Podcast episodes for economics classes

Here are some great podcast episodes for economic classes.  I use them (either reference them or make them available to my students).

 Remember, my linking to them is not an endorsement of everything they say, but rather a way of getting us all to think about things a little differently)

Economic Podcast Episodes

* Why economics and politics don't mix:

*  Introducing GDP: http://www.npr.org/sections/money/2014/02/28/283477546/the-invention-of-the-economy

* Globalization: http://www.npr.org/sections/money/2016/09/23/495226796/episode-725-trade-show

* Textbook prices: http://www.npr.org/sections/money/2014/10/03/353300404/episode-573-why-textbook-prices-keep-climbing

*   Externalities: http://www.npr.org/2015/07/17/421490567/how-did-a-medical-miracle-turn-into-a-global-threat

* A carbon tax (short): http://www.npr.org/sections/money/2013/06/28/196355493/economists-have-a-one-page-solution-to-climate-change

* Sustainability and Economics: http://www.npr.org/2015/07/17/421474018/what-can-a-small-town-in-england-teach-us-about-resilience

* The afterlife of a t-shirt:  http://www.npr.org/sections/money/2015/08/26/434988401/episode-502-the-afterlife-of-a-t-shirt

* The interconnectivity of Globalization: http://podacademy.org/podcasts/the-butterfly-defect-how-globalization-creates-systemic-risks-and-what-to-do-about-it/

* Protectionist policy and Canadian milk prices  FT.com http://podcast.ft.com/?p=3771

* A look at an early strike (I do not think it was the FIRST strike :) )
: http://www.npr.org/sections/money/2015/10/16/449264812/episode-658-strike-one

* Forecasting is hard.  http://freakonomics.com/podcast/how-to-be-less-terrible-at-predicting-the-future-a-new-freakonomics-radio-podcast/

* What is inside TPP?  http://www.npr.org/sections/money/2015/11/06/455055023/episode-662-omg-tpp

* The economics of education: http://www.highlanderinstitute.org/podcast/episode-025-russ-roberts-on-the-economics-of-education/

* Adam's Smith's Invisible Hand (gets two!)
  1. Pro:  https://www.stlouisfed.org/education/economic-lowdown-podcast-series/episode-3-the-role-of-self-interest-and-competition-in-a-market-economy
 2. Con:    https://www.theguardian.com/commentisfree/audio/2011/oct/06/big-ideas-podcast-adam-smith-audio

* a look at the Fed: http://www.bloomberg.com/news/audio/2016-09-21/benchmark-special-here-s-what-you-need-to-know-about-the-fed

*  A look at price inelasticities: Why are weddings so expensive.  http://www.bloomberg.com/news/audio/2016-08-31/53-why-are-weddings-so-expensive-blame-econ-101

* Robert Frank on Income Inequality: https://origin-www.bloombergview.com/articles/2016-05-17/barry-ritholtz-s-masters-in-business-robert-frank-interview

* Economics and immigration: http://www.bloomberg.com/news/audio/2016-07-06/45-the-economics-behind-the-boom-in-anti-immigration-sentiment

* The losers in a global economy?  Or "the reason for Brexit and Populism in politics?" http://www.bloomberg.com/news/audio/2016-05-18/38-the-quiet-epidemic-that-s-killing-white-americans-in-droves

* how widespread this is: http://www.mckinsey.com/global-themes/employment-and-growth/income-inequality-why-so-many-households-are-not-advancing

* Slower growth affects the "American Dream"  http://www.bloomberg.com/news/audio/2016-03-03/episode-27-can-slow-growth-and-the-american-dream-coexist

* Robert Preston on inequality: http://bbc.in/1uTbXVk

*  Is Africa the next boom?  /https://www.brookings.edu/podcast-episode/made-in-africa-manufacturing-and-economic-growth-on-the-continent/

* Why the stock market and the Economy do not always move together: http://www.goldmansachs.com/our-thinking/podcasts/episodes/02-25-2016-hatzius-currie.html



One that is just fun!
http://www.bloomberg.com/news/audio/2016-04-15/24-meet-the-most-important-country-singer-in-economics

Patents: good, bad, or indifferent?

Tabarrok on Innovation | EconTalk | Library of Economics and Liberty:

Ok, so this is probably economics, but it was so interesting I could not pass up sharing it.  And be careful to jumping to conclusions.  He points out that the one area where he believes it works is in pharmaceuticals.  His conclusions?  Create patents of differing times periods (some 3 years, some 20 years, etc).

"Alex Tabarrok argues that innovation in the United States is being held back by patent law, the legal system, and immigration policies. He then suggests how these might be improved to create a better climate for innovation that would lead to higher productivity and a higher standard of living."

It is a podcast and Ted Talk. Here is a look-in via the transcript from the podcast from George Mason:

"The argument for patents is that imitation is a lot cheaper than innovation. So that, if a firm innovates, creates something new, and another firm can come along, imitate that product, eat away all the profit, and the first firm can't recover its research and development costs. And then they wouldn't have any incentive to do them and you won't get much innovation in the first place. Exactly right. Now, there's lots of arguments against. One of the first arguments against is just to ask: Are patents necessary?.....in 1930, we created in the Plant Patent Act, we could patent roses. So, did patenting of roses lead to more roses, more beautiful roses? Because people could capture the benefits without fear of being copied? Exactly. Did it lead to a flowering? No, it did not. We didn't see any big increase in rose innovation. In fact, we might have seen a little bit of a decrease. Moreover, even today, most new roses are not patented. Most inventions, most innovations are not patented. And I think people are a little bit surprised about this. With a few exceptions--chemicals, pharmaceuticals--being really the two biggest important exceptions. In some fields we don't even all patents, like fashion. Highly innovative, no patents at all. But in most fields, most innovations are not patented at all. You mention an example I've been thinking about recently, which is sports. Somebody innovates a new formation in football. It can't be patented. But coaches spend hours looking for a small edge."

Here is the Ted Talk:

 

HT to Ismail Ali Manik

Related articles

• Tabarrok on innovation (cafehayek.com)
• Tabarrok the Statist (marginalrevolution.com)
• Launching the Innovation Renaissance (marginalrevolution.com)
• Plant Patents: If It Smells Like A Rose . . . (tacticalip.com)

Income inequalities and how they hurt

The traditional economist in me has trouble with this.  Why would people care if others have more than they do?  If I am happy, it should not matter if my neighbor gets $20,000 or $200,000 or $200,000,000 a year so long as (s)he has enough to live.

On the other side has been a growing field of research that has shown that inequalities hurt the overall "happiness" and even the health of residents of a country.  While we cover some of it in Behavioral Finance class, I was surprised by the enormity of the findings.

Worth watching even if you may not agree with all of it.

First downgrade of U.S. credit rating - The Washington Post

UPDATE:  Shortly after the original post, the downgrade did in fact happen...

From The Guardian:

"S&P had held back cutting the rating earlier in the day, after the US government reportedly questioned its maths. But the agency insisted it was cutting America's top AAA rating by one notch to AA-plus, saying the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilise its debt situation. 

This is the first time that S&P has issued a "negative" outlook on the US government since it began rating the credit-worthiness of railroad bonds in 1860. 

The dramatic reversal of fortune for the world's largest economy means that US treasuries, once seen as the safest investment in the world, are now rated lower than bonds issued by countries such as the UK, Germany or France."

Editorial:

Upon some reflection, I do believe (or at least hope) that this is a good thing in the long run.  In class we harp that the market is a harsh disciplinarian and it will force managers to think long term even when they themselves have a short term horizon.  We teach that bondholders may help to monitor firms with free cash flow problems.

This is not that different.  Politicians have a short term horizon. And in the absence of shareholders, bondholder really are in the best position to monitor politicians.  (Some may argue that the regular elections serve as the most effective monitoring tools, I disagree.  Incentive problems and conflicts of interest are too strong here:  how often will people vote against money/goods/services going to themselves?)

So it is my hope, that a century from now, history books will look to this day and say, that was the start of the US getting its fiscal house in order.  The choices over the next decades will not be easy, but without some market discipline, I fear the necessary decisions would never be made.


Original post:

S&P considering first downgrade of U.S. credit rating - The Washington Post:

".....S&P officials advised the Treasury that it had decided to lower the AAA credit rating, which the U.S. government has held for 70 years.

.....
Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.

Some analysts are worried about the impact of a downgrade on markets where Treasurys are held as collateral and the AAA rating is required."

Sort of surprised it came now, but not at all surprised it happened. Most speculation was that it would happen this fall.

How will the world integrate emerging economies

‪AtGoogleTalks's Channel‬‏ - YouTube:

Fascinating stuff! Looks at rates of growth historically and how current rates of growth in emerging economies and developed markets are differ. More economics than finance, but well worth your time!

"Michael Spence, winner of the Nobel Prize in Economic Sciences, explains what happened to cause this dramatic shift in the prospects of the five billion people who live in developing countries. The growth rates are extraordinary, and continuing them presents unprecedented challenges in governance, international coordination, and ecological sustainability. The implications for those living in the advanced countries are great but little understood.

Spence clearly and boldly describes what's at stake for all of us as he looks ahead to how the global economy will develop over the next fifty years. The Next Convergence is certain to spark a heated debate how best to move forward in the post-crisis period and reset the balance between national and international economic interests, and short-term fixes and long-term sustainability."

Keynes and Hayek rap from PBS

This is good. Not every day you can teach economics with rap music.

What'll it be? Inflation or deflation? Or both?

Lost in the fear of inflation that has gripped many for months, is the reverse and almost silent bull market killer, deflation. In recent days however we have seen that deflation has again made the news.

In Japan it was reported that "

."..wholesale prices fell a record 6.6 percent in the year to June, as the world's No.2 economy slides deeper into deflation",

In Ireland, the TimesOnline reports that

"Ireland sunk further into deflation in June as the cost of living fell at the fastest rate since the Great Depression, raising the prospect of a prolonged recession"it is deflation that is the problem.

The prospect of deflation has even hit the pages of the US's WSJ Wall Street Journal:"

... falling commodity prices swept away lingering fears of inflation and fueled fresh economic concerns....Contracts on the 30-year bond saw bigger price gains, closing nearly two full points higher with yields seen below 4.25% at contract expiration. "The participants looked around and saw deflation everywhere," said James Barrett, a market strategist ...who cited falling prices in grains and metals alongside energy Wednesday

Most of us know the traditional (and well documented) truth that higher money supply growth leads to inflation rule. How can their be deflation with such a growth in the money supply?

There is no simple answer but when you couple the fact that banks are not making as many loans as they did previously and consumers are not buying as much as they did previously, you have at least the right conditions for deflation.

To make matters worse, the money being spend under the Fed stimulus packages may not be having as large of impact as had been hoped/expected. For instance consider the following article that Charlie a former student of mine sent:

Debt and Deflation - John Mauldin's Outside the Box - InvestorsInsight.com | Financial Intelligence, Advice & Research / Investment Strategies & Planning for Individual Investors.:

"...week, the most important question that an investor can ask is whether we are in for deflation or inflation. And this week we read a well reasoned piece on deflation. ...Van Hoisington and Dr. Lacy Hunt give us a few thoughts on why they think it is deflation that will ultimately be the problem and not inflation we are dealing with today....

...Barro and Perotti are saying that each $1 increase in government spending reduces private spending by about $1, with no net benefit to GDP. All that is left is a higher level of government debt creating slower economic growth."

"....a paper written at the University of California Berkeley entitled The Macroeconomic Effects of Tax Changes: Estimates Based on a new Measure of Fiscal Shocks, by Christina D. and David H. Romer (March 2007). (Christina Romer now chairs the president's Council of Economic Advisors). This study found that the tax multiplier is 3, meaning that each dollar rise in taxes will reduce private spending by $3."

So what do you think? Inflation? Or Deflation.

This is the new poll question I included on the blog: which is more likely Inflation or Deflation?" It's off on the left. Right now Inflation is ahead 58% to 42%.

And if you are not confused enough, one scenario worth considering is short term deflation (due to lower demand), and then longer term inflation (due to higher money supply growth) when the Fed has a difficult time withdrawing money from the system.

Thanks Charlie!

$1.3 million per job? For real?

Old Europe Is Right on Stimulus - WSJ.com:

"The White House estimates of 3.6 million new jobs is based on an 'Old Keynesian' model on the impact of government spending, while the new models adjust for the rational behavioral response to the stimulus by businesses and consumers. The White House figures, by economists Christina Romer and Jared Bernstein, also assume zero interest rates for a minimum of four years. The alternative assumes, more reasonably, that as growth returns interest rates will also rise What the four economists [Cogan, Cwik, Taylor, and Weiland] found is that the Administration's estimates for stimulus growth were six times as high as they could produce under a modern Keynesian simulation. By their estimates, the stimulus would produce, at most, 600,000 jobs and add perhaps 0.6% to GDP at its peak. That's nowhere near a multiplier of 1.5 and suggests the $800 billion would have been better devoted to business tax cuts or fixing the financial system. That's $1.3 million in spending per job, for those keeping score at home."

The paper on which much of the article is written is "New Keynesian versus Old Keynesian Government Spending Multipliers" which is by John F. Cogan, Tobias Cwik, John B. Taylor, Volker Wieland.

Will there be any "green" in a Green Economy?

Not sure if this has much finance content. More of an editorial. Sorry, but I dislike when a major variable is left out of the analysis of things.


From Clusterstock: Green Economy Not Yet Ready For Primetime... But It Will Be Soon:

"The WSJ throws around some scary subsidy numbers, saying the government pays too much for renewable energy, and its still not cheap. The Journal says that if we try to hit Obama's mandate for 25% of our energy from renewables we will kill manufacturing. The high price of alternative energy means factories will go under as they struggle to pay the outsized electricity bills....The flaw in this argument is the time frame: Obama only wants to raise our current level of alternative energy consumption from 1% to 10% over the next four years. And then hit the 25% mark by 2025....Also, as long as we keep investing in green technology, technology improvements should rapidly reduce the cost of green power. In the next two years, for example, solar power could reach grid parity"

Let me state up front that I am biased. Not because of any stock holdings. Not because I have forgotten all of my economics (at least I hope not!) But because as a runner/cyclist/outdoors aficionado/citizen worried about the future, I really hope "The Green Economy" takes does well. Why? For a reason that both the WSJ and Clusterstock seemingly ignore: the externalities of traditional energy sources.

Externalities are those costs that the user of the product do not bear. For instance, I can drive around all day in a car that pollutes the atmsophere and yet most of that cost of pollution falls on others. Externalities are notoriously difficult to measure so often we assume them away. But they are real and in any economically correct discussion must be included.

All energy comes with costs. And it is definitely true that "Green" sources have externalities as well (locally there is a major controversey about wind power right now). But I believe (and this is something that can not be proven since we each may have different probabilities on future events) that the expected present value of the externalities from "Green" energy appear to be lower than those of other sources of energy.

Of course this is just my opinion and your mileage may vary.

To compare differing power sources, we really want to be comparing apples to apples and this is not being done.

The question that needs to be answered convincingly is whether government subsidies (which are easily measurable) are greater than or less than the the externalities (largely not measurable) that accompany more traditional energy sources?

What are these "difficult to measure" externalities? To name a few: pollution (carbon and other), reliance on oil from politically sensitive areas, drilling in pristine wilderness areas, risk of spills, poor diversification of supplies (if I could steal from Taleb "over optimized") which leads to excessive volatility etc.). These externalities are generally not priced in oil (and hence oil is priced "artifically" low), so oil is used more than is strictly optimal in an economic sense.

But "what about nuclear?" some may say. "Look at France. They use much nuclear and have had very few problems" And at some point these nuclear activists have a point. But while the unpriced costs are different, they still exist. The easiest is to understand is the risk of a catastopic event (meltdown etc.). Oh sure the odds are low, but remember Black Swans do happen. And the true cost of that has to be borne in advance.

Why should it be borne in the present you ask? Doesn't this appear to be very similar to the idea of paying large bonuses for good earnings when looming off in the distance was a financial meltdown? Only if the costs are considered a priori will be make the correct decisions. Or in simpler terms, just because something has not happened, does not mean it won't. And if it can, we have to include that in our decisions today.

[Here the reader can flash back a few years to an imaginary conversation at a large investment bank: "Look at Bear Stearns. They take big risks and are heavily levered and they have had very few problems. The cost of debt is lower than the cost of equity. Why don't we do the same? "]

So what should be do? I do not know. I do not think anyone knows for sure, but I will argue long and hard that externalities (both current and future) are as much a cost as the billions of dollars of subsidies for green energy and should be factored into any analysis. Otherwise we are comparing apples and kiwi fruit.

SSRN-Moral Hazard in Leasing Contracts: Evidence from the New York City Taxi Industry by Henry Schneider

Great for class! Interesting, memorable, and on a topic which students often find boring and forgetful.

Leasing is an important, but understudied method of financing a wide range of assets. Unlike owning an asset where the owner of the asset is also the user of the asset, in a lease (and also in a rental agreement), the asset is used by one party (lessee) and only reverts to the lessor after the contract expires. Thus, it can lead to behaviors that are different than if the owner was also using the asset.

These differing behaviors are generally called a moral hazard problem and can help explain why many treat a rental car differently than their own vehicle.

Henry Schneider takes this idea one step (uh, one mile may be more appropriate) and examines the differences between taxi cab driver behavior when the taxi is leased vs when it is not.

the main finding: Even after controlling for endogeniety problems (that is self selection where safer drivers might be more apt to own), leasing does seem to lessen the maintenance and care of the vehicles and lead to more accidents.

The paper: SSRN-Moral Hazard in Leasing Contracts: Evidence from the New York City Taxi Industry by Henry Schneider:

"...evidence about the leasing moral hazard by examining the New York City taxi industry, which is split between taxis operated exclusively by lessees and taxis with owner-drivers. Lessees have significantly worse driving outcomes than owner drivers:

In 2005, long-term lessees experienced 62 per cent more accidents and 64 percent
more driving violations per mile than owner-drivers, and operated taxis that failed vehicle
emissions and safety inspections at a 67 percent higher rate. Moral hazard is an obvious candidate to explain these differences...contracting over driving outcomes instead of actions also faces obstacles since taxis are typically operated by multiple drivers, which prevents some driving outcomes (e.g., vehicle mechanical failures) from being matched to individual drivers....",

On the endogeneity issue:

"...controlling for driver and vehicle characteristics is not straightforward: As
with most empirical work in contract theory...address this challenge in three ways. First, I
estimate the difference in outcomes between lessees and owner-drivers conditioning on a
rich set of observed driver characteristics. Second, I conduct an instrumental variables
analysis to address the possibility of unobserved driving risk that is correlated with leasing
choice, instrumenting for leasing choice with community norms for taxi-ownership. Third,
I compare the before and after outcomes of the 1,130 drivers who switched from leasing
to owning during the sample period....All of these approaches yield qualitatively similar results..."

and finally:

"After controlling for vehicle usage and driver characteristics, I estimate that moral
hazard explains 34 percent of lessees’ violations, 18 percent of their accidents, and 30
percent of leased taxis’ vehicle inspection failures."

Cite: Schneider, Henry S.,Moral Hazard in Leasing Contracts: Evidence from the New York City Taxi Industry(November 2008). Johnson School Research Paper Series No. #03-09. Available at SSRN: http://ssrn.com/abstract=1146648

good stuff!!

Why Economics Is Important! (Mises & Keynes, Think So!) | Simoleon Sense

SimoleonSense has the following great piece.

Why Economics Is Important! (Mises & Keynes, Think So!) | Simoleon Sense:

"Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence…”

“In such vital matters blind reliance upon “experts” and uncritical acceptance of popular catchwords and prejudices is tantamount to the abandonment of self-determination and to yielding to other people’s domination.”

“Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.”"

I can not tell you at how many family dinners and group runs that the idea that economics should be a required class for all students has come up, but it is in the hundreds. Well said!

The Public Payroll Always Rises - WSJ.com

One one hand government spending is in a Keynesian way seen as a means of keeping the economy growinging in an economic slowdown, but given the taxes and
The Public Payroll Always Rises - WSJ.com:

"As the recession hits home, all across America businesses and families are having to make hard decisions about what not to buy this year, or whether they can afford a vacation or that plane trip home for the holidays. The exception is the government -- federal, state and city.

"New York City did witness a reduction in public employment in 2002 and 2003, during the last period of slower economic growth. But the city quickly resumed its habit of ever-growing payrolls, and they have kept growing rapidly in the years since -- to an estimated record this June 30 of 313,965 employees on the public dime, according to the Mayor's office. That's an increase of more than 40,000 public workers in a year when Wall Street has been enduring historic losses and laying off tens of thousands of people."

Which means that New York State Taxes will probably go up again, which will further slow the economy of upstate New York. (BTW recently New York State gave up the top spot in taxes, but we are still a solid #2)

Tech Beat Microsoft and Yahoo Russian Roulette - BusinessWeek

Game theory is always one of the more mathematical modeled issues, so when you get a chance to see an easy one, you grap it, here is just such an analysis:

Tech Beat Microsoft and Yahoo Russian Roulette - BusinessWeek:

"Yahoo and Microsoft have also done their best to increase the others cost and risk of delaying. This month, Microsoft set a three week deadline, set to expire April 26, for Yahoo to begin negotiating. Otherwise, Ballmer would move ahead with plans for a proxy fight, including nominating a new Yahoo board of directors likely to approve an even lower Microsoft bid. The move is intended to make Yahoo shareholders more nervous about waiting for a better bid, and thus more likely to either push for the deal or sell their stock in anticipation of a lower bid, weakening the company’s financial position. “I think Microsoft is wise in trying a first-and-final strategy,” says Robert Hansen, senior associate dean at Dartmouth’s Tuck School of Business who studies game theories applications in business. “That’s a good strategy, if the target believes you are committed to it.”"

Milton Friedman's Free to Choose 1990

Ok, so this may or may not be really finance, but the line between economics and finance is pretty arbitrary, so I am including this one. It is from PBS's 1990 series Free to Choose.

Steven Levitt Lecture

at the Steven Levitt lecture,
originally uploaded by FinanceProfessor.

I took a small group to the Steven Levitt(of Freakonomics' fame )Lecture at UB this week. I will give you some highlights soon.

Weird going to an academic lecture (more or less ;) ) in a basketball arena and having the crowd feel like a basketball game.


A few thoughts: overall VERY interesting.

Random comments and notes from the Levitt Lecture in Buffalo.

Before: Seems weird going to an academic lecture in a basketball arena with a few thousand others. Interestestingly a large portion of the audience were high school students which proves something for about economics but I am not sure what. Some possibilities:

1. they have a lower opportunity cost of time than others
2. demand curves slope down and they were offered free tickets.
3. They were told to go by their teachers and thus had more of an incentive

The first speaker was a high-up at UB (I think VP of academic affairs at UB—I THINK) who was good. His best line was: “only by asking the right questions can world make sense.” (or something like that).

The second speaker was Issac Ehrhlich. He spent most of the time introducing Levitt. His best line: “He [Levitt] proved that economics is not the abysmal science it had been known as.”

Levitt then came on. Some of his comments:

• “Incentives are at the heart of what economists do.”
• He then told the story of John S___ an IRS employee who caused 7 million children to disappear. No, he was not a mass murderer but it was his idea to mandate Social Security numbers for children on parents’ tax returns to qualify for deduction. Many had been lying to get the deduction. With this rule change they could not do it anymore. Makes the IRS about $2B per year! One great idea. Unfortunately for him, he worked in government and was not well paid for the idea: he had to fight (and get congressional help) to get a bonus of $25,000.
• His mom was a psychic. His dad was a doctor specializing in “internal gas”. He then told the story of how he chose to get a PHD in Econ and his math difficulties (indeed his story of his first PHD math class was not unlike mine. Only difference is that he overcame his problems ;) )
• His dad told him if he could not compete against smarter competition “in real economics”, choose a niche that others do not want and excel there.
• His favorite story in Freakonomics is that of the drug dealers (See video below).
• Altruism may or may not increase utility, but the research into altruism definitely showed that people care of how they appear to others.
• My favorite story was about his new work on prostitutes. He said that the world’s oldest profession may also be the world’s worst. Big risks, little money etc. He had a prostitute speak to his class. Had to pay her out of own pocket as paying for a prostitute is frowned upon. Among findings: probably more likely to have sex with a police officer than be arrested by one. The type of “service” has changed over time as premarital sex has become more common. Now take the “weird stuff” to prostitutes (Gary Becker thought that up—I might add internet as well—or so I hear!).

Q&A (others Questions were left out)

• Q. On Trickle down economics. (person clearly wanted to hear it did not work)

A. Tough question. Tradeoff between a bigger pie and more equality. Lower taxes do increase economy but also inequality. In the end “we really do not know”.

• Q. How do you come up with some of your metaphors?

A. Having a mom as a psychic who channels dead people and a father who studies intestinal gas really created an atmosphere where anything was ok. This cuts down on his self-censorship.

• Q. On Health Care:

A. Health care is tough. For some reason people expect it for free. Health care not really different. If you want it, you pay for it. Healthcare is a hige share of GNP, but we do get a lot for it….somehow need to encourage innovation. For instance years ago people expected polio to take up large percentage (30%) if healthcare costs. Then vaccine. Polio costs fell. But now it is difficult to keep patents etc, so vaccines are less profitable, so less of an incentive to develop new ones.

Here is an example of what it was like. This was from a few years ago, but VERY VERY similar to what he did. Some of it even in the same words.

3 Americans Win Nobel in Economics - New York Times

3 Americans Win Nobel in Economics - New York Times:

"The field of mechanism design theory strives to take into account the realities of economic life systematically. Adam Smith’s “invisible hand” is a powerful metaphor that describes how the market, in theory, will always efficiently allocate scarce resources. Yet real-world conditions tend to complicate things. Competition is not completely free, consumers are not perfectly informed, optimizing private production and consumption may have social costs, and institutions can strongly shape economic bargaining. The work begun by Mr. Hurwicz, and advanced by Mr. Maskin and Mr. Myerson, gave economists and policy makers new intellectual tools to address questions like those listed in the academy’s citation: “How well do different such institutions, or allocation mechanisms, perform? What is the optimal mechanism to reach a certain goal, such as social welfare or private profit? Is government regulation called for, and if so, how is it best designed?”"

So Fama, Jensen, et al will have to wait at least another year.

Monkey pay? Monkey do

Financial Rounds points out a really really cool article that shows for the zillionth time that economics works.

The blog entry is a review of a paper by Boyle who examines issues within academia. Now it has become my trademark to mention whenever pay issues come up that there are two key points to every pay issue: the form of pay and the level of pay. Form of pay is what creates incentives, whereas the level of pay determines the pool of candidates for the job.

It is this paper, Boyle largely examines the level of pay. What makes the paper is that in New Zealand university pay is independent of field. Thus in areas where the market rate is higher, the New Zealand schools lose the better employees to other schools whereas in fields where the market rate is lower, they get a better selection of candidates (and by extension employees).

The Unknown Professor (at FinancialRounds) summarizes it perfectly:

"In New Zealand, faculty receive the same salary regardless of their academic discipline (with a few exceptions - the medical and dental fields). So, a high-quality researcher in finance would give up a lot to go to New Zealand as an academic, since academic finance salaries are higher elsewhere. In contrast, an English professor considering a position in New Zealand has lower opportunity costs, since English professor salaries are relatively low outside of New Zealand."

Boyle introduces the main points very succiently:

"Even if non-financial phenomena such as pride and enjoyment are important motivators, the insights of personnel economics and efficiency wage theories suggest that there are still good reasons for believing that low remuneration should have an adverse effect on average worker quality.

• First, there is a sorting effect: offering low remuneration discourages applications from high-ability workers.....
• Second, there is an incentive effect: for given worker ability, high remuneration motivates greater effort due to the greater competition for such positions and hence the greater threat of termination in the event of under-performance....
• Third, there is an appreciation effect: low pay may make workers feel less valued"
  

The findings? Again in Boyle's own words:

"more valuable opportunities have a significantly adverse effect on discipline research quality; on average, a one standard deviation increase in the average difference between US and NZ salaries lowers a discipline's average quality score by about 13%. A higher salary shortfall also reduces the percentage of high grades achieved by a discipline, and increases the number of low grades."

In other words, by and large labor markets do work. Of course, there are exceptions (people willing to accept less pay to be near family, work more flexible hours, or whatever), but by and large, if people are paid a below market rate, the employees will not be as "good" as if they were paid more.

Or as Boyle so aptly puts it: "paying peanuts attracts mainly monkeys"

Too informal for you? Ok, another Boyle quote: "pay levels do matter in determining the available pool of quality workers." (which says it better, but is not nearly as much fun).


Cite of paper:
Boyle, Glenn, "Pay Peanuts and Get Monkeys? Evidence from Academia" (August 2006). Available at SSRN: http://ssrn.com/abstract=922180

A Defense of Economics

Economics Wins, Psychology Loses, and Society Pays by Max Bazerman, Deepak Malhotra

The short version of the Bazerman and Malhotra chapter is that the authors believe that economics has come to dominate (to the exclusion of other fields) the social sciences and political arena. (Somewhat analogous to the idea that rational economics has dominated in finance to the detriment of psychology and behavioral finance).

The authors identify "five predominant myths, adapted from pervasive economic assumptions, which serve as guiding policy principles and serve to destroy value in society. These myths include:

1) Individuals have stable and consistent preferences
2) Individuals know their preferences and they pursue known preferences with volition
3) Individuals make decisions based on all of the evidence available to them
4) Free markets solve economic problems
5) Credible empirical evidence consists of outcome data, not of mechanism data"

While I have reservations about each of these, I will concede some truth in their views. For instance, Does psychology matter? Undoubtedly (see for instance their discussion of spending increases had the term "bonus" been used instead of "rebate" with respect to taxes).

However I disagree with much of the paper. Rather than being the norm, I would argue that it is only the rare close-minded financial economist who does not understand that other social sciences also have roles to play (even the most ardent of financial economists now concede some things to behavioral finance). That economics, and by extention finance, has become dominant is because it has shown it to be the best way we have of dealing with problems and limited resources.

Are there problems with economics/finance/free markets? Yes. Do some rights get trampled? Yes. Should we consider other models? Sure. Given enough time, we should consider all things, but given limited amounts of time and resources, we could do MUCH worse than relying predominantly on economic principles!

And in that spirit, I hope society grows more (and not less) economic in our thinking. That is not to say growth for growth sake. That is not even to say always growth--retrenchment can be value maximizing. But ideally growth through positive NPV investments. Where all costs and benefits are considered. Why? Because with a proper assigning of property rights (including environmental, intellectual etc), economics does work.

---

Suggested Citation

Bazerman, Max and Malhotra, Deepak K., "Economics Wins, Psychology Loses, and Society Pays" (2005). Harvard NOM Working Paper No. 05-07. http://ssrn.com/abstract=683200

Greenspan on Adam Smith--February 6, 2005

Alan Greenspan gave a great tribute to Adam Smith! Fascinating!

FRB: Speech, Greenspan Adam Smith February 6, 2005 Some of the highlights:

"In the broad sweep of history, it is ideas that matter. Indeed, the world is ruled by little else. As John Maynard Keynes famously observed: "Practical men, who believe themselves to be quite exempt from intellectual influences, are usually the slaves of some defunct economist....In his Wealth of Nations, Smith reached far beyond the insights of his predecessors to frame a global view of how market economies, just then emerging, worked. In so doing, he supported changes in societal organization that were to measurably enhance world standards of living."

Later Greenspan notes

"For most of recorded history, people appear to have acquiesced in, and in some ways embraced, a society that was static and predictable. A young twelfth-century vassal could look forward to tilling the same plot of his landlord's soil until disease, famine, natural disaster, or violence ended his life....Smith lived at a time when market forces were beginning to erode the rigidities of the remaining feudal and medieval practices and the mercantilism that followed them....For the first time, modern notions of political and economic freedom began to gain traction....gave rise to a vision of a society in which individuals guided by reason were free to choose their destinies unshackled from repressive restrictions and custom.

Adam Smith played a key role in the progression of this economic thought:

"In 1776, Smith produced one of the great achievements in human intellectual history: An Inquiry into the Nature and Causes of the Wealth of Nations. Most of Smith's free-market paradigm remains applicable to this day"

Great Stuff! I definitely recommend you read the whole speech!

Norwegian, American share Nobel economics prize - Oct. 11, 2004

Norwegian, American share Nobel economics prize - Oct. 11, 2004

Congratulations to Finn Kydland and Edward Prescott on winning the 2004 Nobel Prize for Economics!

While economic forecasting is difficult, our understanding has improved greatly in recent decades. We have come to understand that monetary and fiscal policy are important and that the supply side (not just the demand side) must be considered. These insights are in no small part because of Kydland and Prescott.

In any Macro Economics class or Money and Banking class it is now standard fare that supply shocks matter. For instance, the economy soared in the 1990s in part because of the increased technology that was available. Kydland and Prescott were at the forefront of this economic revelation when in 1982 "they created a model which showed that supply-side shocks -- such as technology -- are a driving force behind the business cycle, rather than variations in demand alone." (CNN)

Their famous 1982 Econometrica paper also showed the importance of expectations on the business cycle. For instance, if higher inflation is expected, but not here yet, market participant's will act as if it is there. This was particularly important during the 1970s when central bankers continually changed their policies designed to keep the inflation in check. Predictably, these changes often led to higher inflation. From the San Francisco Chronicle:

"In the 1970s, many Western countries had high inflation because their central
banks didn't keep a consistent monetary policy. They accepted rising inflation
for a short-term decrease in unemployment, said Per Krusell, a member of the
Nobel Committee for Economics. A 1977 article by Prescott and Kydland
highlighted this problem, which led to many countries forcing their central
banks to stick to certain policies, regardless of market forces."

Kydland teaches at Carnegie Mellon University and the University of California. According to the SF Chronicle he was teaching when he herd he had won:

"Kydland told The Associated Press he learned about the prize during a lecture
at the Norwegian School of Economics and Business Administration in Bergen,
Norway. "I was a little perturbed when they interrupted my lecture until I got
to the secretary's office and found out what the phone call was about,"

Prescott teaches at Arizona State. No reports as to what he was doing when he heard.


Overall a very good choice! FWIW I still think Jensen and Fama are deserving of the award. Maybe next year!