Lake Wobegon
Jul 16, 2012

"...where all the women are strong, all the men are good-looking, and all the children are above average."

If all the children are of the same ability, then they are all (weakly) above average.

Suppose that all the children are of ability 2 except Bob, who is only of ability 1. Then all the children except Bob are strictly above average.

Have you ever heard humorous observation that 90% of drivers think that they are better than average? The statement is potentially true, if there are a few really horrible drivers.

Too much information
May 22, 2012

Don't trust GI Joe--ignorance is half the battle, at least according to the US Preventative Services Taskforce. The task force recommended against screening healthy men for prostate cancer because most of the prostate cancers detected will not kill the patient, and the complications from treatment can be quite severe (impotence, loss of bladder control, etc).

Still, I find the panel's conclusion strange. Couldn't one screen for the cancer, and then just opt out of treatment? How can more information be bad?

At my local coffeeshop, the cost of filter coffee is:

10 ounce mug -- 1.75
12 ounce cup -- 2.05
16 ounce cup -- 2.35
refill on mug -- 1.00

The customer in line in front of me today asked which is the most cost effective way to get a largish amount of coffee. The barista told the customer that getting a mug and a refill was the best bang for his buck. This struck me as wrong, since adding the four ounces from 12 to 16 ounces costs only 30 cents, while adding the four ounces from 16 to 20 ounces costs 40 cents. After I bought my coffee, I pointed this out to the barista. He said that the 16 ounce cup costs 14.7 cents per ounce, while 20 ounces of coffee costs only 13.8 cents per ounce, so the 20 ounce mug is a better deal. Who was right?

Here is a picture in my defense:

The blue line defines the budget set, and the red line is an indifference curve. You can't get coffee for any price until you purchase 10 ounces. The price of coffee then goes down a lot, until you get to 16 ounces, and then it goes down, but less. The marginal cost is what matters here (caveat: I probably should have had the red line intersect the y-axis somewhere--too lazy to change it).

If only we could have seen the customer's utility function, we could have given him better advice. Then again, revealed preference proves that he chose his best option anyway.

This oddly specific world bank report (ht: CGD) reminded me of my experience as a freight forwarder in New York. One of the tasks I was responsible for was shipping school buses to West Africa. African businessmen would buy cheap old school buses at auctions on the east coast of the United States. The businessmen would hire us to find someone to drive them to a port, and ship them off to the relevant African port.

I remember one shipment in particular. I was shipping some buses to Congo-Kinshasa. First the buses were to arrive in (say) Italy, then to be shipped to (say) Cote D'Ivoire on a different ship, and then on to Nigeria on another ship, and so on, following a complicated path ending at Boma, Congo. This sort of circuitous shipment is common in that part of the world. Anyway, once the buses shipped out, I prepared the documents, sent them off to my client in the Congo, and forgot about the shipment.

Six-weeks later, my client called me demanding to know where the buses were. After some detective work including a bunch of long distance phone calls to exotic locales, I found out the buses were sitting in port at Pointe-Noire in Congo-Brazzaville. They had been sitting there for two weeks, and had missed several ships to Boma. I called Pointe-Noire several times with a horrible phone connection, but I couldn't figure out why the buses were not shipping. This was extremely frustrating, given the proximity of Boma and Pointe-Noire. The buses made it half-way around the world, and then got stuck right next to where they were supposed to go.

Weeks later the buses did ship, and the client received them in good condition. Who knows what sort of bribes my client ended up paying. The last thing I remember about that file was that at some point I suggested that my client just drive to Pointe-Noire and pick up the buses himself. He told me that if he tried to drive on the roads in that area, he would probably be shot and the buses stolen.

I just read an Economist Free Exchange post containing the following chart:

Look at the discontinuity between 49 and 50 firms in the French firm size distribution graph. I would be willing to wager that there is some French industrial policy which kicks in at 50 employees. (ht: petek)

The best sort of technological progress is the sort that does not require new "stuff". It is a little bit magical when someone uses the same inputs and a better process to produce more output. A couple of weeks ago my colleague Alex Fakos gave me an example. He told me about the way telecom companies transfer information through optical fiber cables. The cables are expensive to install, so they are only infrequently replaced. Over time, however, the algorithms for transferring information through the cables have improved, so more and more information can be passed through the same cables. Nothing physical changed--people just thought of better ways to send information.

This morning I had what was, for me, a profound thought--the first input in the supply chain of every production process is a natural resource. Since every important feature of the world was identical a few thousand years ago, everything that is being produced today could have been produced in ancient Rome--if only they had the ideas. The real driver of technological progress is ideas, not electricity, the combustion engine, or computers. If one takes the view that "stuff" is natural resources, then all technological progress is the best kind.

Here is a thought experiment: Suppose that a large research library from today's world was to materialize in Rome during the 1st century AD. Assuming that the Romans don't burn it down, how long would it take them to create working mobile phones? What stops them from doing it in a year? The answer to this question may be related to how technology moves between regions of the world today.

Inside Job
Apr 9, 2012

This evening I finally got around to watching this award winning documentary. The film is way too Michael Moore for me. The hallmark of this type of film making is the "gotcha" moment. For example, Inside Job shows clips of government/industry officials making incorrect predictions, repeatedly uses footage from a congressional hearing in which legislators sputter angrily at the heads of the big investment banks, and edits interviews with Wall Street's defenders to make them look bad. I find this style of argument insulting to my intelligence. There are two sides to every story, and I feel like I am not hearing the other side.

I actually agree with most of the points the documentary is trying to get across. Investment banks betting against the same assets they are selling to clients is highly questionable business practice. Economists should reveal funding sources or conflicts of interest in published papers. The incentives of the financial industry cause managers to take overly risky bets, and the financial industry has a cozy relationship with the government. I just do not need to have the argument shoved down my throat. The truth is on the film's side. All it needed to do is let the facts speak. I wish Inside Jobs had been more Frontline--present the facts, and let me decide.

If you have gone to Starbucks in the last month, you have seen the red, white, and blue friendship bracelets with a piece of metal woven in hanging next to the register. The word "indivisible" is engraved on the metal. This is all part of the Starbucks "Create Jobs for USA" campaign. If you buy a bracelet for five bucks, the money is donated to the Starbucks Create Jobs for USA Fund. I unsuccessfully inspected a bracelet at some point to see if I could determine where it was made, since outside of this campaign, such a trinket would almost certainly be made in China--probably in some Bracelet City. I can't help but wonder if the jobs that are being created by the Starbucks campaign are mostly bracelet manufacturing jobs.

Reading the documentation, I found that donated money goes out as grants to lending institutions which focus on small business--community development organizations, for instance. In effect, the donations act as a subsidy to small business in the United States. This might create jobs, or it might not. Almost by definition, donations will make small business owners better off and some of this will probably filter through to their employees.

All this is fine as far as it goes, although I think this is a great example of donating to feel good rather than do good. Credit markets generally work well in the United States. Why should I subsidize small business owners rather than, say, give donation directly to people who have lost their jobs? My real worry is that this kind of donation crowds out those that do a lot more good in the world. (side note: a quick search of the literature shows a bunch of papers looking at crowd out of private donations by public subsidy, but I didn't see much about the crowd out of private donations by other private donations. Maybe there is room for an easy experiment?)

I have been in Washington DC for the last couple of days attending an orientation for an NSF fellowship. The fellowship is for American students working in the sciences. Less than 10% of the group of 200 or so are social scientists. The rest do hard science. I must say it is a little intimidating--they are studying things like nanoparticle electrophoresis and the selection pressures behind insect morphology. I study conspicuous consumption.

Chatting with these hard science people, I realized that they face similar issues to those we talk about in economics. They just call them different names. For instance, hard scientists talk about physical models vs. statistical models. Physical models are based on deep physical theory--conservation of mass, conservation of energy. Statistical models are not tied to any deep theory. They are trained on data to make accurate predictions--a neural network is one example. Compare physical models to structural models in economics and statistical models to reduced form models. Structural models are based on deep assumptions about human decision making, while reduced form models are more concerned with patterns in data--see the microfoundations debate a few weeks ago.

One of the first things we did in this orientation was to dejargonify our project titles. Most of the titles, mine included, went from being totally incomprehensible to someone outside the field to being more or less understandable to an educated non-scientist. I can see that using jargon helps succinctly express complicated ideas to the initiated, but the cost is making your work incomprehensible to lay people. Maybe that is the point.

Defending meat eating
Mar 24, 2012

The New York Times is holding a contest for a 600-word ethical defense of meat eating. (ht: Kevin Hurley) As you may know, I am a vegetarian, but for fun I am going to submit a statement anyway. Here is my first draft. Please poke holes in the comments.

IS it ethical to eat meat? First let us cut this whale of a question down to a more bite-size morsel. I doubt that anyone would disagree that eating meat is ethical in some extreme situations--suppose that you were stranded in a lifeboat and you needed to kill a fish to feed a starving child. Likewise, it would be hard to defend the practice of cutting pieces off of a live pig to eat in front of the wounded animal. Let's specialize the question to more common situations. In particular, I choose what I think is the easiest position to defend--regularly hunting and eating fish for consumption.

This position is relatively easy to defend because wild animals exist whether humans kill and eat them or not. Wild animals rarely die of old age. They starve or are eaten by predators. Even if an animal dies of illness or infection, it will meet a painful end as scavengers begin feeding while their victim is still alive. If a human kills a wild animal, the end may still be painful. The point is that the animal was going to die painfully anyway. The relevant question is about how much longer the animal would have lived, and weighing the pleasure gained from these extra days or weeks against the pleasure that a human receives from consuming the animal. In the case of fish, I can see how the pleasure a human gets from eating a fish may outweigh the additional pleasure (or displeasure!) a fish gets from living a short time longer.

People often choose to be vegetarian because eating meat is bad for the environment. This is not the place for a discussion of what sorts of meat farming are sustainable. Instead, let us grant the premise that eating meat harms the environment. Is it unethical to benefit oneself at the cost of harming the environment? Not necessarily. The cost of a poor environment is borne by everyone, including future people, but the beneficiary of meat eating is a single person. The costs of eating meat are not fully paid by the individual doing the eating. In economics, this is known as an externality. It is unethical to substantially harm others in order to benefit oneself a small amount. However, as long as the meat eater compensates everyone else for the marginal impact his meat eating has on the environment, then meat eating is not unethical due to its environmental impact. Externalities are often corrected using taxes, and I can easily imagine a meat tax functioning like current taxes on tobacco products.

To sum up, I have defended two positions. Eating wild fish is ethical because additional time alive is not worth much to fish, some people get substantial pleasure from eating fish, and fish die painfully whether or not they are killed by humans. Eating meat is unethical if people harmed by its adverse effect on the environment are not compensated. If these people are compensated, however, eating meat is ethical.