax cuts. Ordinary citizens can comment on that every two, four and six years. But they don’t choose government spending.

To make the story work, you must replace voters in the story with politicians. That’s right; the politicians who order the tax cuts are the ones who spend like it’s the last day of the 20%-off sale at Macy’s. And to make the story work, you must further assume that politicians are either so stupid that they don’t realize we are going to have to pay the money back, or so selfish that they don’t care. While I don’t dismiss the possibility of the former, I would lay my money on the latter. The objective of most politicians is to get re-elected, to keep playing this game, and that means cutting taxes as well as spending money on constituents back home even when it is contrary to their stated ideological goal of reducing the size of the government.

“Starve the Beast” is a bankrupt idea because it expects the same pandering politicians who cut taxes to also cut spending. It turns out you don’t even need to model the politicians’ objective functions, because it all comes down to common sense. Responsible governments pay for what they buy. Irresponsible governments put it on the grandkids’ credit card and toss a little extra in the cart for their friends.