Rational Action

Max Sawicky on Milton Friedman:

Friedman’s impact of economic thinking is large in two connected, malignant ways. One is the idea that the economy is a self-regulating, self-correcting mechanism that works for the best when left alone. The second is that this state of affairs has an ethical foundation.

I shy away from most of the criticisms that Max endorses, but these three sentences are spot on. Paul Krugman’s look back at Friedman in the NY Review of Books is a must read. He is catching some criticism for his opening:

Until John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936, economics—at least in the English-speaking world—was completely dominated by free-market orthodoxy.

Check out this post on the History of Economics Society mailing list about the state of the discipline pre-Keynes. The thread is fascinating.

Update: Why do I shy away from the linked criticisms? Well actually, the only one that caught my eye was Dean Baker’s take on the natural rate hypothesis. Baker finds it worthless in its current formulation, but I think it’s an elegant model that fits the facts. I’ve read some of the other criticisms but I don’t feel like looking them over again…

There is a fever going around the open source community lately over the One Laptop Per Child project. For those who are not familiar, OLPC is a project to create and sell a $100 laptop to poor communities, for use by children. The story goes that by giving these kids access to first world technology, they will be better equipped for the electronic economy of the 21st century, or something like that.

Everything I read about OLPC is setting off warning bells. The techie in me worries about the design philosophy. In order to avoid paying fees to Microsoft, the laptop will run a custom built distribution of Linux with its own new interface. I have no confidence that the interface will be particularly good, and more importantly, the OLPC experience will have little relation to that of a “real” computer. We don’t need new paradigms; we don’t need to reinvent the wheel because we have a scheme to save the world.

Even worse, the project has been milking its strange new interface for publicity — they apparently think it is an asset! Thankfully, Microsoft has gotten Windows CE to run on the laptop, which is a promising development, and I imagine some of the countries that purchase the laptop will opt to have WinCE preinstalled instead of the Linux distribution.

The more fundamental problem with OLPC is the notion that one road out of poverty for poor nations is giving children cheap access to technology. I can understand why people who love computers would feel that everyone should have a computer, but come on. Education is enormously important to economic growth and poverty reduction, but the countries which moved into sustained economic growth did not do so by giving students laptops! (How do I know? Because many of these countries experienced a shift in growth before laptops existed: see South Korea, Taiwan, Thailand, etc.)

If rich countries really want to help, they should consider much more carefully what poor countries need. Is it laptops? Last I checked, careful studies had shown medical interventions to be quite effective in increasing school attendance and even aptitude (kids who are sick when they are very young tend to do worse in school when they are older.) Are there any studies showing that laptops in schools increase aptitude? Are there any studies about laptops in schools in poor countries, at all?

It is noble to want to help the poor, but if we are going to devote a limited amount of resources to help, then we should make sure to maximize the benefit the poor receive from those resources. By this metric, OLPC fails miserably. It is a very nice but fundamentally flawed idea. If it does fail, I just hope that people aren’t discouraged from helping out in general.

Here’s a quick line of reasoning for why a very competitive private healthcare system might be less efficient than, say, good ol’ single payer:

1. Managed care assumes that having health insurance served by various competing entities will reduce health care costs by providing incentives for efficiency.
2. Preventive care is a major and perhaps the most important source of efficiency in the healthcare system.
3. A managed care provider would treat preventive medicine like an investment. Induce a covered person to engage in preventive techniques, and this will reduce costs in the long run for the provider.
4. To make the insurance market competitive, people must be able to switch to different health care providers often. Health care providers must be able to compete for patients throughout the life cycle. Otherwise the provider would gain monopoly power and would have reduced incentives to become more efficient.
5. A patient which has engaged in a great deal of preventive medicine has a lower expected long run cost of health care than if he did not engage in preventive medicine.
6. This person would receive offers for reduced premiums from the other managed care providers after he engaged in preventive medicine, and so he would switch to the other provider.
7. As he did this, the “return” on the “investment” in preventive medicine would be wiped out for the patient’s original managed care provider.
8. Thus in a competitive environment, preventive medicine will have a very limited return for the managed care provider Since most efficiency gains in the health care system are going to come from preventive medicine, a managed care system will generally forego this method of reducing costs.

What do you think?

Tonight I had the wonderful opportunity to see three of the greatest living economists speak. The event was practically a showcase for the MIT economics department, as speakers Robert Solow, Jagdish Bhagwati, and Paul Krugman all spent much of their careers teaching there. The topic of the evening was “Coping with Globalization”. *

I don’t have the drive to summarize the whole event, and I doubt you all care anyway. I do want to convey a nice example that Dr. Solow brought up, because he used it to isolate the basic, perfectly legitimate problem that we have with trade. The example was a copper miner in Arizona who awoke to learn that vast copper deposits had been discovered in Indonesia. The copper miner would probably admit that this discovery made the world better off, and probably even made America better off, but he’d know for sure that it made him worse off. Switch copper with low-skill labor, and you have the problem with globalization in the US.

So far, so good. Solow’s is the standard parable economists use for trade: the gains are spread out (they accrue to anyone who’s not low-skill labor) and the losses are concentrated. The textbook rejoinder is that since trade makes the economic pie larger, the winners could compensate the losers such that everyone benefitted. Economists call this change a “Kaldor-Hicks improvement“.

People who have studied economics might be more familiar with the term “Pareto improvement” — a change which makes at least one person better off without making any others worse off. Pareto improvements are unambiguously good, practically by definition. But free trade without recompensation is not Pareto improving! Since it is Kaldor-Hicks improving, and this condition does not actually require that losers be compensated for their losses, free trade is not unambiguously good.

Solow noted that this appeal to ex post compensation rings a bit hollow given what has happened to the welfare state over the past few decades. Can we really be so gung ho about free trade when this compensation fails to materialize? Solow wasn’t so sure, and Krugman agreed with him. Bhagwati admitted that the welfare state ought to be doing more helping out, but questioned whether trade caused such a definite downward pressure on the wages of the unskilled.

I am not so sure where I stand. I value equality, and I think that the richer you are, the less better off an additional dollar makes you. My utilitarian analysis says that the country is worse off if the richest 10% gain $10,000 a year and the poorest 10% lose $5,000 a year. If the distribution of the gains from free trade looks like that, then any expansion of free trade would give me pause. **

According to the Stolper-Samuelson theorem, moving to free trade in a capital intensive country (e.g. the US) will tend to benefit capital and harm workers, although in a Kaldor-Hicks improving way. If we take this theorem as any guide, then alongside tariff reductions we would do well to expand our social support network, perhaps by increasing the Earned Income Tax Credit, providing universal healthcare, or improving public schools. Free trade on its own is good for some people and bad for others. With the right policies, we can make it good for nearly everyone.

** The situation is not so simple because the gains may go the opposite way for the trading partner

I write editorials because I believe, perhaps incorrectly, that in doing so I can influence policy. Before this semester, having written three of them, there was just about no evidence that my writing had effected much change anywhere. But today I picked up a copy of the Spectator to find this article on the front cover:

Student Clubs Stung by Film Copyrights
Stricter Enforcement Jacks Up Price of Movie Screenings; Groups Seek Relief

New enforcement of the copyright law protecting public movie screenings will cost Columbia clubs hundreds of dollars per showing this semester. As student groups are left grappling with preexisting budgets to accommodate new fees, there has still been no agreement on a solution to alleviate the costs.

Wahoo! They noticed! (Confused? I recently wrote two op eds about this copyright policy, one explaining how the new situation was inefficient, the other outlining a solution in which clubs cut a special deal with the MPAA to license movies cheaply.)

You might be thinking, “Who cares if they reported on something you said was a problem. What really matters is solving the problem, and you haven’t had any influence there.” Wrong! It turns out that Stanley Tan, who runs the Activites Board of Columbia, is considering the “collective bargaining” solution just like the one that I outlined in my editorial:

[Tan says,] “In the short run, ABC is willing to provide funding on a case-by-case basis. In the medium run, we’re working on whether we can get a collective bargaining deal, which means that SDA and ABC will negotiate for all clubs at Columbia with one of the [distribution] companies, but this is very premature.�

And more importantly, this wouldn’t be the first time a student group tried to cut a deal with a the movie industry:

Ferris Reel screens films in Lerner Cinema on Thursday nights and has been operating under the copyright rule for many years. Snow said the group arranged a deal with Swank Motion Pictures, a big distribution company, so that renting 6 reels cost them $4,000 instead of $7,000.

The group’s needs are slightly different from that of the average culture club because they are renting the reels, not simply purchasing public performance licenses. But Snow thinks Columbia could arrange a similar deal on behalf of its clubs.

“I would like to see the University or SDA step up to strike a deal with the distribution companies,� she said.

Fantastic!

The Spectator has published my second editoral on the movie screening fiasco. Again, I didn’t choose the title, and again, they gave me a nifty picture!

Copyright Wars: Looking for a Solution In yesterday’s submission, I explained how Columbia’s decision to require performance licenses for public screenings of movies was harmful to everyone. Because movie distributors charge so much money for these licenses, few clubs will screen films on campus, destroying a vital element of campus life. Since clubs will acquire so few licenses, it is hard to see the movie distributors making much of a profit themselves. This outcome benefits no one, and we can do much better. Read on…

I didn’t choose the title, but my new op-ed is in today’s Columbia Spectator. They even made a little picture for it in the print edition!

Copyright Wars: Breaking the System Although few students have yet to feel the difference, social life on campus is headed for some major disruptions. A new campus policy concerns the public screening of copyrighted material: now when clubs want to show movies to an audience, they must acquire a license to do so. These licenses cost about $500 and are often difficult to obtain. It’s hard to imagine there will be many movie screenings on campus this semester. Continue reading…

I was watching Hardball the other day when I heard a woman named Kate O’Beirne of the National Review make this outrageous claim:

[Feminists] get a lot of mileage out of the fact, the claim, that women work for 76 cents on the dollar. Think about that for a minute. If a woman with the same education level, skills, and experience would work for 76 cents to a man’s dollar, who would ever hire a man? There is no discriminatory wage gap.

O’Beirne is right in some narrow sense, since the “gender pay gap” ought to apply when a man and a woman of equal qualification receive different wages, and “76 cents on the dollar” does not take into account differing characteristics between the genders. Women tend to have less experience in the labor market and tend to work in lower-paying occupations, so simply comparing the average wage of women and men reveals little about whether woman are being shortchanged given their acquired ability.* To show that O’Beirne is being mendacious we’ll have to look a little more closely at the labor market.

Thankfully, two labor economists have done the work already. The Gender Pay Gap, a paper published in the Journal of Economic Perspectives by Francine Blau and Lawrence Kahn, presents the mountain of evidence that gender discrimination exists in the labor market. And by the way, those who don’t have to read economics papers for homework should know that the JEPr is a very well respected publication — in other words, not the place one would go to publish his or her political hackery.

Blau and Kahn use data from a representative sample of the United States, and they find that taking into account factors like education and occupation narrows the gender gap, but does not close it. When all is said and done, they find a pay gap of 12 cents on the dollar between statistically identical women and men.

There are caveats here. We think of the gender pay gap as the unexplained difference between the wages of men and women, and we may well be missing a relevant variable that could help explain it. However, other studies have sought and succeeded in finding evidence of discrimination without using Blau and Kahn’s data. For example, one study tracked the wages of a well specified group of UMich law school graduates, finding that the unexplained pay gap widened to 40 cents on the dollar after 15 years.

O’Beirne has some explaining to do. She is certain that profit maximizing pressure would eliminate any gender wage gap, but in this world men and women with the same qualifications take home significantly different wages. The best evidence we have says she is at least probably wrong. The wonders of empiricism!

Then again, the fault of empiricism is that it doesn’t say much about the “why”. I have a few ideas, and I also have an economic model (not my own, duh.) The model I find not so realistic, but maybe I’ll talk about it. Economics can help answer this question but I think other disciplines can provide elegant, maybe more convincing, explanations. Shoot, if you want to.

* That sounds obnoxious. I certainly don’t mean that women are inherently inferior. I believe that women are socialized into getting less schooling and avoiding certain subjects. This post is a direct response to the claim that men and women receive equal pay for equal work.

I’m currently testing out a little perl script that will turn your “Recently Updated Profiles” page on The Facebook into an RSS feed. If this sounds interesting to you, drop me a comment.

Currently it works by using the “recently updated profiles” page to build a list of profile URLs. Then it fetches every recently updated profile, which lets it know the day the profile was last updated. The program hits facebook’s servers pretty hard and is slow to boot. With some caching I bet I can speed it up, but for now it’s too resource intensive to release to the public.

Another problem: if you read RSS feeds outside of your web browser (in Thunderbird, for example), you won’t be able to see anything, since facebook requires cookies. Sage works nicely in Firefox. Safari reads RSS itself, right?

I read a pretty awful column in the Columbia Spectator the other day, so I decided to write a response. Lo’ and behold, they printed it without any cuts!

To the Editor:

While I am open to arguments against Jeffrey Sachs’ plans to save the world, I would not trust Chris Kulawik to make them. In his latest column (“The Cult of Sachs,� Oct. 19), Mr. Kulawik claims that the Great Society failed to help the poor, and so anything resembling it would fail in foreign countries, too. If he had reached these conclusions through responsible analysis, then perhaps he would have a point.

The statistics that Mr. Kulawik cites against the Great Society have little to do with the program he criticizes. He claims that “the poverty level, 10.1 percent in 1970, would fall a meager .1 percent to 10 percent in 1998.� Why does he choose this time period? The Great Society was a program proposed and implemented by President Lyndon Johnson. We ought to at least begin our analysis in 1964 and end it in 1969, lest we confuse the effects of the Great Society with those of dismantling it.

The official U.S. census poverty statistics—Mr. Kulawik cites the numbers for American families, not for all Americans—show that the poverty rate fell more than seven percentage points between 1963 and 1969. By that time, about 12 percent of Americans were living at or below the poverty level. More than thirty years later, roughly the same fraction of our citizens subsists at this level of real income.

Mr. Kulawik owes his readers an explanation as to how the Great Society prevented the poor from sharing in America’s economic growth in the 1960s, and he ought to explain to his editors why he backed up his claims with the wrong statistics. Perhaps once he has acknowledged these failures of logic we will listen to his suggestions on alleviating world poverty.

Adam Sacarny CC ’07

From here.