Friday, November 30, 2007


I had previously wondered here about the source for Al Gore's An Inconvenient Truth claim that 30 percent of CO2 was from forest burning. I'm reading this claim here by Nicholas Stern on Voxeu although the number is lower (probably because the base is greenhouse gases and not C02).
... there should be a coherent, integrated international programme to combat deforestation, which contributes 15-20% of greenhouse gas emissions...
Unfortunately, there is no source for this either although he notes this as a way to decrease GHG. Gore did not target this in his book which I had thought was a a large source of GHG.

Thursday, November 29, 2007

Why do little girls like pink?

I had wondered if girls liked pink because of some innate characteristic (perhaps some genetic predisposition to pink) or whether because they were being marketed pink stuff. Peggy Orenstein has a partial answer:
When colors were first introduced to the nursery in the early part of the 20th century, pink was considered the more masculine hue, a pastel version of red. Blue, with its intimations of the Virgin Mary, constancy and faithfulness, was thought to be dainty. Why or when that switched is not clear, but as late as the 1930s a significant percentage of adults in one national survey held to that split. Perhaps that’s why so many early Disney heroines — Cinderella, Sleeping Beauty, Wendy, Alice-in-Wonderland — are swathed in varying shades of azure. .... It wasn’t until the mid-1980s, when amplifying age and sex differences became a key strategy of children’s marketing (recall the emergence of “ ’tween”), that pink became seemingly innate to girls, part of what defined them as female, at least for the first few years. That was also the time that the first of the generation raised during the unisex phase of feminism — ah, hither Marlo! — became parents. “The kids who grew up in the 1970s wanted sharp definitions for their own kids,” Paoletti told me. “I can understand that, because the unisex thing denied everything — you couldn’t be this, you couldn’t be that, you had to be a neutral nothing.”
From: The New York Times Magazine article What's Wrong With Cinderella

Gas Pricing Update

I had noted here here and here that gas prices seemed out of whack at two adjacent gas stations. Over the past few weeks, the prices of regular gas did indeed converge: from 3.19 vs 3.16 to 3.21 vs 3.23 and today 3.25 vs 3.25. It took a lot longer than a model of oligopolistic pricing would have predicted.

I'm starting to keep an eye on two gas stations down the road that have the same owner - a Shell and a Sunoco. The price of regular gas at the Sunoco was 3.19 and at the Shell was 3.26.

Perhaps I have it all wrong and the model I should be thinking of is a product differentiation with different pricing strategies to segment the market. But then again, perhaps gas is gas any where and everywhere.

Wednesday, November 28, 2007

Anecdotes versus data

Here is another example where anecdotes can be more important than data:
In my view, the September 2007 bank run experienced by the British mortgage lender Northern Rock settles this debate once and for all – deposit insurance is essential to financial stability.
This is from Steve Cecchetti's Subprime Series, part 2: Deposit insurance and the lender of last resort

Measuring respect

Marginal Revolution had an interesting question: Why don't American kids respect their parents more? The usual suspects abound and I'm sympathetic to the bad parents and liberal/PC environment (e.g. no spanking) reasons but I thought I'd advance something else a little more off the beaten track. Americans are less trusting of governments and authority (compared to Europeans, for instance). Hence they teach their children to question authority more often. Questioning of authority can also be equated with lack of respect. In any case, can we actually measure respect (and what is respect) or is the question posed merely an impression?

Tuesday, November 27, 2007

Inequality doesn't matter

In a review of Paul Krugman's book Conscience of a Liberal, Herb Gintis says:
... no one cares about inequality. People care about injustice, unfairness, poverty, sexual predators, family values, gay marriage, terrorism, and many other problems of everyday life. People don't care about Gini distributions and other abstractions.
If this is true then there is a lot of irrelevant research on income inequality. Or perhaps,
1) Inequality is correlated with a sense of injustice. When does inequality proxy for injustice or to put it simply, how unequal do income distributions have to get before there is a sense of injustice. Or does inequality as a result of being a robber baron (e.g. corruption) become a proxy for injustice as in some countries.
People hated the Robber Barons because they were robbers and barons, not because they were rich. Oprah Winfrey and Bill Gates do not send the Pinkerton men out to protect their ill-gotten gains; nor to the other super-rich.
2) The statement at the beginning of the blog would then also point to why some results show that inequality is not always correlated with crime and other social problems.
3) What about inequality and financial deepening? There are models that show that inequality is a necessary component of growth in so far as the rich save and invest and hence redirect their wealth toward growth as a whole.

Saturday, November 24, 2007

Is tradition an impediment to experimentation?

This Thanksgiving was the first time we tried grilling a turkey and it turned out well. I wondered whether tradition could some times be an impediment to experimentation, and experimentation I am also suggesting is something good because it could lead to new discoveries. Tradition is an excuse to resist trying something new -- "We've always done it this way", for instance.

One area that is ripe for experimentation is our insurance. We currently hold all our insurance policies (life, auto and home) with one insurer. Should we experiment by switching? I realize that the costs of switching could be onerous which is why I've resisted any attempts to do any research at all into this.

I experiment with household help services, in particular, plumbing companies. I do find that costs vary a great deal (and some of these experiments were quite costly!) even for similar jobs but I have resisted settling on one plumbing company at this time. Perhaps it is time to stop experimenting on this.

The teachers at our kids school are constantly experimenting -- e.g. changing the schedule so that some classes are longer (but fewer times per week), instructional materials, integrating IT, etc. Sometimes it can be frustrating to see all this change every year -- it seems like after teaching for such a long time they should know by now what works. But perhaps I should stop harping and applaud them for their constant efforts at learning how to do things better and experimenting.

Friday, November 23, 2007

Thanksgiving turkey

Put it on the Weber grill this year. The trick was to make sure it fit into the grill which it did -- it was a 10 pounder set in a roasting pan. Grill was set at medium which was around 450F for about 2 hours and 15 minutes. Worked great. I'm tempted next time to try it without the pan to see if I can get a crispier skin. Hmm...

Wednesday, November 21, 2007


Economists have usually studied standards as a war between competing technologies, e.g. Betamax versus VHS. I have something more mundane that seems to have escaped the lens of economists. I was changing the shower curtains the other day and realized that the number of rings on the curtains are standardized. Things are so much easier this way. I'm hoping that one day electrical outlets around the world will be standardized. I am curious though how standards evolved on such mundane every day things. I was reading in an issue of National Geographic (which unfortunately is not available online) that once the US had many different types of electrical outlets as well and that the government eventually mandated a standard. My guess is that in a lot of cases some governing body (or trade group) decides at some point that all these differences have to stop. What makes them decide in this manner? When do the benefits outweigh the costs? For instance, our cell phone battery chargers are all different for different phones. So are chargers for different electronics such as laptops, cameras, video cameras.

From the customer's perspective:
1. I have fewer chargers around the house.
2. When I travel I don't have to lug all these different chargers with me.
3. Fewer chargers to recycle.

From the manufacturer's perspective, won't this cut down on costs if they could all share one type of charger? Well, perhaps not. They would prefer to have the customer pay for one (although the cost is probably bundled into the phone). Is this an example of market failure? I don't think so but there are possibly some negative externalities that are not factored into the cost of the manufacturer in some way.

Mankiw versus Krugman

It's beginning to look like Prof. Mankiw is going head to head with Prof. Krugman but they're not really facing off but through blogs and pres articles. Prof. Mankiwlinked to this article in the Washington Post, I assume to illustrate the inconsistencies in Prof. Krugman's position on whether Social Security is in crisis. As usual I can always rely on Mark Thoma to elucidate Prof. Krugman's position. As he explains, Prof. Krugman was talking about Social Security in relation to the Bush tax cuts. Prof. Mankiw is also taking on Prof. Krugman on health care. Prof. Mankiw links to an article by John Ford from UCLA. This sounds a lot like a face off to me (but by letting a third party do the talking, just as Prof. Krugman is letting Mark Thoma do his bit). It's starting to look like a showdown.

N. Gregory Mankiw fired the opening salvo on misinterpreted health care statistics when the New York Times published his op-ed entitled Beyond Those Health Care Numbers. Paul Krugman, also writing for the Times fired back with Health Care Excuses. Although he doesn't explicitly address Mankiw's piece, it seems clear that he intended to correct the record.

Krugman explains that the U.S. spends more per capita on health care than any other country despite lower life expectancies and a very high proportion of uninsured patients. He feels that those who suggest more measured interpretations of these facts are little more than "apologists for the status quo".

Accordingly he offers his take on their misguided statements (which he calls excuses):

Excuse No. 1
He cites the standard 47 million uninsured in this country as exhibit one. People have argued (Mankiw, for example) that this number is misleadingly high because it includes illegal aliens (10-20 million) and that many of the Medicaid-eligible simply don't apply until they get sick. These are both excellent points; but Krugman diminishes the latter (and pointedly ignores the former) by suggesting that "showing up in an emergency room isn't at all the same thing as receiving regular medical care".

This may be true, but to some extent it really represents a matter of choice. Most of these patients are generally healthy and don't attach much value to seeing a doctor when they are well. Well-insured patients often make the same decision. It's hardly the health care system's fault that patients don't take advantage of resources made available to them. Certainly as a nation, we can do a better job of educating citizens about their benefits; yet to do so hardly requires the drastic overhaul Krugman would like to see.

Moreover, Krugman doesn't seem to know that much of preventive medicine falls into the category of dogma and has yet to be validated by well-executed studies. Many of the components of the highly vaunted "annual physical exam" fall into this category.

This is not to say that pap smears, mammograms, cholesterol screening, etc. are not useful (quite the contrary), but that much of "well-patient care" hasn't been shown to lower morbidity or mortality.

Excuse No. 2
People have argued that the reason our life expectancy is lower than Canada's , for example, is because we have much more obesity. As such this factor (which is largely out the hands of health care providers), leads to more disease, more mortality and therefore shorter life expectancy.

Krugman makes the legitimate point that the connection between obesity and mortality is probably overstated. However, to some extent, this is a straw man argument. Few people really believe that obesity is the cause of our reduced life expectancy. What Krugman fails to mention is that trauma, homicide, and teen pregnancy (with its concomitantly higher infant mortality) have a much greater impact.

Life expectancy is calculated by dividing the total number of person-years lived by an imaginary cohort by the size of that cohort. A teenager killed in a gang shooting or a premature infant who dies in her first year of life costs society far more person-years than the septuagenarian who passes quietly away in his sleep. When the young die, a country's life expectancy takes a much bigger hit.

Certainly, it is an indictment of our society that violent death and the high infant mortality associated with teen pregnancy are more common in the U.S. than in other developed countries. The reality is however, that medical care itself cannot be blamed for this nor for the consequent lower life expectancy.

Excuse No. 3
Krugman reports that people assert that health care is better in 2007 than in 1950. He points out the irrelevancy of that position in supporting current policy practices. If some people do make this argument then like Krugman, I don't find it very compelling. However, I don't ever recall anyone seriously raising this straw man point as an entire justification for our system.

Excuse No. 4
Krugman claims that those advocating change short of a government single payer are fear-mongers when they point out inadequacies of other countries in their delivery of health care. He describes Rudy Giuliani's reference to higher prostate cancer mortality in Great Britain compared to the U.S. as "fake numbers". They constitute one more example "in a long, dishonorable tradition of peddling scare stories about the evils of 'government run' health care".

Unfortunately, he offers no other such examples nor does he offer a scintilla of proof that Dr. David Gratzer, who supplied Giuliani with this information was actually wrong.

In a
previous column, Krugman's idea of "proof" takes on this form: "The details are technical, but the bottom line is that a man's chance of dying from prostate cancer is about the same in Britain as it is in America" (my emphasis). Read it. His analysis doesn't get any more penetrating than this.

Contrast this with Gratzer's reasoned response to mainstream media criticism of his methods. Gratzer, like Krugman is a scientist and deserves a cogent, logical argument. Failure to offer that serves no purpose but to obfuscate reality and cheapen the discussion.

In the end, Krugman builds his op-ed to this conclusion: "So now you know how to answer the false claims you'll hear about health care. And believe me, you're going to hear them again, and again, and again."
Perhaps, but only to the extent that people continue to make the original claims without appropriate context.
John S. Ford, MD, MPH is Assistant Professor of Medicine, David Geffen School of Medicine at UCLA. You can find more of his writing

Tuesday, November 20, 2007

What is the purpose of blog comments?

There are two that I can think of:
1) To solicit suggestions, information, feedback. For this I'd say that anything more than 20 comments becomes difficult to parse.
2) To engage readers in a debate -- in some cases, not even bothering to participate. For some this might be to write something inflammatory and watch the fireworks that follow. Here, there can be no limit to the number of comments or even the need to police the comments as Prof. Mankiw had been doing.

I would believe that most bloggers prefer (1) but occassionally lapse into (2). The comments on Marginal Revolution and Econbrowser are usually pretty good. I prefer those on Econbrowser.

Plausible theory but where is the evidence?

I had asked this in earlier post. Marginal Revolution in Piling on Samuelson says that Samuelson needs to do his homework. I questioned Krugman's theory on Econbrowser but I got no evidence either. Here was Krugman's theory:

Instead of investing in physical capital, many companies are using profits to buy back their own stock. And cynics suggest that the purpose is to produce a temporary rise in stock prices that increases the value of executives’ stock options, even if it’s against the long-term interests of investors.
It’s not a far-fetched idea. Researchers at the Federal Reserve have found evidence that ... stock buybacks are strongly influenced by “agency conflicts,” a genteel term for self-dealing by corporate insiders. ...

Whatever the reasons, we now have an economy with incredibly high profits and surprisingly low investment.

I was hoping to find some information on stock buybacks (that doesn't require me to pay a lot for it). The suggestions in the comments section of Econbrowser didn't lead to anything useful.

More and better data

I read this as a silver lining and the importance of more and better data gathering techniques: U.N. To Cut Estimates of AIDS Epidemic.

Among the reasons for the overestimate is methodology; U.N. officials traditionally based their national HIV estimates on infection rates among pregnant women receiving prenatal care. As a group, such women were younger, more urban, wealthier and likely to be more sexually active than populations as a whole, according to recent studies.

Do I suspect manipulation or conspiracy? The inner conspiracy theorist in me would like to:
Critics have also said that U.N. officials overstated the extent of the epidemic to help gather political and financial support for combating AIDS.
"There was a tendency toward alarmism, and that fit perhaps a certain fundraising agenda," said Helen Epstein, author of "The Invisible Cure: Africa, the West, and the Fight Against AIDS." "I hope these new numbers will help refocus the response in a more pragmatic way."

Loy Krathong DC at the US Capitol Reflecting Pool

We were at the event Saturday evening Nov. 17. It was organized by the people who bring the Asian Festival to DC which looks like an umbrella group of various sponsors including Singha Beer and the Thai Tennis Organization of America. I was a little disappointed. The setting was wonderful and it was a cold night. My chief complaint was that even though the event was open to the public there was very little information on the schedule. As it was we sat for about 2 hours before the Loy Krathong festival itself which unfortunately could not be done in the actual pool itself. The organizers had set up a small temporary pool beside the party tent which seemed to be open only to invited guests. I felt a little under-dressed compared to the gents in tuxedos and the ladies dressed to the nines. I should have asked for a beer and tasted some food but I didn't want to be led away from the party by the U.S. Park Police.

The MC was an interesting gentleman in a pink bow. He explained that the Loy Krathong festival had its roots in Deepavali. I was surprised that he used this word because here it is usually called Diwali and I haven't heard the version of this word for a long time. Deepavali was what it was called in Malaysia. (On a separate note, I once mentioned another Indian celebration to some Indians but they had never heard of it -- called Thaipusam. I was surprised to read on Wikipedia that it was mainly celebrated in Malaysia, Singapore and Mauritius. )

There was also a band from Los Angeles playing Thai contemporary music -- basically reinterpreting Thai music to its modern form. They had a mix of modern musical instruments as well as Thai instruments. Unfortunately, I don't remember their name but they were pretty good. A sample of their work is on:

Monday, November 19, 2007

National Geographic on CD?

I came across an interesting article on Admiral Zheng He in National Geographic. We had learned about him in our history books but it was spelled Cheng Ho in those days and I was surprised to learn that he was a Muslim. This is probably the only article that I've read about him. Our history books mainly focused on his role in establishing a Chinese presence in Melaka in Malaysia. I have no way of judging the accuracy of the article but I don't doubt the veracity. It was a very long time ago when China was opening up.

It would be nice to be able to get National Geographic along with all the multimedia extras that are on the web site on a CD. I've looked but they don't seem to be offering it. As it is we are recycling our old copies. They take up a lot of room.

Sunday, November 18, 2007

Can a little make a lot of difference? And other rambling thoughts ...

I'd have to believe it does. Just as each of us does a little driving each day contributes to CO2 and thus to global warming, each of us can also switch to compact fluorescent lightbulb and hopefully decrease the CO2 that is created. I had previously asked myself this here when I started new magazine subscriptions (more trees cut down!) and when I was shredding our old checks (does it really prevent ID theft?).

Now the Washington Post is reporting that antibacterial soap can result in antibacteria-resistant germs. Here is another example of how small actions by each of us can contribute to a potential health problem. But can it? It sounds theoretically plausible but as the article points out there is very little direct evidence of this.

In economics there are also many theoretically plausible models but the evidence isn't always there to support the model. There are many smart economists who can always build a model that can deliver theoretically plausible results to demonstrate causality. However, finding the evidence and data to support the model is the real hard work. One such model is Ricardo's theory of comparative advantage but this is for another time.

Saturday, November 17, 2007

Again anecdotes versus data

Yet again another example where anecdotes can overwhelm any kind of statistical study. There is sometimes a frenzy over anedoctal evidence and when calm eventually prevails, rather than learning from this experience, the public chooses to ignore the facts or statistics. When the issue comes up again, all they will remember are the anecdotes because they are sometimes so powerful. This is from Rubin's In An Uncertain World on IRS abuses:

... throughout the hearings, others tried to turn a few abusive episodes into a misleading impression about the IRS as a whole. No one cared that 205 million returns were processed every year without any known dishonesty or corruption. Once the idea took root that the IRS was an out-of-control agency gratuitously abusing taxpayers, reason and proportion could not be brought to the issue. ... The problem is that owhen one person is abused -- and some people really were -- a government official who tries to paint a more complete picture simply won't be heard. ... What I never I understood in any of these firestorms is why some enterprising reporter didn't pursue the other side of the story out of self-interest. .. for the most part, the coverage seemed utterly one sided, with at best an offsetting paragraph or two ... (p. 209-10)

One example was an editorial in The Washington Post that accused members of Congress of having "assaulted and weakened" the IRS -- which was true -- but neglected to mention how the Post itself and other news organizations had contributed to the process. (p. 211)

Child care

This article in the New York Times Magazine by Lisa Belkin, Knowing Noreen:

The relationship between a mother and the woman she hires to care for her children is filled with unspoken truths. The mother does not say out loud that she expects the nanny to have more patience, more time, more energy than she has for herself. The nanny does not say, in turn, that this is just a job, and that you cannot love a stranger's child as your own. The mother wants the nanny to give love, and the children to return that love - but not too much.

Yet while we consider the lives of our children to be priceless, we don't seem to act in the same way. We trust school bus drivers with their lives yet we don't pay the drivers accordingly. Likewise, the child caregivers more often than not earns not much more than minimum wage around $9 an hour. How much do their teachers earn and how much respect do we accord to the teachers? Is this a case where bad apples (drivers, teachers, child care workers) affects the expected quality of services received and so we adjust the amount we pay accordingly? If so, there either must be a lot of bad apples or a few bad apples that we weight very heavily.

Friday, November 16, 2007

Novels with incredible settings

By incredible settings I mean where the setting complements the story very well or overwhelms the story to the point that only the setting matters. I'm reading Antartica by Kim Stanley Robinson. It's slow going -- I feel like I need to be a glaciologist or a geologist in order to understand what he is trying to say.

Weight of Water by Anita Shreve - this was a novel where the setting was necessary for the story and complemented it well.
Shipping News by Annie Proulx -- in the end I didn't really care too much about the characters but I liked the description of the Newfoundland coast and for me it overwhelmed the story.
Gypsy Man by Robert Bausch -- this was a wonderful story with vivid descriptions of life in rural Virginia and incredible, incredible voices.
Bourne Identity, and Bourne Supremacy by Robert Ludlum -- again good complements to the story. In Bourne Identity, great descriptions of Zurich and Paris and in Bourne Supremacy, Hong Kong.
Tony Hillerman novels

Ice Skating

At 40+ I'm learning ice skating. After almost 6 months I'm getting weary. Today I read on the Recreational Skating FAQ:

Let's look at the process of learning to skate. First of all, if skating were easy, it wouldn't take 10+ years to learn the sport. So get over the notion that you will get results, any kind of results, quickly. You absolutely must fall in love with the process of skating. And the process of skating involves a lot of self examination. You will learn to face your fears. You will learn perseverance like you've never experienced it. And you will have the greatest highs in the world when after months and months and months of working at something without any indication of improvement you have an "AHA!" moment and suddenly find yourself gracefully and seemingly effortlessly doing that which only a month ago seemed impossible.

Skating involves complete control over every single muscle in yourbody. Learn to focus NOT on getting the trick, but one gaining a greater sense of awareness of your body and increased control of it. The ice rink is the skater's laboratory. It is where we go to experiment. What happens if I turn my head this way? What happens if I lean a little more that way? What happens if I drop my shoulder another 1/2 inch? If you go to each skating session with the goal of learning more about how your body affects your skating, you will never leave frustrated. You may learn 1001 and things that do not help you with this trick. But you will have learned some interesting things.

Have fun and keep working at it. Because if you work at it long enough and have patience, the skating gods will visit you with a lovely"Aha!" and all the pain and suffering will instantly be forgotten. (adapted from "What I get from skating", by Janet Swan-Hill)


Thursday, November 15, 2007

Do jobs determine our sense of self?

From Robert Rubin's In An Uncertain World:

People who are heavily dependent on a job for their sense of self become hostage to the job and to those who have power over them. Some one whose identity is not job-dependent, on the other hand, has the ability to walk away, which creates a sense of psychological independence. (p. 319)

Are these people more the exception than the norm? Perhaps on Wall Street where there are a number of high performers this may be true, but I think for a lot people, a job is mostly just a way to pay the bills. And for the other lot of people it's both - the job has its enriching parts but for the most part it is also a way to pay the bills.

Wednesday, November 14, 2007

Can we judge ourselves by anything else other than outcomes?

In Robert Rubin's book In An Uncertain World, he suggests that we should not only focus on the outcome of a decision but also the thought process which went into it in order to be able to fairly judge whether it was a good or bad decision. This seems to be a restatement of "The road to hell is paved with good intentions". I am sympathetic to the view but it's just too easy to convince myself that I did everything I could and the best I could. There are corrollaries to this:
1. In Fooled By Randomness, I could just as easily attribute success to ability when it was luck.
2. In Cognitive Dissonance, I can justify being right almost all the time.
The engine that drives self-justification, the energy that produces the need to justify our actions and decisions — especially the wrong ones — is an unpleasant feeling that Festinger called "cognitive dissonance."

Tuesday, November 13, 2007

Engineer terrorists

Marginal Revolution commented on the following paper, Engineers of Jihad and I added my two cents in the comments but I wanted to clear my mind on what my implicit assumptions had been when I commented.

1. In developing (and Islamic) countries, the numbers of slots for various fields (i.e. engineers, lawyers, etc.) are fixed.
2. Men are more likely to become engineers/scientists/doctors because of cultural preferences.
3. There are more slots in social sciences than there are in sciences and more slots in engineering than medicine. (Medicine is harder to teach than engineering, for instance).

I'm basing all this on my experience in Malaysia about 20 years ago. At the end of the A-levels (more accurately, it was called the STPM at the time) we apply for a field of study in university. We take our performance on the A-levels as given and decide if these are good enough to get us into our chosen fields. If our grades aren't good enough for medicine (which is usually the hardest to get into) then we would pick something else and in a lot of cases if we wanted to get into sciences then engineering would be the likely default (as one other person commented on Marginal Revolution). We would list our three choices and then at some point in the future we would receive a letter telling us if we had been accepted and if not then we could be admitted into something else that was leftover.

Moreover, the government also sponsors many students to go abroad to study engineering. This is in part due to its policy of supporting the development of science and technology in the country. However, upon their return from abroad, many of them are unable to find jobs even though the government is supposed to place them. Someone I knew spent a year being unemployed as a petroleum engineer until he was finally accepted at Petronas.

In any case, it's easy to generate any result we want with these assumptions and I made one up. I assumed the probability of being a terrorist is 0.1. The probability of being male and applying and being an engineer/doctor/lawyer is 0.8 while for an economist is 0.5 and social science is 0.3. This gives an expected number of terrorists of 220 with 36% of the terrorists being engineers.

Monday, November 12, 2007

Are cutoff rules efficient?

We were at Mount Vernon yesterday and K1 wanted to buy something from the gift shop. I set a limit of $5 and rather quickly found out that there was very little that she wanted that was under $5. She was determined however, and in the end she did find something for herself and K2. As for myself, we spent a lot more time in the gift shop than I would have liked and wondered to myself if I should have set a higher limit. In any case, if I did set a higher limit I would have had all kinds of conditions attached to it e.g. no more stuffed animals, nothing breakable, etc. There were more things in the gift shop that I did not want than I would have been able to address with various conditions a priori, so in the end, yes, I think the cutoff rule was efficient although we were in there an awful long time.

Gas pricing revisited

I posted previously about the price of regular gasoline at two gas stations: one was $2.99 and the other was $3.09. I happened to go by there again today and had expected that the gap between the two prices to have closed. Instead, it was now $2.99 and $3.14. Here is one possible story. As a gas station owner, I get charged by the distributor for gasoline (my cost of goods). The distributor does not know the pricing models of other distributors but instead behaves myopically. So I'm charged $3.07 for Monday of one week and then $3.13 again for Monday the next week. The other gas station owner also pays his distributor but at a different time of the week for instance, on Friday, so he is charged $2.89 for one week and I am thinking that it will be above $3.00 the next week. (These are all made up numbers.)

What I am observing is a lag in the switch in prices. Why doesn't the other station owner with the high gasoline price lower his price? Because he is constrained by the cost charged by his distributor. I take this as a strike against oligopolistic pricing models using gas stations as examples.

Saturday, November 10, 2007

Gas pricing

Today I was at the gas station on Westlake Drive and Democracy Blvd next to the mall. At this gas station, the Shell and the Exxon are right next to each other. Price for regular at the Shell was $2.99 while at the Exxon, it was $3.09. As expected, the line for the pumps at the Shell were snaking out to the mall road while there was virtually no one at the Exxon. This is as close to perfect imformation as you can get. Economists like to use gas stations as an example of say oligopoly pricing behavior or to over exaggerate the ability of gas station owner to set prices at the pump as in here (perpetuated by Prof. Mankiw). I used to believe this kind of stuff (the model of oligopoly pricing as well as the kind of stories told in the above link) and actually thought that they were very neat.

These days, I no longer believe that gas stations are a good example of oligopoly pricing, nor the kind of behavior in the Mankiw post. The change is mainly due to the what I've read about zone pricing. When I worked as a research assistant a long time ago, I had the opportunity to examine the financial statements of a gas station owner and discovered that cost of goods to the owner was incredibly high. (I forget what this number was but usually, COGS are around 60% and I think in the case of the gas station owner it was around the 90% region).

In short, armchair economics is fun. However, using gas stations as examples of monopolistic pricing and the story in the Mankiw post are examples of armchair economics that can lead to wrong policy prescriptions. As a footnote, I am unconvinced about the existence of price gouging; I just don't think that the story that was posted by Mankiw is a good rebuttal of price gouging.

Friday, November 9, 2007


K1 once asked me if I trusted her and I said it depends on what. Perhaps it was not the best answer but I remembered reading this article in the New York Times Magazine by Lisa Belkin, Knowing Noreen. This passage struck me as appropriate:

James Joyce, whose spirit is everywhere in Dublin, once said, "In the particular is contained the universal." This is about child care only in its particulars. It is not a tale of evil nannies lurking around every corner, or a declaration that children are not safe with anyone other than their mothers. More universally, it is about trust, and the harsh reality that as well as you ever know anyone, you can know only what he or she allows you to see.

We know this, and yet we trust. We trust strangers not to poison our food in their restaurants, not to drive drunk when we board their buses. We trust loved ones, even though each year brings new stories of husbands leading double lives, wives whose hidden demons cause them to kill. We hire office workers after a few hours of interviews, at best, and trust them not to steal or destroy all that we have built. We go to a doctor based only on the fact that our neighbors seems to like him. We hand employers out Social Security numbers, and valets our car keys, and bank tellers our balances, and nannies our children.

Thursday, November 8, 2007

Returning library books

Society revolves around trust. Many transactions are carried out based solely on trust. For instance, when I return a library book I trust that this will be processed as such even though I do not receive any confirmation of this transaction. But trust is one sided in this case. To check out a book, I need to go to a libarian to have it checked out.

Our county library seems to have instituted a new "policy" concerning book returns. Instead of depositing books into a slot to be scanned by the libarian, apparently we can now just leave them on the counter. Unfortunately, I have been on the receiving end of having books on "overdue" status even though the books were returned and reshelved without having been scanned as having returned. Its too easy for a librarian to be distracted when books are left on the counter and forget to check them back in and to just put them on the cart for reshelving.

I realize that this mistake is only a very small proportion of the total number of books being processed but for people like me it would be nice to have a system with a receipt. I suppose it would be the same thing as going up to the librarian and having the books checked in. Of course, it turns out that trust is not really one sided. The library has to trust me when I tell them that the books have already been returned.

Fair trade

Charlton and Stiglitz's Fair Trade was an interesting counter-point to advocates who favor opening up all markets. For instance, Stiglitz and Charlton distinguish between trade openness and trade liberalization:

There is a difference between trade openness (the state of having low barriers to imports) and trade liberalization (the process of reducing those barriers). Trade liberalization is supposed to deliver gains as resources are transferred from protected sectors, in which a country does not have comparative advantage, to those sectors where it is more efficient and where it can export more successfully. But in developing countries, the lack of resources (labor and other production inputs) available to new industries is not usually the constraint which prevents the growth of new export sectors. Developing countries have vast reserves of resources, particularly labor, which are already unemployed or underemployed. Thus trade liberalization is not required to 'free up' these resources for use in new industries. (p. 6)

They also note why gains from liberalization are likely to be small:

The fact that implementation and adjustment costs are likely to be larger in developing countries, unemployment rates are likely to be higher, safety nets weaker, and risk markets poorer, are all facts that have to be taken into account in trade negotiations. For some of the smallest and poorest states, the adjustment costs of trade liberalization may significantly outweigh the benefits available. (pp. 8-9)

Surprisingly, they attack the gains from free trade not in terms of its effects on growth (which I consider the econometric evidence to be weak in the first place) but in terms of its purported efficiency gains:

Most traditional arguments for free trade are, however, based not on growth but on efficiency, i.e. liberalization leads to a change in the level of welfare rather than any change in the long-run rate of growth. ... However, the underlying assumptions which yield that conclusion are highly restrictive and often fail to capture relevant features of developing countries' economies. The standard argument in favor of trade liberalization is that it improves the average efficiency in a country. Imports from foreign producers may destroy some inefficient local industries, but competitive local industries are supposed to be able to absorb the slack as they expand their exports to foreign markets. In this way, trade liberalization is supposed to allow resources to be redeployed from low-productivity protected sectors into high-productivity export sectors. But that argument assumes that resources will be fully employed in the first place, whereas in most developing countries unemployment is persistently high. One does not need to redeploy resources to put more resources into the export sector; one simply needs to employ hitherto unused resources. In practice, trade liberalization often harms competing local import industries, while local exporters may not automatically have the necessary supply capacity to expand. ... Unfortunately, most of the models which attempt to address questions of welfare gains from trade liberalization assume full employment, and therefore provide no answers to this key question: the impact of liberalization in economies with underutilized resources. (pp. 25-26)

A second assumption of the model underlying the conclusion that trade liberalization is welfare enhancing is the existence of perfect risk markets. ... Without trade, producers are insulated from the full force of output fluctuations by built-in insurance: if there is a reduction in the quantity of output firms can produce, then they can charge a higher price for it. Thus their incomes vary less than output. Because their incomes will be more variable, risk-averse firms will invest less in some sectors with high returns but high variability; and as the economy moves into lower return, less variable activities, total output will decline. Under quite plausible conditions, one can show that free trade is Pareto-inferior to autarky - everyone is worse off - which is just the opposite result to that of the conventional wisdom (Newberry and Stigltiz 1984). (p. 26)

Not unexpectedly they also attack the use of CGE models:
Most of the tools used to analyse general equilibrium effects of trade liberalization are static models. They describe the movement from one 'steady state' to another but do not incorporate the costs associated with transition of the consequences for economies which are initially out of steady state. (p. 69)

This book has plenty more including arguments against TRIPS and TRIMS which while interesting in their own right made for rather dry reading. It felt as though the more "colourful" parts of the books were written by Stiglitz (few passages) and the more technical aspects of WTO, TRIPS and TRIMS (substantial amounts) were written by Charlton.

Wednesday, November 7, 2007

Blog shrill

Mark Thoma here commented on how shrill some have found Paul Krugman to be. This was an interesting post although I passed on the comments because I was afraid the comments were going to be shriller than the post which I found to be very even in tone. I had stopped reading Krugman's NYT columns for many years now because I did find him a little shrill and a lot of the language was provocative. I wondered why he did what he did and after reading some of his posts it sounded like he was angry and and felt like he needed to get people's attention so that he could present some facts.

Is shrillness the only way to get attention now? Unfortunately, I think so and it may have its roots in talk radio and the rounds of Sunday talk shows which I've also given up on. Unfortunately I also find economists in general to be more provocative in their language perhaps because of their natural tendency to be skeptical. I read Arnold Kling and Brian Caplan's blog for a while and found that they too tended to attract what used to be called "flames". This observation that economists tend to use argumentative and provocative language is obviously a very biased observation on my part since for the most part the blogs I tend to read are by economists. Thank goodness I haven't strayed into political blogs although I found Andrew Sullivan to be a pretty good writer. Note that Mark Thoma does not appreciate Andrew Sullivan's comments on Paul Krugman.

This is the nature of discourse the present day - we blog and link to each other instead of communicating and debating directly. Come to think of it, perhaps it's not all bad.

Tuesday, November 6, 2007

I wish An Inconvenient Truth had footnotes

Liked the book and the movie but I've been trying to find the source of this passage:

Much of the forest destruction comes from burning. Almost 30% of the CO2 released into the atmosphere each year is a result of the burning of brushland for subsistence agriculture and wood fires used for cooking. (p. 227)

This seems like one area to target but the book does not discuss it.

Monday, November 5, 2007

Horseback riding

K1 has friends who are taking horseback riding. My knee jerk reaction and after thinking about it for a long time reaction are the same. I want to make something similar to that Pony remark in the Seinfeld episode. What do I have against horseback riding anyway?

Sunday, November 4, 2007

Data, statistics, facts - what are they?

I am confused because of this article by Prof. Mankiw - Beyond Those Health Care Numbers. Mark Thoma points out the following:

He should also know that life expectancy from birth, which he is using in his arguments about different death rates for infants and the young, is not the only or even the best way to make life expectancy comparisons (as opposed, to say, the life expectancy at age 30, age 40, etc., i.e. given that you've already made it through the infant and young adult years).

The data is not disputed, nor are the statistics (e.g. the average life expectancy), but the facts (i.e. the interpretation of the data/statistics) are disputed. What is the correct number to present? Unfortunately, this reminded me of a line I wrote for a review of Econospinning by Gene Epstein:

...this book is an indictment of economics and statistics and a reminder as to why the average person hates both.

The full review of Econospinning is below. (I didn't try to shop this around. It's a little pathetic.)

In this book, Gene Epstein, the Economics editor at Barron’s presents examples of how employment numbers such as the unemployment rate, labor force participation rates and wages can be interpreted or in this case, misinterpreted or manipulated. Indeed almost two thirds of this book is devoted solely to various employment numbers and how they can be misused. In an interesting aside he recounts how President Richard Nixon thought that Jews holding high positions in the Bureau of Labor Statistics were undermining him and proceeded to have them fired.

Almost half the book is spent criticizing numbers presented by Paul Krugman in his New York Times column. Along the way, Epstein also tries to straighten the record on former Federal Reserve Board Chairman Alan Greenspan. Greg Ip, the Wall Street Journal reporter had given a positive review of the chairman’s tenure and Epstein exposes what he calls the Greenspan myths. He also takes aim at the CNBC morning show Squawk Box, newscaster Lou Dobbs at CNN, author Barbara Ehrenreich’s bestselling book “Nickel and Dimed” and two chapters of the bestselling book “Freakanomics” by University of Chicago economist Steven Levitt and his co-author Stephen Dubner.

Given that Epstein’s theme is how to properly interpret numbers released by various government agencies, the book is scattered with various boxes on how ratios should be calculated. Sadly, this book is an indictment of economics and statistics and a reminder as to why the average person hates both.

Saturday, November 3, 2007

Relative status and happiness: Show me the money

Relative Comparisons and Economics: Empirical Evidence is a nice and short review on relative status and comparisons from the FRBSF and the underlying data issues. This anecdote from Robert Rubin's In An Uncertain World is more convincing:

Bob Strauss once captured this dynamic when he said that a lawyer at his firm earning $90,000 a year -- this was some time ago -- and offered a $10,000 raise with the stipulation that a peer next door would get a $20,000 raise would prefer no raise at all to someone on his own level being paid even more. (p. 102)

There are a lot of anecdotes that convince me that people care about their ranking much more than analysis of happiness data or experimental data. I need to remind myself to look into models that assume relative consumption and explore the impacts (aside from those in asset pricing models such as Abel's Asset Prices under Habit Formation and Catching up with the Joneses)

It also sounds like the regression specifications in the literature are similar to those used in estimating peer effects, i.e. the average of some variable for the group in which the individual belongs to is included as a regressor. I recall Manski having a criticism of this approach but I cannot remeber the details.

Friday, November 2, 2007

John Taylor wants to use economics to win the war in Iraq

John Taylor thinks that economics can work better than economics in securing the peace in Iraq.

My strong recommendation is: As soon as Gen. Petraeus and his coalition forces secure an area -- a neighborhood or a town -- we should immediately focus as best we can on the economic part of our mission. Help businesses reopen and hire people, especially young people who might otherwise join the enemy.

This is similar to Using Incentives to Solve the Israeli-Palestinian Conflict and in both cases it may be optimistic. As far as I know Prof. Taylor's approach has not been tried in Iraq. Given his track record, I say let him try.

The following is another rejected book review of John Taylor's Global Financial Warriors (I thought it was a gentler version of I,I,I:

“I was responsible for leading 350 finance experts and staff ... giving advice to finance ministers and central bank governors. I spent time on the ground in difficult areas like Afghanistan, Iraq, Liberia, and Haiti, and made a total of 120 visits to foreign countries, and attended over 400 meetings in the White House, experiences that afforded me a unique top to bottom perspective. I was responsible for coordinating U.S. financial policy internationally … I also had to coordinate policy internally with the State and Defense Departments…. I also gave over two hundred speeches and made another fifty trips to U.S. cities … I testified before committees of the Senate and House of Representatives twenty five times.”

Moreover, in reading the book we also find that Taylor, who once advocated the abolition of the International Monetary Fund, is an effective coordinator who was able to provide the leadership that was essential in a task oriented organizational structure to achieve the stated missions to which he was assigned.

The book covers the tumultuous years that Taylor was the Undersecretary of International Affairs at the U.S. Treasury from before 9/11 to 2005. Rather than tell the story chronologically, Taylor chose to divide the book into the missions that were undertaken. This has the advantage that each chapter is more or less self-contained. Unfortunately, it leaves the reader a little disoriented as events unfold such as the resignation of Paul O’Neill as Treasury Secretary. The book is almost structured like a résumé. He lists his achievements as follows:

1. Successfully coordinated internationally to freeze the assets of terrorists thereby effectively halting the flow of funds.
2. Planned, coordinated, supervised and implemented the financial reconstruction of Afghanistan, including acceleration of reconstruction funds and implementation of metrics to measure progress.
3. Prevented global financial contagion from the default by Argentina: Successfully utilized IMF’s augmentation of $8 billion to force debt renegotiation and to signal effectively to markets that no funds would be forthcoming thereby allowing the markets to anticipate and adjust to the news.
4. Successfully implemented “collective action clauses” in international bond issues thereby eliminating the need for the IMF to act as global bankruptcy court. The use of “collective action clauses” has prevented another international financial crisis.
5. Successfully negotiated for 100 percent cancellation of debt for developing countries. Shifted World Bank (IDA) loans to grants and implemented results measurement system.
6. Arranged and negotiated a financial package for Turkey in exchange for using Turkey to invade Iraq from the north.
7. Planned, coordinated, supervised and implemented the financial reconstruction of Iraq, including the reopening of the Central Bank, the delivery of tons of cash and the issue of new currency. Advised on monetary policy to that was used effectively to prevent inflation. Coordinated and negotiated for an 80 percent debt relief of Iraq loans.
8. Allowed massive Japanese intervention in the currency markets that resulted in a successful relation of the Japanese economy thereby ending Japan’s “Lost Decade”. Effectively signaled to the Japanese that once its economy was growing that it should stop its intervention in the currency markets and allow market forces to determine the exchange rate. This hands-off/hands-on approach achieved the desired result with Japan and subsequently, China which let the yuan float.

Taylor is an admirer of President Bush, often recounting how easily the President sets everyone at ease no matter how tense a situation is as well as how quickly the President can grasp economic issues that were presented. However, he does not say anything about the two Treasury Secretaries, Paul O’Neill and John Snow beyond describing his conversations. There are also interesting details about his interactions with Bono as well as with Anne Krueger, both while she was at the World Bank and at the IMF. He tells how the press, especially Paul Blustein at the Washington Post seemed to accentuate the differences he had with Ms. Krueger particularly in the debate as to whether the IMF should act as a global bankruptcy court. The story that he tells about how cash was flown into Iraq by military transport planes was also quite riveting.

The book is an interesting insight into how policy is formulated, sometimes by deliberately using press releases and speeches to gauge further reactions before making final recommendations. Sometimes the choice of where to have a meal and what to serve can be as important as the language in communiqué.

With everything that Taylor achieved while Undersecretary, it is hard to think how different things could be if he had been Defense Secretary.

Thursday, November 1, 2007

I just killed more trees

We had some miles expiring on Delta and we were told we could convert it to magazine subscriptions which we did. I felt a little guilty about all the paper that would be generated. I am one of those who does believe that a little can go a long way and this probably would have gone a long way in saving some trees. In any case, the self interest side won -- why would I want to give up all those miles for nothing? It actually would have been easier if the airline had said the miles are expiring -- period.

Then I thought, what if everyone started cancelling all their subscriptions and the publishing companies started to go bankrupt. What if we all stopped reading books and newspapers? Would I then be responsible for dstroying jobs and livelihoods? (This already seems to be happening to newspapers as everyone has gone online although more because its free I think, than to save some trees. Saving trees seems to be a good (?) side effect.) Should the government intervene and make unemployment benefits more generous?

Data versus anecdotes

Andrew Gelman had an interesting post on data Skepticism About Empirical Studies:

Nick Firoozye writes,

I [Firoozye] wanted to point your attention to the following podcast by Ian Ayres on Supercrunchers, where he shows himself an enthusiastic (if perhaps a bit naïve) proponent of the statistical method. Entertaining, definitely. One thing though that I thought you might be interested in is Russ Roberts’ (the interviewer's) own skepticism over the econometric method, which I think probably warrants a response. It may be that Roberts’ own view is due to his now-Austrian economics slant (i.e., somewhat anti-formallist approach) or perhaps to the fact that mainstream econometrics is a frequentist pursuit and one might question the honesty of the results as a consequence.

I don't really have much to add here, except that the problem noted by Roberts (it's hard to know whether to believe a statistical study) is even more of a problem with non-statstical empirical studies (i.e., anecdotes). ... But there are a lot of areas where we have only weak opinions which can indeed be swayed by data (see here for some examples). These cases are important in their own right and also can serve as benchmarks for the success of statistical analysis, so that we can trust good analyses more when they're applied to tougher problems. This is one way that applied statistics proceeds, by exemplary analyses of problems that might not be hugely important on their own terms but serve as useful templates.

Personally, I don't find one empirical study all too convincing (whether it is an econometric study or a randomized trial). But over time as more and more studies on different data sets start to show the same result then I would be swayed. I also would place more emphasis on anecdotes than Prof. Gelman does. These stories can be extremely convincing even though they may not be representative of the situation being discussed. As pointed out by McCloskey, convincing others comes down to who can tell a better story. A study with a good anecdote beats everything, but I think good anecdotes can beat a statistical study any day. (Notice how hard economists have been trying to convince the public that free trade is good but the personal stories from those who have lost jobs over trade always trumps these arguments.)

Another well cited example is Ronald Reagan's characterization of those on welfare as Welfare queens. This label while not representative I think had a negative effect on everyone on welfare.