Monday, August 25, 2008

I know I'm feeling old when ...

1. After I give blood all I want to do for the rest of the day is sleep.
2. The first thing I look for when I arrive somewhere is the location of the restrooms.
3. The songs I used to listen to are now referred to as oldies.
4. Bob Costas born at least a decade before me looks younger, better and has more hair than I do. Got to love him during the Olympics.
5. I forget whether I have taken my medication (fortunately it's just allergy for now) or whether I've paid my bills.
6. I can't carry the vacuum cleaner up the stairs.

Thursday, August 14, 2008

Questioning "natural monopolies"

In a previous post, I had suggested that the government invest in infrastructure such as additional phone lines/fiber optic/broadband connections. I think that this should also be extended to power lines, sewage, etc. The argument was that the government could then auction off these assets when they are complete and then use the proceeds to fund additional infrastructure investment or maintenance. The traditional argument against this has been that utilities are "natural monopolies" - i.e. it doesn't make sense to have two sets of power lines or telephone lines going into the same house.

I would argue that because of this natural monopoly argument,
1. There has not been enough competition in services because Verizon owns its lines, Pepco owns its lines, etc.
2. Not only that, when there is service, it sucks - note the loud complaints against cable TV companies and phone companies. Granted it's not as bad as when phone and electrical companies were actually owned by the government but I think we can do better.
3. There has literally been NO innovation in delivering power or telco services to homes - are lines really the best that we can do? Innovation is required to drive down costs of establishing connections be they innovations in drilling/boring to put in underground cables or assembly/replacement of poles for phone and power lines.
4. This lack of innovation, I believe, partially explains why we constantly struggle with getting power back on after a storm - the lack of innovation results in the lack of planning, thinking and drive to work efficiently or just plain replacement of current technology with better less vulnerable technologies which aren't available because of the lack of competition.
5. Granted, government investment itself is no panacea, but by building additional infrastructure it can, a) build in some redundancy in the system, b) jump-start some innovation be it R&D at the federal government level or by using lowest bidders to build the infrastructure.
6. If telcos can invest in multiple cell towers, e.g. Verizon/ATT can have their own towers in the Washington metro area - whose costs are non-negligible and is not subject to a natural monopoly argument then why should other telco or power services be subject to the same argument?

Now is the time to tax gasoline

Not when it was at $2 a gallon when this was proposed.

Based on Jim Hamilton's post:
"But with oil prices now coming down even faster than they went up, is that all going to be reversed? None of the changes above were easy for people to make, and I don't expect them to reverse those steps that easily either. Although the price of gasoline today is less than it was a few weeks ago, it's still much higher than it had been at the time you purchased your last car. As consumers replace older models, they're invariably going to continue to substitute into more fuel-efficient vehicles even if oil prices continue to decline. In addition, there was a mentality in 2005 that what looked like high gasoline prices at the time ($3 a gallon) were only temporary. I expect an opposite perception could have set in today-- even if gasoline prices go lower for a few months, consumers know they could go back up and nobody wants to be permanently stuck owing the big gasoline bills they remember from this summer."

Tuesday, August 12, 2008

Building our way out of slums

I came across two articles on slums, specifically Dharavi in Mumbai (coincidentally, one after another):
1. From Economist (subscription required):
The idea now in vogue is to bring in a developer, let him put up multi-storey buildings, use some of the flats to rehouse those living on the site and sell others at a profit. Slum-dwellers often have enough money to pay rent, and such deals remove a financial burden from the local authority or landlord. ... Others worry that such schemes will allow corrupt officials and corrupt developers to make huge fortunes at the expense of the poor. ... More generally, he believes that both government and developers have a strong interest in keeping property prices high—and Mumbai's rank among the highest in the world. Vijay Mahajan, of Bombay First, a businessmen's group formed to promote and improve the city, agrees. The higher the prices, the more builders can charge. As for the politicians, they profit from an invisible line that runs directly from slumlord to local politician to state minister to his boss. Money runs up along this line, and so do votes. In return, the government lets the slums remain undemolished. It is a pay-and-stay arrangement.
2. From National Geographic who describes one such developer:
"Talk about doing something about Mumbai slums, and no one pays attention. Talk about Dharavi, and it is Mission Impossible, an international incident," says Mukesh Mehta as he enters the blond-paneled conference room of the Maharashtra State Administration Building. For nine years, Mehta, a 56-year-old architect and urban designer, has honed his plan for "a sustainable, mainstreamed, slum-free Dharavi." At today's meeting, after many PowerPoint presentations, the plan is slated for approval by the state chief minister, Vilasrao Deshmukh.

Dharavi is to be divided into five sectors, each developed with the involvement of investors, mostly nonresident Indians. Initially, 57,000 Dharavi families will be resettled into high-rise housing close to their current residences. Each family is entitled to 225 square feet (21 square meters) of housing, with its own indoor plumbing. In return for erecting the "free" buildings, private firms will be given handsome incentives to build for-profit housing to be sold at (high) market rates. ...

At first glance, Mehta, resident of an elegant apartment building on swank Napean Sea Road, a longtime member of the British Raj–era Bombay Gymkhana and Royal Bombay Yacht Club, does not appear to be a Dharavi dreamer.

"You could say I was born with a golden spoon in my mouth," he remarks at his West Bandra office overlooking the Arabian Sea. "My father came to Bombay from Gujarat without a penny and built a tremendous steel business. An astrologer told him his youngest son—me—would be the most successful one, so I was afforded everything." These perks included a top education, plus a sojourn in the U.S., where Mehta studied architecture at Pratt Institute in Brooklyn.
"For me, America has always been the inspiration," says Mehta, who made a fortune managing his father's steel business before deciding to develop real estate on Long Island's exclusive North Shore. "Great Gatsby country," he says, detailing how he built high-end houses and lived in Centre Island, a white community with "the richest of the rich"—such as Billy Joel, who recently listed his mansion for 37.5 million dollars.

"The slums were the furthest thing from my mind," Mehta says. This changed when he returned to Mumbai. He saw what everyone else did—that the city was filled with a few rich people, a vast number of poor people, and hardly anyone in the middle. This was most evident in the appalling housing situation. The city was split between the Manhattan-priced high-rises that dotted the south Mumbai skyline and those brownish areas on the map marked with the letters ZP for zopadpatti, aka slums. ...

Then it jumped out, as clear as real estate's incontrovertible first axiom, location, location, location: Dharavi, right in the middle of the map. It was a quirk of geography and history, as any urban planner will tell you (the American inner city aside): Large masses of poor people are not supposed to be in the center of the city. They are supposed to be on the periphery, stacked up on the outskirts. Dharavi had once been on the northern fringe, but ever growing Mumbai had sprawled toward the famous slum, eventually surrounding it.

It didn't take a wizard to see the advantages of Dharavi's position. Served by two railway lines, it was ideally situated for middle-class commuters. Added to this was the advent of the Bandra-Kurla Complex, a global corporate enclave located directly across the remaining mangrove swamps, as close to Dharavi as Wall Street is to Brooklyn Heights. Sterile and kempt, the BKC was the future, right on the doorstep of the zopadpatti.

"I approached it as a developer. In other words, as a mercenary," says Mehta, satellite images of Dharavi spread across his desk. "But something happened. I opened an office in Dharavi, started talking to people, seeing who they were, how hard they worked, and how you could be there for months and never once be asked for a handout."

It was then, Mehta says, "I had an epiphany. I asked myself if these people were any different from my father when he first came from Gujarat. They have the same dreams. That was when I decided to dedicate the rest of my life to fixing the slums. Because I realized: The people of Dharavi—they are my genuine heroes."

Back on Rajendra Prasad Chawl, news of the plan's approval was met with a decidedly mixed response. Meera Singh barely looked up from Baba Ramdev's lecture. She had heard often the stories about Dharavi's supposed transformation. Nothing much ever happened. Why should Mukesh Mehta's scheme be any different? Moreover, what reason would possess her to move into a 225-square-foot (21 square meters) apartment, even if it were free? She has nearly 400 square feet (40 square meters). "Informal housing" has been good to her. She receives 1,100 rupees a month from the furniture workers and another thousand from renting her basement. Why should she give this up for a seven-story apartment building where she'll be saddled with fees, including "lift" charges? She doesn't like to ride in elevators. They give her the creeps.

Amit Singh was more outspoken. Mehta's plan was nothing more than "a scam, a chunk of fool's gold." Amit was already drafting an editorial in the Janhit Times demanding a citizen's arrest of "the gangster Mehta."

(The entire article is more engaging than this clip can provide).

But I wondered: Why not just give the people of Dharavi clear title to the land that they are living on? After all, aren't economists currently riding the bandwagon of the importance of property rights and institutions that enforce such rights so that economic growth can become self sustaining?
In an insightful recent book, The Mystery of Capital, Peruvian economist Hernando de Soto notes that the poor in much of the developing world would have property that could be pledged as collateral if its legal status were not murky. For example, houses built in the Dharavi slum in Bombay are solidly constructed and sit on prime land. But since they are encroachments on government or private land, they have no legal status. Because their property cannot serve as collateral, de Soto argues, the poor have no access to finance. The solution to this problem, he suggests, is to offer the poor clear title to their land.

While there is substantial merit to his idea, it is no panacea. If the poor are squatting on someone else's private property, or as is typically the case in the developing world, government land, legalizing encroachment could lead to a free-for-all to occupy the remaining land, leading to widespread insecurity of property, the opposite effect of that intended.

If, on the other hand, the poor had a long history of occupying the land and have the sanction of the community in doing so ... the incentives created by legalizing may not be altogether perverse. But if it is the local community that enforces property rights, then it is unclear that a title from a remote government would be enought to make the property good collateral. It would take a really brave bank officer to attempt to repossess a house in the Dharavi slum against the wishes of the local mafia ... (or the local mafia under a crooked politician who most likely is benefititting from "rents" extracted from those living on the land. See the Economist article for an illustration in Nairobi.)

The above is from Raghuram Rajan and Luigi Zingales, "Saving Capitalism from the Capitalists" (pages 32-33).

Everyone's a winner

I am struck, these days by the extra effort that seems to have gone into de-emphasizing competition. Whenever they play kickball or something similar in P.E. at K1 and K2's school, the teacher always says to the kids that they are not to keep score. It doesn't matter who wins or loses (it's how they play the game?). This summer at horse camp, first place ribbons were given out to all the riders (though when they are given out, the counselors always pick something positive to say, such as "most improved post-and-trot" which I liked).

Is winning and achieving something to be frowned on? Are children too young to learn the "agony of defeat?" Are we protecting them too much from disappointment? We don't have any experience in competitive leagues such as soccer or hockey but even with the de-emphasis, they instinctively know what it means to win or lose. When told not to keep score, some one always will.

Yet in this year's Olympics we celebrate an athlete's desire to win:
Michael Phelps - Phelps etched his name with Mark Spitz and Carl Lewis among the winningest Olympians ever with his third gold medal and third world record in as many days. ... Phelps all the way. “I hate to lose,” he said. “When you lose a race like that, it motivates me even more to try to swim faster.” (From an AP report.)
An announcer on NBC compares Michael Phelps desire to win (or his dislike in losing) to Tiger Woods. "He's the Tiger Woods of swimming."

Monday, August 11, 2008

Is more regulation the answer?

We may well be in the tail end of the subprime crisis but with the news that Freddie Mac and Fannie Mae have also been substantially affected, there have been calls for increased regulation of the financial markets. Perhaps the answer is not so much more regulation, but better regulation although the balance is always hard to find. I was reminded of this aspect of trying to achieve a good balance when reading "The Commanding Heights".

From page 369:
[In addressing environmental concerns and health] ..
He [Judge Stephen Breyer] points to the challenge of building flexibility into regulation. "It is always a problem to get discretion into the process so that the regulator can apply a reasonable amount of cautios regulation. Because no one trusts anyone else, there is less discretion, more rules, more rigid results. The only way to improve this regulation is to give the administrators more discretion. But Congress writes the rules to prevent discretion. If there is too much discretion, there is a risk of abusing it. If you stop discretion, you get rules and rigidity."

Critics of the current system worry about its rationality and the "last 5-or 10-percent problem." Remediating 90 or 95 percent of a pollution problem can be done in an efficient, cost-effective fashion. The last 5 or 10 percent - purity - is a much more difficult - and sometimes an almost unachievable - goal, and one that diverts resources from more pressing needs. "The drive for perfectionism has created a very big mess," said Justice Breyer. In his book Breaking the Vicious Circle: Toward Effective Risk Regulation, he cited a case he presided over when he was a federal judge. The case involved a ten-year battle to force the cleanup of a toxic waste dump in New Hampshire: "The site was mostly cleaned up. All but one of the private parties had settled. The remaining private party litigated the cost of cleaning up the last little bit, a cost of about $9.3 million to remove a small amount of highly diluted PCBs and "volatile organic componds" (benzene and gasoline components) by incinerating the dirt. How much extra safety did this $9.3 million buy? The forty-thousand-page record of this ten-year effort indicated (and all parties seemed to agree) that, without the extra expenditure, the waste dump was clean enough for children playing on the site to eat small amounts of dirt for 70 days each year without significant harm. Burning the soil would have made it clean enough for children to eat small amounts daily for 245 days per year without significant harm. But there were no dirt-eating children playing in the area, for it was a swamp. Nor were dirt-eating children likely to appear there, for future building activity seemed unlikely. The parties also agreed that at least half of the volatile organic chemicals would likely evaporate by the year 2000. To spend $9.3 million to protect non-existent dirt-eating children is what I mean by the problem of the 'last 10 percent.'"

Saturday, August 9, 2008

Dangers of globalization from 'The Commanding Heights"

Jagdish Bhagwati's upbeat speech on free trade (and by extension globalization) seems to be in contrast to the current situation. The last chapter of The Commanding Heights seemed appropriate to consider at this point:

From pages 408-415:
Five tests, in particular, are likely to be decisive in shaping people's thinking and judgment about the market. The outcome of these tests will over time provide the signposts to the future frontier betweens state and market - and the character of the battle over globalization.
1. Delivering the Goods?
... Will market economies deliver on what they promise in terms of measurable economic goods: growth, higher standards of living, better-quality services and jobs? After all, it was the failure of markets and the loss of confidence in their capaciy that led to governments' assuming a much more assertive role in economic management. If, ..., privatization, deregulation, and the opening up of economies to competition are seen as job-destroying rather than job-creating, market policies will surely be subject to continuing attack and constant revision. ...
2. Ensuring Fairness?
... For many, the market system will be evaluated not only by its economic success but also by the way the system will be evaluated not only by its economic success but also by the way in which that success is distributed. ... Is the system just and fair? Or does it disproportionately benefit the rich and the avaricious at the expense of hardworking people of more moderate circumstance? ...What a market advocate describes as "incentives" is translated into "greed" in the vocabulary of the market critic. Conspicuous consumption and the flaunting of wealth weigh the scales toward "greed" and thus accentuate the criticism of inequality. ...
3. Securing the Enviroment?
... The most pressing environmental issues are those that affect the 5 billion people in the rest of the world. A large number of these countries start from low levels of standards and practice - and management. Their environments are under stress because of poverty ...
4. Coping with Demographics?
Population trends will challenge the performance of market economies. ... Those [developing countries] confront an enormous swelling in the younger age groups and the difficult tasks of generating jobs and increasing per capita income. The surge in population has created a combustible mixture of idleness, poverty, disillusionment, and a bitterness that can be a tremendous source of political and economic instability that spills over borders.
5. Upholding Identify?
... But it [participation in the global economy] also challenges the values and identities of national and regional cultures, including ethnic and religious identities. It can undermine a taditional and comforting sense of security ...

... The backlash against globalization is premised exactly on the idea that there is something seriously wrong with the workings of the global marketplace, and that is where the focus of the debate is. On one side are those who say, though often with more emotion than data, that a globalized economy is fundamentally unfair and immoral and that the markets and capitalism are the economy. On the other are those who say that the priority is to develop the new and appropriate rules for the new world that will enhance and broaden the benefits while dealing with the downsides. (pg. 417)

Friday, August 8, 2008

The Commanding Heights

This book covers the transition to market economy in most of the world in the late 70s and 80s after the failure of Keynesian interventionist policies. Notably absent in this story is Africa. Each chapter covers a region (Eastern Europe for example) or country (Great Britain) and relates the process in which the transformation to market economy takes place. It was fairly entertaining except that it was written in a tone that reminds me of a narrator on TV. (Of course, it was made for TV on PBS and makes me wonder which came first.) What I found really irritating was the phrase "commanding heights" was repeated much too often. It reminded me of a TV ad that keeps repeating its 800 number.

The cautions despite the success of capitalism, from page 404:
Yet, whatever the transformations in the world economy, an underlying mistrust of the market persists. Why? George Schultz pointed to one reasone when he said, "Markets are relentless." As competition becomes more intense, here is no respite from its pressures. People turn to government to provide shelter from the constant demands of the market. The move to the market may bring a higher standard of living, ... But it also brings new insecurities - about unemployment, about the durability of jobs and the stress of the workplace, about the loss of protection from the vicissitues of life, about the environment, about the unraveling of the safety net, about health care and what happens in old age.

Tuesday, August 5, 2008

The use of "I"

Edward Tufte's - see earlier post - criticism of David Galenson's book included Galenson's use of the word "I" (or rather too much use of the word "I"). I think that the main reason for this has been the move away from using the passive to the active voice:
"The hypothesis tested is ..." versus "I test the following hypothesis".
On a similar note, I also see articles where, instead of "I", the author uses, "We". This works fine when there are multiple authors but I also sometimes come across these even though it is a single-authored paper. I find it a little disconcerting but am willing to let it go.

Personally, I've always preferred the passive voice but at work, we are constantly being urged to write using the active voice. I'm not sure why there is a trend toward the active voice - I feel like I'm writing my resume or something.

The Anti Commons

A previous post on manging the fisheries commons led me to look at the following on the Anti-Commons problem, i.e. the problem that can arise when there are too much property rights (I think I'm summarizing the anti-commons correctly.)
1. The Tragedy of the Anti-Commons: A New Problem. An Application to the Fisheries
Abstract: The operation and management of common property resources (“the commons”) have been exhaustively examined in economics and political science, both in formal analysis and in practical applications. “Tragedy of the Commons” metaphor helps to explain why people overuse shared resources. On the other side, Anti-Commons Theory is a recent theory presented by scientists to explain several situations about new Property Rights concerns. An “anti-commons” problem arises when there are multiple rights to exclude. Little attention has been given to the setting where more than one person is assigned with exclusion rights, which may be exercised. We analyze the “anti-commons” problem in which resources are inefficiently underutilized rather than over-utilized as in the familiar commons setting. In fact, these two problems are symmetrical in several aspects.
2. Do Formal Intellectual Property Rights Hinder the Free Flow of Scientific Knowledge? An Empirical Test of the Anti-Commons Hypothesis
Abstract: While the potential for intellectual property rights to inhibit the diffusion of scientific knowledge is at the heart of several contemporary policy debates, evidence for the anti-commons effect has been anecdotal. A central issue in this debate is how intellectual property rights over a given piece of knowledge affects the propensity of future researchers to build upon that knowledge in their own scientific research activities. This article frames this debate around the concept of dual knowledge, in which a single discovery may contribute to both scientific research and useful commercial applications. A key implication of dual knowledge is that it may be simultaneously instantiated as a scientific research article and as a patent. Such patent-paper pairs are at the heart of our empirical strategy. We exploit the fact that patents are granted with a substantial lag, often many years after the knowledge is initially disclosed through paper publication. The knowledge associated with a patent paper pair therefore diffuses within two distinct intellectual property environments one associated with the pre-grant period and another after formal IP rights are granted. Relative to the expected citation pattern for publications with a given quality level, anticommons theory predicts that the citation rate to a scientific publication should fall after formal IP rights associated with that publication are granted. Employing a differences-indifferences estimator for 169 patent-paper pairs (and including a control group of publications from the same journal for which no patent is granted), we find evidence for a modest anti-commons effect (the citation rate after the patent grant declines by between 9 and 17%). This decline becomes more pronounced with the number of years elapsed since the date of the patent grant, and is particularly salient for articles authored by researchers with public sector affiliations.

Less technical:
1. James Surowiecki reviews a new book called the Gridlock Economy.
We hear a lot about the “tragedy of the commons”: if a valuable asset (a grazing field, say) is held in common, each individual will try to exploit as much of it as possible. Villagers will send all their cows out to graze at the same time, and soon the field will be useless. When there’s no ownership, the pursuit of individual self-interest can make everyone worse off. But Heller shows that having too much ownership creates its own problems. If too many people own individual parts of a valuable asset, it’s easy to end up with gridlock, since any one person can simply veto the use of the asset. ...

The commons leads to overuse and destruction; the anticommons leads to underuse and waste. In the cultural sphere, ever tighter restrictions on copyright and fair use limit artists’ abilities to sample and build on older works of art. In biotechnology, the explosion of patenting over the past twenty-five years—particularly efforts to patent things like gene fragments—may be retarding drug development, by making it hard to create a new drug without licensing myriad previous patents. Even divided land ownership can have unforeseen consequences. Wind power, for instance, could reliably supply up to twenty per cent of America’s energy needs—but only if new transmission lines were built, allowing the efficient movement of power from the places where it’s generated to the places where it’s consumed. Don’t count on that happening anytime soon. Most of the land that the grid would pass through is owned by individuals, and nobody wants power lines running through his back yard. ...

Property rights (including patents) are essential to economic growth, providing incentives to innovate and invest. But property rights need to be limited to be effective. The more we divide common resources like science and culture into small, fenced-off lots, Heller shows, the more difficult we make it for people to do business and to build something new. Innovation, investment, and growth end up being stifled. ...

When something you own is necessary to the success of a venture, even if its contribution is small, you’ll tend to ask for an amount close to the full value of the venture. And since everyone in your position also thinks he deserves a huge sum, the venture quickly becomes unviable.

2. The Environmental Economics blog is closer to the commons problem:

The Economist takes another tack. It reviews some of Elinor Ostrom's critiques of Harding. She has found several examples, including the "miracle of the Rhine," that showed how the commons can be managed without selling off every last bit and assigning ownership, the usual solution to Harding's problem. Management of Swiss (or Austrian) Alpine pastures is another example. Farmers don't tend to add animals until the ecosystem collapses. Quite the opposite: Many of these pastures have been managed successfully for decades or sometimes centuries, despite belonging to no one in particular.

The Economist also tracked down the 12th Biennial Conference of the International Association for the Study of the Commons last month, where Charlotte Hess spoke about extending the concept of the commons to global public goods like oceans or Antarctica. That's where managing becomes more difficult. Once the entire Earth is the common, like with climate change, it's not as simple as having a handful of farmers divvy up a pasture or establishing unwritten norms for Sahelian nomads.

David Galenson

The NYT recently featured David Galenson whom I've always thought of as an economist with an interesting research agenda. Therefore, I was equally surprised to find that Edward Tufte whom I had always thought of as a statistician with equally interesting research on visualizing data disparaging Galenson's research. Examples of Tufte's critiques are:
"For one thing, the book presents 15 data tables with 2,029 entries (artists' birthdates, deathdates, ages, and frequency of appearances in exhibitions and art history textbooks) - but not a single auction price or price index or anything else that might measure an economic transaction. Likewise for the text in the 265-page book: no prices at all. The book's 2 graphs show a vertical axis, Ln(Price) = natural logarithm of prices, along with age/price curves for Cezanne and Picasso. These 2 tidy curves, without any actual data points, are the only quantitative evidence about auction prices in the book. Readers are not told the number of paintings plotted graphically. The Cezanne age/price curve could result from all sorts of underlying data."
(Good Point - and taken. Galenson should have known better.)
And here:
"David Galenson begins with an intellectual history of the work, disarmingly written in the first- person singular with 35 self-references in the first 2 pages."
(I thought that this was a low blow. And although I dislike the trend where the reporter inserts himself/hereself into the story I've begin to accept it as a trend. See writer Caroline Kettlewell's opinion on narrative non-fiction.)
And here's the unkindest but perhaps not totally untrue cut of all:
economisting: (e kon' o mist' ing) 1. The act or process of converting limited evidence into grand claims by means of rhetorical ploys, especially punning. 2. The belief or practice that empirical evidence can only confirm and never disconfirm a favored theory. 3. Conclusions that are theory-driven, not evidence based. See also confirmation bias, painting with a broad brush, Iraqi weapons of mass destruction, post-modern critical theory, marketing.
Ultimately, I feel that Tufte has an axe to grind against economists and when I sense such feelings of animosity in any kind of writing it leads me to believe that the author is biased and as such cannot be taken seriously. Pity.
See also comments here and here which seems to imply that Galenson is a sloppy/bad writer and no worse but I view this as being generous. I think that if a person is sloppy/bad that will reflect into his or her other areas as well. In the case of a book, such as this that I think is trying to extend the reach of economics, Galenson has a responsibility to write clearly and with more careful thought.

Monday, August 4, 2008

Rise and Fall of Baby Names

I pulled some girls' baby names of the Social Security website and thought it was interesting. Here low numbers are "good" i.e. #1 is rank 1. Emily has been ranked #1 for almost a decade now.

Effects of new windows

We replaced our windows Nov 06 and have wondered whether it's really made a difference. It doesn't really make sense to just compare before and after since there is variation in the temperatures and natural gas prices over time. I ran a regression using therm which is a measure of energy used as the dependent variable and heating degree days and a dummy variable that indicates when we got our new windows as independent variables.


VariableCoefficientStandard ErrorT-stat
Heating Degree Days0.210.047.86
New Windows-9.623.1-3.11

If I'm reading this correctly, we're saving about 10 therms per month?
I'm a little suspicious of OLS however since both Therms and HDD exhibit strong seasonality. The econometrics literature doesn't seem to address regressing two seasonal series against each other. Most of the univariate time series literature is concerned with autoregressive processes, integrated series, etc.

Subcompact fuel efficiency trends

This post on a proposal to buy up "clunkers" as a fiscal stimulus and at the same time address some environmental concerns had me looking at trends in fuel efficiency. I obtained the data from Appendix F of Light-Duty Automotive Technology and Fuel Economy Trends: 1975 Through 2007. I was surprised to find that since 1996 fuel efficiency had declined and that fuel efficiency of 1982 subcompacts were no better than those of today. Of course, fuel efficiency is not just a function of model year but also depends on how well the older cars have been maintained. As such, a plan to buyback "clunkers" because they are more polluting based on some model year cutoff is perhaps not the best way to approach it.

Of course, more analysis of other car classess needs to be done but since my Saturn SL2 is considered a subcompact I just went with this. What this does not show is the average weight of the vehicles in this class which has been trending upward just as fuel efficiency has been trending down. I suspect that the increasing weight of the vehicles in this class accounts for the lower fuel efficiency. This is probably explained by the disappearance of the 2-door and hatcback versions of the Honda Civic that were ubiquitous in the early 80s. With fuel prices at $4.00 a gallon we're starting to see a comeback of these 2-door cars like the Toyota Matrix

Eyeballing Appendix F for midsized cars, fuel efficiency for this class of vehicles has actually increased. From 1975 to 2007, it looks to be from around 11mpg to 24 mpg. Fuel efficiency reached 21 mpg around 1985 and seems to have hit a wall since then.

CAFE standards were enacted in 1975 which is when the data starts and if we are judging the success of CAFE solely on fuel efficiency it appears to have achieved great gains but has stagnated from the mid 80s onward. Can a new CAFE standard force the industry to achieve more gains in fuel efficiency?

But why does the industry have to wait? Perhaps the new higher gas prices might be the impetus needed to invest in the R&D that can achieve gains in fuel efficiency or has auto technology reached a plateau as far as this is concerned? Can fuel efficiency be achieved only by making vehicles lighter? Is there little advance left to be made in combustion engine technology?

Friday, August 1, 2008

Why it's so hard to read Bhagwati

Or, is Jagdish Bhagwati the next Faulkner of economics? I've been struggling with his book "In Defense of Globalization" and unfortunately, I find his speech just as tedious (note, this isn't exactly the adjective I'm looking for) but perhaps after reading this one will get the idea:
"But outsourcing happened to revive again, a couple of years ago, when the distinguished macroeconomist Alan Blinder, with us today, who was deeply influenced by Thomas Friedman’s bestselling book on globalization --- which seemed to translate the credible statement by Bangalore’s remarkable IT entrepreneurs-cum-scientists such as Nandan Nilekani that they could do everything that Americans could do into the frightening non sequitur that therefore Indians would do everything that the Americans were doing --- published an essay in Foreign Affairs (April 2006) that bought into the line that outsourcing of services on the wire would increasingly export American jobs to these countries and imperil the US and its working and middle classes."

How to treat outliers

I came across this post on outliers and was surprised to read that it pointed back to Mark Thoma who in his zeal to debunk the Laffer Curve advocated throwing out an outlier. I agree with Crooked Timber that outliers need to be treated with caution and should be excluded only after careful consideration, not because it doesn't accord with the results that we would like to have. Note that this does not say that I agree with the existence of the Laffer Curve as the WSJ was in quick to publish.

Here is how we've looked at outliers at where we work:
1. Outliers are usually but not always indicative of some possible data entry error. So these are excluded only if after checking that it was an error and there is no recoverable data, it is then set to missing.
2. If the variable is set to missing and is part of a set of predictor/covariate/independent variable (I never know which terminology to use because where I am each discipline uses her own terminology) then some statisticians might advocate some kind of imputation. (I'm not a big fan of imputation but I'll go with it for now.)
3. If outliers are valid observations then they are part of the empirics that need to be modeled, explained, what have you. We don't just throw it out because it is incovenient and does not fit with our idea of the world.

As an example, one of the problems we had was something like this:
Q. How many times did you (the parent) spank your child in the past week?
R. It must have been over 100 times.
(It was duly coded as 100.)

What was the best way to handle this record? It was obviously an outlier. In the end, after some hand wringing we set it to the maximum (the maximum excluding this outlier, that is). Was it better to set it to missing? I don't know. No imputation was performed on this variable because it was an outcome - the study wanted to test the treatment effects of some program on parental practices/style.

Biofuels and food prices

This news article form the Guardian:
Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank report obtained by the Guardian.
The damning unpublished assessment is based on the most detailed analysis of the crisis so far, carried out by an internationally-respected economist at global financial body. ...

It will also put pressure on the British government, which is due to release its own report on the impact of biofuels, the Gallagher Report. The Guardian has previously reported that the British study will state that plant fuels have played a "significant" part in pushing up food prices to record levels. Although it was expected last week, the report has still not been released.

Without seeing the study it is hard to determine how the 75% figure was arrived at but here is a speculation.
1. It was done using an analysis of variance so that 75 percent of the variation in the changes in food prices is caused by some variable that measures the change in the amount of biofuels produced.
2. If this is the case, then I don't really consider this causality per se but the finding is interesting nonetheless. Indeed if this is the case then I would not say that biofuels have caused food prices to go up by 75 percent.
3. It could have been done using the coefficient in a standardized regression although standardized regressions are criticized because some predictors are easier to change than others regardless of the unit of measurement. More recent discussion especially between Sander Greenland and Andrew Gelman can be found here. *
4. The results could be sensitive to the variable used to proxy for amount of biofuels produced - it could be amount of crops diverted or change in amount of bioenergy or something else although I would expect that some sensitivity analysis would have been done and perhaps the press merely used the largest number for publicity purposes.

* Sander Greenland is coauthor of "The fallacy of employing standardized regression coefficients and correlations as measures of effect" (1986) in American Journal of Epidemiology and his critique is quite harsh.

A solar power breakthrough?

MT pointed to this:
'Major discovery' from MIT primed to unleash solar revolution, Anne Trafton, News Office: In a revolutionary leap that could transform solar power from a marginal, boutique alternative into a mainstream energy source, MIT researchers have overcome a major barrier to large-scale solar power: storing energy for use when the sun doesn't shine. ...

More engineering work needs to be done to integrate the new scientific discovery into existing photovoltaic systems, but Nocera said he is confident that such systems will become a reality. ...

And a commenter:
As an engineer, I smile at the sentence "More engineering work needs to be done...". Ah, what years of sweat and tears and money burned hides behind that little innocuous sentence....

Pie in the sky? I hope not. I'm hoping to go solar in about 10 years when everything else has been paid for. Perhaps better storage technology will actually be in the market by then.