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Tuesday, October 29, 2013

Max U, Sociopath

Deirdre McCloskey was here yesterday to talk to grad students about how to write better (because god knows how terrible academics write). So I got some good advice but more:
I call the utility maximizing agent in economics Max U because he "maximizes subject to." Do not use Max U as a model to live life. Screw incentives. Max U captures an interesting aspect of human behavior, but I don't know if you've noticed, that agent is a sociopath.
I am paraphrasing of course. An economics moment of zen.

I've read more about Deirdre in Wikipedia since and her personal life is quite colorful. She gives a public lecture today on "Why Economics Can't Explain the Modern World: 1800 to the Present."

Friday, October 18, 2013

There is No Line! The Illusion of Eradicating Poverty

The momentum seems to be building for a goal to “eradicate poverty by 2030.” Reducing poverty is a noble goal, one to which I fully subscribe. But the “eradicate poverty” campaign is actually only focused on “extreme” poverty which is an absurdly low and completely arbitrary definition of the poverty. I am for eradicating poverty, but real poverty, as experienced by billions of people in the world, not on the extremist vision of “dollar a day” poverty. There is no poverty line at a dollar a day (now really $1.25 in purchasing power parity currency units). A dollar a day global poverty line exists nowhere except in the minds of elite technocrats, advocates, and donors. 
What would a “line” look like? There is line at 0 degrees Celsius. Below that line water is solid and above that line water is liquid. As water crosses the freezing point it changes states—it freezes. Similarly a person can be said to “have a fever” because we know that the normal, healthy human temperature is 37 degrees Celsius (98.6 F) and temperatures much above that are a reliable symptom of certain infections.

In contrast, as people cross the “dollar a day” poverty line…absolutely nothing special happens to anyone anywhere
There is no line at dollar a day in objective indicators of well-being. The wide availability of multi-module household data sets allows us to construct graphs showing the relationship between non-money indicators of household and child well-being--like malnutrition or health or child enrollment or access to sanitation or access to electricity--and household economic status for dozens and dozens of countries. As people get more prosperous they are nearly always better off by nearly every indicator—but there is no line. There is no discontinuity or sharp non-linearity around a dollar a day poverty line in any country for any indicator.

There is no line at dollar a day subjectively assessed well-being. In the entire research on subjective well-being or happiness no one has ever argued people are happier or feel better about life because they are “not poor” by the dollar a day standard (any more than any other gain in income). No person in history has ever celebrated crossing the dollar a day threshold—any more than any other income gain—there is no line.

There is no line at dollar a day in income dynamics. One might think a poverty line exists that demarcates a “poverty trap” and that people “in poverty” have a hard time escaping poverty—except that it doesn’t. All of the available evidence that tracks households over time finds enormous fluidity across the dollar a day threshold--and no evidence that it is harder to increase incomes from just below than just above—there is no line. ...
Only Lant Pritchett has the cahones and eloquence to say something like this. And this is why he ranks high on my list of favorite economists. There is more at the CGDEV blog.

Tuesday, October 15, 2013

What's Behind the US as a Nobel Superpower?

And why not the EU or China or Russia?

I am culling this directly from one of my favorite sources of news feed, The .Plan by James Choi. Bret Stephens from the WSJ writes:
Note to Xinhua: China, with 1.3 billion people, has produced a grand total of nine winners in its entire history. Of those nine, seven live abroad, including three in the U.S. Another, Liu Xiaobo, sits in a Chinese prison. ...

Russia, with a population of 142 million, has three living Nobel laureates, or one for every 47 million. So much for the land of Pasternak and Sakharov.

A more interesting case is Israel. The Jewish state should be a Nobel powerhouse, given that Jews, 0.2% of the world's population, have won 20% of all Nobels, including six prizes this year alone. But while Israel can claim nine living laureates, three of them live and teach mainly in the U.S. ...

Then there is Europe: Half a billion people with a comparatively minuscule Nobel representation. France has, by my count, just 10 living laureates. Germany does better, with nearly 30, although at least nine of them (including Henry Kissinger, physicist Arno Penzias, and this year's medicine winner, Thomas S├╝dhof), have long lived in the U.S. Britain does about the same as Germany.

Why is Europe such a Nobel laggard? In hindsight, evicting and killing most of its Jewish population was perhaps not the best idea...

A more contemporary answer is the pervasive mediocrity of higher education throughout the EU. ... 
Which brings us to the Nobel superpower. Since 2000, Americans have won 21 of the 37 physics prizes, 18 of the 33 medicine prizes, 22 of the 33 chemistry prizes and an astonishing 27 of the 30 economics prizes. ...

The secret of America's Nobel sauce isn't hard to understand: an immigration culture that welcomed everyone from Ronald Coase (from the U.K.) to Subrahmanyan Chandrasekhar (from India) to Martin Kaplus (from Nazi-era Austria) to Elizabeth Blackburn (from Australia). A mostly private, highly competitive, lavishly endowed university system, juiced by federal funding for fundamental research. A culture of individualism and an ingrained respect for against-the-grain thinking.
This is far from solid proof, I agree, but this last paragraph encapsulates to me, in theory, the best of what the US can be. It isn't always that way. But it must also continue to be about the culture that welcomes, as that inscription on the statue of liberty says, the poor, the tired, the hungry, yearning to be free.

Many presage that China will soon overtake the US as the world's economic superpower, but I am still bullish on the US for three reasons: 1. Immigration 2. its University system and 3. Hollywood.

But then again here we are with such a dysfunctional government.

Monday, October 14, 2013

When Incompetence Trumps Corrupt Behavior

I am reminded of the saying that goes something like: Why blame corruption when you can easily blame incompetence? Azerbaijan releases election results before voting had even started. The Post reports:
Azerbaijan's big presidential election, held on Wednesday, was anticipated to be neither free nor fair. President Ilham Aliyev, who took over from his father 10 years ago, has stepped up intimidation of activists and journalists. Rights groups are complaining about free speech restrictions and one-sided state media coverage. The BBC's headline for its story on the election reads "The Pre-Determined President." So expectations were pretty low. 
Even still, one expects a certain ritual in these sorts of authoritarian elections, a fealty to at least the appearance of democracy, if not democracy itself. So it was a bit awkward when Azerbaijan's election authorities released vote results – a full day before voting had even started...

The data were quickly recalled. The official story is that the app's developer had mistakenly sent out the 2008 election results as part of a test. But that's a bit flimsy, given that the released totals show the candidates from this week, not from 2008.
As I said it's funny when these things happen because it makes me wonder whether what we should worry about is not corruption per se but just simply incompetence of government officials. But then again I am reminded that a lot of corrupt behavior is shrewdly done.

HT Karelle from my Twitter feed.

Saturday, October 12, 2013

Will the World Bank Become (Like) a University?

Or at least that's how it sounds to me. The NYTimes reports on the major restructuring that's taking place in the Bank:
The reorganization, Dr. Kim said, is aimed at making the bank more efficient and quicker on the ground — a more effective engine of change that is more responsive to countries’ needs in real time. He said the idea was to be a “solutions bank,” he said, offering lending or grants, consulting and technical expertise. (One of his predecessors as president, James Wolfensohn, made his goal turning the institution into a “knowledge bank” back in the 1990s.) 
The reorganized bank would focus more on working in partnership with the private sector, Dr. Kim said. It would also be more tolerant of higher-risk, higher-reward and more controversial ventures. “If you have a spectacular failure, the only thing that I would be disappointed about is if we didn’t ensure we learned from that failure,’ ” Dr. Kim said.
I really like that part about learning from failure. That is not done enough. Often, we hear about best practices but never learn about worst practices.

Some of my old colleagues/bosses are hopeful about the change. Nancy Birdsall is too.
Ms. Birdsall also said that the bank might need to do more to adapt to the world’s development needs as they change, for instance devoting money and expertise to problems like drug and human trafficking that occur outside of a single-country context. “The new development challenges are often global in nature, shared by people in the United States and Japan and so on,” she said. “Climate is the classic example.”
Let's see how this develops.

Thursday, October 10, 2013

A Restaurant Guide on Tax Cheats

Of potential tax cheaters, that is.
Next time you eat out in the Philippines, you might want to check the government's restaurant guide. It doesn't tell you where the best food is, but if you're possibly patronizing a tax cheat. 
The Bureau of Internal Revenue and the Finance Department have started running weekly ads in major newspapers and websites listing top-ranked restaurants based on TripAdvisor reviews along with the amount of tax each restaurant paid based on government figures.  
The latest ad Wednesday listed 40 top restaurants in metropolitan Manila's two cities, but only 17 of them were top tax payers — the implication is the others may be cheating. The Philippines has clamped down on rampant tax evasion, including a "Tax Watch" campaign targeting restaurants, shops, doctors, lawyers and others, in a bid to increase revenue collection.  
Finance Secretary Cesar Purisima has said the government is using statistics to reveal tax anomalies...
Smart! Will Filipinos vote with their stomachs? Someone can measure this. The full story is here.

Wednesday, October 9, 2013

The Long Term Effects of Birth Control

A hat tip to Freakonomics, where I first saw about this post. Our resident labor economist Martha Bailey here at Michigan presents new evidence on the long-term effects of birth control policy in the US from the 1960s and 1970s. And evidence suggests largely positive impacts decades later:
This paper assembles new evidence on some of the longer-term consequences of U.S. family planning policies, defined in this paper as those increasing legal or financial access to modern contraceptives. The analysis leverages two large policy changes that occurred during the 1960s and 1970s: first, the interaction of the birth control pill’s introduction with Comstock-era restrictions on the sale of contraceptives and the repeal of these laws after Griswold v. Connecticut in 1965; and second, the expansion of federal funding for local family planning programs from 1964 to 1973. Building on previous research that demonstrates both policies’ effects on fertility rates, I find suggestive evidence that individuals’ access to contraceptives increased their children’s college completion, labor force participation, wages, and family incomes decades later.
If you are willing to generalize results elsewhere, this is a blow to those who say the controversial Reproductive Health Act will have zero or no effect in the Philippines. Time will tell on this one.

(Disclaimer: I have yet to read the full paper)

The Good News About More People Dying of Cancer?

Here is an excerpt from The Emperor of All Maladies which I am in the midst of reading, an excellent book:
Cancer is an age-related disease--sometimes exponentially so. The risk of breast cancer, for instance, is about 1 in 400 for a thirty year-old woman and increases to 1 in 9 for a seventy year-old. In most ancient societies, people didn't live long enough to get cancer. Men and women were long consumed by tuberculosis, dropsy, cholera, smallpox, leprosy, plague, or pneumonia. If cancer existed, it remained submerged under the sea of other illnesses. Indeed, cancer's emergence in the world is the product of a double negative: it becomes common only when all other killers themselves have been killed. Nineteenth century doctors often linked cancer to civilization: cancer, they imagined, was caused by the rush and whirl of modern life, which somehow incited pathological growth in the body. The link was correct, but causality was not: civilization did not cause cancer, but by extending human life spans, civilization unveiled it.
Longevity, although certainly the most important contributor to the prevalence of cancer in the early twentieth century, is probably not the only contributor. Our capacity to detect cancer earlier and earlier, and to attribute deaths accurately to it, has also dramatically increased in the last century...
There are a ton of good insights here about the history of cancer research that I wish there was a comparable book on the history of poverty. Or is there already? Similar to the history of cancer, the history of poverty seems to be replete with instances where we-thought-we-know-but-actually-don't. For instance, we thought we knew that microfinance would be a magic bullet in solving poverty but the evidence on this turns out to be mixed. Lately, the latest craze is on cash transfer programs, but even this doesn't seem to be a comprehensive solution.

What is the secret to cancer or the secret to unlocking development? We are still working on it.

Sunday, October 6, 2013

Economist Nouriel Roubini, Party Animal

The economist, who became known as 'Dr Doom' after predicting the financial crisis, has been forced to remove his giant hot tub from the roof of his $5million New York penthouse, it emerged today... 
Asked about the models who attend his parties, he once told New York Magazine: 'They love my beautiful mind. I am ugly, but they’re attracted to the brains.
Now, who says economists are boring?

From the Daily Mail. Hat tip to EconJeff.

Friday, October 4, 2013

Does Winning Awards Reduce Productivity?

It appears so, according to this latest paper by Borjas and Doran. They compare the productivity over time of mathematicians who win the Fields medal (equivalent to a Nobel Prize in mathematics) to similarly brilliant mathematician contenders who just narrowly lose out on the award. Productivity is measured in terms of publication rates in mathematics journals. The results are succinctly summarized by this amazing graph:


Those who win the award have similar publication rates with those who just lose out on the award when both are still eligible (anytime prior to year 0) but productivity dramatically drops thereafter for those who go on to eventually win the award.

I caution on generalizing these results to other settings but it is a good reminder for those of us who just lose out on coveted prizes. It is not the end of the world. You may in fact be a better off losing out in the long run.

Hat tip to Marginal Revolution, where I first heard about this paper.

Thursday, October 3, 2013

Can Decentralization Increase Corruption? Evidence from Indonesia

Decentralization of power from the central government to local units is one of those things often touted as a cure to corruption and many other problems of governance. The idea is that devolving fiscal responsibility to officials in local communities who have more at stake in terms of outcomes yields better results for communities: projects getting done, and less corruption. In theory at least, this is how it is expected to work.

Today I feature another one of those favorite papers, this time on corruption. Burgess et al. (gated) test the theory with Indonesian data, exploiting the decentralization laws that were put in place post-Suharto. These laws remarkably increased the number of administrative district splits done to take advantage of these new laws, increasing the number of political jurisdictions, and effectively increasing the number of local officials within provinces enforcing forest laws. They utilize novel satellite data that tracks annual deforestation across eight years of this institutional change to examine how local officials’ incentives affect deforestation. Were more empowered provinces better able to take care of their forests? One would think that such measures would decrease illegal logging. Little did they know...

Exploiting the differential timing of administrative splits, Burgess et al. show that provinces that had more local officials enforcing local laws increased deforestation in their jurisdictions. Satellite data showed that their provinces became less green (in terms of pixel color). Moreover, price data shows that the price of timber within these areas decreased. This, they say, is consistent with local officials engaging in Cournot competition with each othe, as if they were firms. Only, in this case, the "product" they were selling were illegal logging permits. Having more local officials in an area seemed to intensify the competition for corruption. And as predicted, the price of timber decreased, its production increased, hastening deforestation.

They go on lengths to rule out alternative stories. Maybe newer administrative districts were new and so were unable to properly enforce laws in the beginning. But they show that the effects of the splits on deforestation are even stronger in the medium term, inconsistent with this story. At the same time, increased deforestation appears to occur not only in the newer administrative district but rather for the whole province, also in parts where the the district split did not occur. Perhaps provinces whose political jurisdictions increased were merely provided with more quotas for legal logging. But the result also holds for provinces where logging is completely prohibited (sanctuaries).

It is a cautionary tale for those who would, without qualifications, champion decentralization. I think the study demonstrates clearly how corrupt bureaucrats respond to incentives and how we might naively implement policy that is counterproductive when we fail to think hard about incentives.

This need not be always the case however. I know at least of a randomized control trial done by Bjorkman and Svensson for instance who find that community empowerment actually increased health outcomes but the context there is different. In contrast, the seminal paper by Olken shows how community monitoring does not actually decrease corruption as measured by "missing expenditures" from roads because monitoring is subject to elite capture and free riding at the local level. There, monitoring through a top down approach using audits by the central government worked better. I may write about this paper in the future since it is such a classic.