Are You More Honest Than a Fifth Grader?

Cheating on tests in China has become so bad that the Liangzhou Discipline Inspection Commission and Organization Department got 5th graders to monitor exams for police and judges.

Of all of the exam takers vying for 66 district-level judge, prosecutor and investigator positions, students identified 25 alleged cheaters, whose test results were disqualified, the report said.

...

Cheating on tests is common in China, where pressure to pass competitive exams for entrance to university, civil-service jobs and other coveted positions is intense.

This is one reason admissions decisions for Chinese students to US universities are so difficult

Computer trading makes markets better

The hype against high frequency trading is misplaced:

...some algorithms basically infer the price increase from trades, getting rid of the profits otherwise available. But these are all short term scenarios, and basically make a market efficient. That is, say Apple announces good news, suggesting a sharpe bounce in the stock. An investor tries to buy, and would like to trade 1MM shares, but clearly that's too much, so he puts in an order for 1000, then next minute, another 1000, and another. A machine might sense the pattern and basically jump on for the ride with him, diluting his profits. Is that bad news? Only for the short-term trader. For the longer run investor oblivious to this, who was on the other side, they got to sell at a higher price (the price rose faster than otherwise). The short-term speculator basically makes less because the algorithm reverse engineers his insight. This is the essence of an informationally efficient market, where news gets into the price asap. That those at the bleeding edge are making a profit is not a bug, it's a feature.

Can better information lead to worse policy?

Congress thinks so:

WASHINGTON (Reuters) - A panel of U.S. lawmakers voted on Thursday to prohibit the federal government from "denying or rationing" medical care based on studies comparing medical drugs and devices.

The U.S. House of Representatives Energy and Commerce Committee passed the Republican-sponsored amendment, despite objections from Democrats. It is a potential win for drug and medical device makers, which argue that such comparison studies could favor cheaper treatments.

Income elasticity of demand for hotel rooms

Apparently, it is about +4:

... thought leaders envisions lodging demand recovering at 4 times the rate of the general economy -- as part of a "snap back" to make up for the unprecedented 4 to 1 decline we have just experienced. Such a snap back would create some very interesting and positive results for hotel profits and hotel values!

Happy Birthday Milton

Watch the great economist eviscerate Phil Donohue, with a light touch, in only three minutes:

Computer Care Crisis?

One piece of evidence for the existence of a health care crisis is that the spending on health care has grown very fast. Implicit in the claim is that increasing cost, and not increasing demand, is the main cause for the rise in expenditures. Such an upward shift in supply might be a concern. Yet there is considerable evidence that new treatments, drugs and levels of care have increased the quality of care. Just how much would you be willing to pay for one more QALY? This upward shift in demand is simply the reward to providers for doing a better job.

To make the case more forcefully, one can compare healthcare expenditures with computer expenditures. The Bureau of Economic Analysis (BEA) website with the Industry Economic Accounts (IEA) contains data on the dollar value of output by industry over time. I aggregated the industries that I consider to be "Health" and "ICT," basically computers, software and telecom. (Since I am not familiar with the health data, I could be missing some industires.) Normalizing 1998 = 100 you get:
















I doubt policy makers would claim that computer costs are "out of control" requiring an overhaul of the "computer care system" with more direct government intervention in the "computer services delivery." I suspect that nearly all of the growth in computer output is due to greater demand from ever better products and services from amazing innovations. In fact, there would be a fear that more government intervention might stifle the flow of yet-to-be-developed innovations. Might the same apply to healthcare?

What's so funny about rationing care?

George Bush blew his chance to reform social security by proposing changes that did nothing to address the out-of-control costs of the program. His proposal for private accounts went down to defeat. Similarly President Obama’s (or Congress’) health care proposals do nothing to address the out-of-control entitlement programs (Medicare and Medicaid).

Either a European style system, where care is rationed by queuing or by treatment, or a market-style system with big deductibles or co-payments, where care is rationed by price, would control costs. The point is that we have neither. There is no mechanism in either the status quo or the various Congressional proposals to control costs, and this is the legacy of the Greatest (and now Obama's) generation: we lack the political courage to ration care.

Bundled pricing in German brothels

In an effort to boost business in these tough economic times, German brothels have introduced flat-rate sex promotions. Similar to an "all-you-can-eat" pricing at a restaurant, the promotions allow patrons to consume as much as they want. The promotion is not illegal, but it has led to objections from some law makers.

“This is an outrageous violation of human dignity,” Heribert Rech, the Baden-Württemberg interior minister, told The Times.

“So-called flat-rate sex is an immoral development which cannot be tolerated in our society.”

If flat-rate pricing is immoral; is per-unit pricing moral?

California Budget Stalemate

Not just this year, but year after year, the California state budget fight appears to be more intractable that anywhere else. One claim is that the the budget is balanced on the backs of very few taxpayers. So poked around for the data and found them online at the California State Franchise Tax Board Website. These data are very interesting to numbers geeks like me. For 2006 it is true that the 5,896 tax filers with incomes of $5million or more were liable for 21% of all tax receipts. But, their average state income tax rate was "only" 10%. Perhaps more interesting is that FTB provides a table with filings, total income and tax liabilities by income category. From this table it is relatively easy to construct a Lorenz curve comparing what fraction of income is earned by what fraction of earners (or filers in this case).



















The more "curved" it is the more uneven the income distribution. About one-third of all income is earned by the top 5% of tax filers. I had expected this to be even more "curved." When you do the same thing for tax liabilities, you get:




















The same top 5% of high earners are responsible for about two-thirds of total tax liabilities. With this visual representation, it becomes a bit more clear why high earners are trying so hard to hold the line on tax increases.

"Bailout" from Nashville's own Merle Hazzard

Competition for Newspapers (or for bloggers?)

The Examiner.com is an attempt at "new media." The Examiner.com provides the platform, ads, and other overhead. Individual "examiners" are private contractors providing content and getting paid by their audience size - moral hazard is dealt with. But just about anyone can contribute - adverse selection may be a problem.

Examiner.com is your inside source for everything local. From pets to careers, entertainment to sports, health to parenting and hundreds of more topics, Examiners across the country contribute unique, original content to enhance your life in your local city – wherever that may be.

But... this is the site about that site. We are staff members of Examiner.com in Denver, Colorado, and we will be talking about what there is to know about life at Examiner.com — from the inside.

Is it an eNewspaper? Is it blogging? Is it a profitable business model?

This is going too far...

In response to the California budget crisis,

The Bureau of Electronic Appliance Repair and the Bureau of Home Furnishings and Thermal Insulation ... be merged into the Bureau of Electronic and Appliance Repair, Home Furnishings, and Thermal Insulation.

Game Theory in the Tech World

Why is Google pursuing a new operating system? How about the logic behind Microsoft's new search application? Rather than seeing these as all-out attacks, this WSJ opinion piece characterizes them as credible threats designed to deter all-out war.

Profit Opportunities from "Cash for Clunkers?"

Tucked inside an NPR report on the "Cash for Clunkers" program is this gem:

Emich was surprised to learn that most of the customers were middle-class folks with good credit ratings — usually thrifty people who kept their cars for a long time.

I was expecting low-income, poor credit," says Emich. "It has been the complete opposite." He says a few of the customers paid cash for their new cars.

I wonder if our minivan qualifies? Other identified impacts are:

1. An increase in the demand for labor at wrecking yards - I am not a market participant.
2. An increase in the supply of spare parts - the expected operating costs for my old minivan just fell.
3. A decrease in the demand for gasoline from fewer low MPG cars - also good for my minivan.
4. Oh yeah, an increase in the demand for new cars - an indirect auto industry bailout.

Unlike the more direct GM and Chrysler bailouts, consumers need not support the "US" auto industry with their new purchases. Will demand increase more for these "US made" cars or for "imports?" Consumers turning in Chevys to buy Toyotas would indicate that the US auto industry is continuing to lose its historic comparative advantage. Did the German version of this experiment disproportionately affect German auto makers?

Lost in Translation

The Guardian Reports:

It probably seemed a good idea at the time. But Russia's attempt to create a joint gas venture with Nigeria is set to become one of the classic branding disasters of all time ‑ after the new company was named Nigaz.

Unfortunate and unforeseen translations of brand names have been the bane of marketers in an increasingly globalized world. While American culture is particularly pervasive, I have to wonder just how sensitive two countries in Eurasia and African should be to what is likely to be a very US taboo against "the N-Word." In this case, however, "Nigaz" is a conjunction of descriptive company and country names. And it is not like they will be buying 30 second ad spots on American TV. If "Conoco-Phillips" translated into a pejorative in a Nigerian dialect or in Russian it would not stop them from using the name.

Is your iPod un-American?

REASON takes on the myth of American-made goods:

[the iPod's] parts are made in dozens of nations, and creating the little doodads employs thousands of foreigners. Final assembly is done in China-a country that right-wingers and left-wingers alike fear is an economic threat to the U.S.

and yet thousands of US jobs are dependent on it.

A tax on the healthy

Should we force this guy to buy health insurance?

I am disgustingly healthy, so much so that the only doctors I see – or try to: I'm near-sighted – are ophthalmologists. Could I be hit by a bus tomorrow when I head out for my daily walk? Possibly. But that's such an unlikely disaster that I've chosen to spend my money on more personally pressing needs than medical insurance.

Knowledge without incentives: the sad case of Africa

From the lonely voice of REASON:

Sales Below Cost Laws

Don't expect really low prices if you are shopping in one of four states that prevent retailers from selling below cost. Shoppers in Wisconsin will be missing out on Walmart specials.

Wal-Mart Stores Inc. announced a slew of $9 back-to-school specials Tuesday - items such as a Texas Instruments calculator, eyeglass frames for kids and backpacks. But some of those won't be sold for that price at Wisconsin stores because it would violate state law.

Wisconsin is one of four states in the country that have laws forbidding retailers from selling below cost. The others are Alabama, Hawaii and Oklahoma. Wal-Mart said prices and availability will vary in those states.

The Wisconsin law, officially the Unfair Sales Act, includes a provision requiring minimum markups on gasoline, alcohol, prescription drugs and tobacco.

The Importance of Incentives - Zimbabwe Edition

The Center for Global Development reports:

Land reform begun in Zimbabwe in 2000 was supposed to redistribute land from predominantly white-owned commercial farms to much poorer black farmers who toiled on communal lands. Proponents argued that the redistribution was necessary because commercial farms occupied the most fertile lands, leaving only dry, dusty land for communal use. This rationale reflects confusion about cause and effect regarding land ownership and land quality. In the "Before" photo below, the dry communal lands on the left are sharply delineated from the green private farms dotted with lakes and ponds on the right--so sharply that soil quality and rainfall are unlikely to explain the difference. Now click the arrow to see what happened after land reform. The dams and irrigation systems on the private farms collapsed, making them look more like communal lands, to the detriment of all.

To get the full effect, you must click through and examine the photos. My students will recognize this as sort of photographic difference-in-difference estimator from a "natural" experiment. That is, we can visually see how the different regions change at different rates.

Hat tip to Art Carden at Division of Labor.

Raising Rivals' Costs?

Walmart is supporting health care reform that would extend employer mandated health insurance coverage to more employees who currently have no employer provided coverage. In doing so, they have attracted the ire of other retailers as expressed through their lobbying group, the National Retail Federation. Has Walmart seen the light and is merely becoming more magnanimous? Of course not. Walmart's optimal compensation scheme has led them to extend coverage to more of its employees up to 52% from 46% just three years ago. In contrast, retailers as a whole cover 45% of their workers. It is safe to assume that the costs of this reform would be greater for Walmart's competitors than to Walmart.

More on Kidney Donations

The low supply of donor kidneys relative to demand is a recurring theme on our blog. Here's Virginia Postrel in The Atlantic on the need for more creative solutions. An excerpt on the issue of paying donors:

The obvious solution to the problem of barter is, of course, money. Altruistic blood donors often receive freebies like movie tickets or paid vacation hours that would be illegal for kidney donors. Plasma and sperm donors routinely receive cash, as do egg donors and surrogate mothers, who get tens of thousands of dollars.. If transplant centers could pay $25,000 or $50,000 to each living kidney donor, many more people would line up to contribute.

Such payments could even save taxpayers billions of dollars. Long-term dialysis is a federal entitlement. Under a special law, Medicare covers everyone, regardless of age, who has made minimal Social Security tax payments—about 319,000 of the country’s 400,000 dialysis patients. Compared with dialysis payments, every transplant from a living, unrelated donor saves an expected present value of almost $100,000 in medical costs, according to a 2003 American Journal of Transplantation article by Matas and Mark Schnitzler, an economist then at Washington University in St. Louis and now at the Saint Louis University Center for Outcomes Research.

Eliminating the waiting list would thus save taxpayers $8 billion, or $4 billion if each living donor received a lump-sum payment of $50,000.

Outsourcing Woes for Boeing

Boeing has been beset with labor issues in the past. Boeing's strategy to deal with this going forward is to outsource more of the work. About 30% of the 777 is manufactured by Boeing's partners and assembled by Boeing. The 787 plan was to outsource even more. This could have three effects. First, more technical jobs in manufacturing, where workers have more bargaining power, go to suppliers while the less technical "snap together" assembly jobs remain with Boeing. Second, multiple production lines make Boeing less vulnerable to disruptions. Third, by being more focused on what they do best, suppliers may eke out efficiencies in production.

Alas, it is not so easy to change production methods in this industry. Delivery of the 787 Dreamliner has been delayed again. A main culprit has been coordinating the various elements of the expanded supply chain. Manufacture of fuselage sections by Vought seems to have been especially plagued. Enough so that the Vought executive in charge was fired. It seems as though problems of incentives, hold up, and monitoring of arm-length operations were not fully appreciated. In the end, Boeing had to take an ownership stake in the operation earlier this year and buy out the Vought operations altogether earlier this month. Perhaps the experience with other suppliers was more positive, but this indicates that the supply chain is only as strong as its weakest link.

Gaming "Mandatory" Health Insurance

What happens when you force insurers to offer coverage to everyone at similar prices? Ask Massachusetts. The state has a law that requires nearly all residents to buy health insurance. The state also requires guaranteed issue and community rating, which means insurance companies have to cover anyone who applies (regardless of their health) and charge similar premiums. Not surprisingly, people wait until they are sick, and then buy insurance.

Well, the returns are rolling in, and a useful case study comes from the community-based health plan Harvard-Pilgrim. CEO Charlie Baker reports that his company has seen an "astonishing" uptick in people buying coverage for a few months at a time, running up high medical bills, and then dumping the policy after treatment is completed and paid for. Harvard-Pilgrim estimates that between April 2008 and March 2009, about 40% of its new enrollees stayed with it for fewer than five months and on average incurred about $2,400 per person in monthly medical expenses. That's about 600% higher than Harvard-Pilgrim would have otherwise expected.

Cheap Flights to Yakutat, Alaska

Under the auspices of the Essential Air Service program, the US government provides subsidies for air travel to rural destinations. So, for example, you and I pay nearly $2 million a year under the program to subsidize flights into Yakutat, Alaska. The House recently voted to increase the budget for this wealth-destroying initiative.

The legislation approved by a House Appropriations subcommittee would give $173 million in the upcoming budget year to the Essential Air Service, which provides subsidies to small airlines to fly unprofitable routes. That's a $53 million increase.

In many cases the flights are nearly empty. In other instances, such as flights between Buffalo Niagara International Airport and Jamestown, N.Y., just 76 miles away, it's quicker to drive than fly.

The Bush administration sought unsuccessfully to cut the subsidies, which keeps flights going to 107 communities spread across 31 states in the continental U.S. and 45 tiny towns in Alaska. But the Essential Air Services program enjoys strong support among lawmakers; in April, 22 senators wrote White House budget director Peter Orszag to demand more money for it.

"Simply put, the Essential Air Service program was a promise made to rural America, and a promise that must be kept," the senators wrote.

Do stronger passwords do anything?

Apparently not:

Strong passwords do nothing to protect online users from password stealing attacks such as phishing and keylogging, and yet they place considerable burden on users. Passwords that are too weak of course invite brute-force attacks. However, we find that relatively weak passwords, about 20 bits or so, are sufficient to make brute-force attacks on a single account unrealistic so long as a "three strikes" type rule is in place. Above that minimum it appears that increasing password strength does little to address any real threat.

Are too many students going to college?

Lotteries vs. auctions

One out of four is a start

For the first time in over 150 years elk will be hunted in the great state of Tennessee. Five tags have been allocated for a bull elk only hunt to take place October 19th through 23rd in the North Cumberland Wildlife Management Area.

Four of the elk tags have been allocated to hunters whose names were randomly drawn by the Tennessee Wildlife Resources Agency (TWRA) - BUT ONE TAG STILL REMAINS AND CAN BE YOURS

The Tennessee Wildlife Resources Foundation (TWRF) will sell a fifth elk tag to the successful high bidder through an E-bay auction beginning July 16th and ending July 25th.

Why a second stimulus is unlikely

The first was merely an exercise in patronage:

Barack Obama let congressional appropriators write the stimulus package. The result, according to the Government Accountability Office, is that only $29 billion had been spent as of June 19, 90 percent of it for Medicaid and "the State Fiscal Stabilization Fund administered by the Department of Education."

Translation: The money has gone to state governments in fiscal trouble because of declining revenues and (in some cases) profligate spending. This insulates public employees union members from the painful effects of recession that are being felt by almost everyone else, with the added political benefit of channeling money to unions, which in turn channel some of it to Democratic politicians.

Paying You to Steal from Me

You would have to think me an idiot if I gave you money to steal from me. But, how is that any different from states receiving federal aid (read: money from you and me) and then offering tax incentives to companies to re-locate jobs.

But economists are beginning to wonder whether such initiatives create or save jobs at all. Companies taking advantage of lucrative tax incentives are jumping from state to state—and bringing their jobs with them. Sure, some states will see job gains, but they may be only temporary. As a result, the states' efforts likely won't improve the national jobs picture. The tax-break boom "undermines the economic union, and it misallocates resources," says Arthur J. Rolnick, senior vice-president and research director for the Federal Reserve Bank of Minneapolis. "It amounts to economic warfare among states."

One example: Recently Michigan, Tennessee, and Wisconsin all tried to convince GM to locate a new small-car plant in their states. GM picked Michigan, which offered around $44 million in incentives, including a 100% tax break on new equipment for 12 years. I am sure Michigan residents appreciate all the Tennessee and Wisconsin tax payers helping to underwrite their offer. And, it's actually even worse. GM won't be creating any new jobs, it's simply converting an existing plant in Michigan and retaining 1,200 workers, and not hiring any new ones.

Does the practice of states offering these incentives sound familiar to anyone who has studied game theory?

Unintended consequences

John Makin blames the government:

But the housing bubble only burst after government subsidies pushed house prices up so fast that marginal buyers could no longer afford to chase prices even higher. A bubble created by rigged financial markets and a government-sponsored obsession with home ownership is not a result of market failure, but rather, a result of bad public policy. The belief that home ownership, per se, is such a benefit that no amount of government support could be too great and no pace at which home prices rise could be too fast is the root of the crisis.

What's the point?

Without the cooperation of the poorer countries, reducing carbon consumption in rich countriies, e.g., by raising the price of carbon emissions, will simply move industry and production to poorer countries. This used to be derisively called "exporting pollution," but now it seems like offical government policy.

’AQUILA, Italy — The world’s biggest developing nations, led by China and India, refused Wednesday to commit to specific goals for slashing heat-trapping gases by 2050, undercutting the drive to build a global consensus by the end of this year to reverse the threat of climate change.

Peter Huber predicted as much:

By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap. Manufacturing and heavy industry require a great deal of energy, and in a global economy, no competitor can survive while paying substantially more for an essential input. The carbon police acknowledge the problem and talk vaguely of using tariffs and such to address it. But carbon is far too deeply embedded in the global economy, and materials, goods, and services move and intermingle far too freely, for the customs agents to track.

But as these poor countries get richer, they will demand less pollution.

Voluntary transactions create wealth...

and the new Financial Products Safety Commission will make them harder to consummate. Former colleague Todd Zywicki says that the proposed regulation is based on a flawed analogy:

An unsafe toaster is a hazard to anyone who buys it. That's not true for loans.

Virtually every credit product is valuable to some consumers. Low-documentation loans are a boon for homeowners with a lot of equity who want to refinance their mortgages (even as they are a dangerous thing to offer speculators).

And unlike toasters, borrowers have substantial say over whether their loan "explodes." Foreclosures have risen throughout the country, but an epidemic exists only in a handful of areas -- Las Vegas, Phoenix, Miami and the Inland Empire region of California are all places where foreclosure rates are five to 10 times higher than the national average. These areas saw price bubbles that have now popped, giving many homeowners who owe more than their house is worth strong incentives to walk away from their loans.

When the going gets tough, blame the speculators

Telling hostility to markets

In Washington, the Commodity Futures Trading Commission, the main U.S. futures-market regulator, said it is considering tougher regulation of oil-futures markets. The proposed rules, which drew immediate criticism from traders, would seek to curb the influence of speculative investors such as hedge funds and investment banks by limiting how much money any single trader can bet on any one commodity at a time.

Max out your credit cards, then borrow from friends and family

The double whammy of tightening credit markets and falling housing values are making it more difficult for small business owners to finance their businesses. Venture capital investments aren't a realistic source of capital for the great majority of new businesses, so they often rely on debt financing. A fairly common source is equity tied up in real estate; however, drops in housing values mean less equity to draw upon.

As home equity lines vanish, other avenues of small business financing are also running dry. More than 40% of small business owners polled in April by the National Small Business Association said the limits on their credit cards had been cut in the past year, and 63% said their interest rates went up. Bank lending is in freefall. Even with stimulus incentives, the SBA backed 30% fewer bank loans to small businesses last quarter than it did a year earlier. The agency's lending volume has dropped to less than half what it was before the recession set in at the end of 2007.

The other shoe

Wait until next year:

Many economists fret about an unpleasant scenario in 2011, when the stream of stimulus money will ebb, reserves will have been drained and revenues will still be meagre. Medicaid enrolment may still be swollen by recession. Promises to retired workers, including pensions and health care, will weigh more heavily than they do now. This year was painful, but those to come may be even worse.

Once upon a time...

Colleague Bob Driskill tells the story of the financial crisis without invoking bubbles. In particular, the relatively small subprime mortgage sector started a run on Investment Banks who were borrowing short (in commercial paper) and lending long (by buying Mortgage Backed Securities) because it exposed a flaw in the financial engineering. In particular, instead of re-working the defaulted mortgages, as would have been efficient, the lenders began fighting among themselves.

...higher-than-expected default rates led to "tranche warfare:" the mortgage servicers and the various tranche-holders had di¤erent incentives to preserve the overall value of the MBS in the face of higher-than-expected defaults. Furthermore, tax issues complicated any effort to get to Pareto improvements among the different tranche-holders. This seems a little like what happened with railroad bonds and bankruptcy in the late 1800’s: the early bond covenants seemed to be incomplete and poorly designed to stop liquidation of railroads that had value as an operating entity.

HELP WANTED: creative accountants

The Montana Public Employees' Retirement Board and the Montana Teachers' Retirement System declare in a recent solicitation for actuarial services that

If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration.

Homer Economicus

In the second edition of our textbook (available 2009 Sept. 15) we include material on asset bubbles and psychological pricing, departures from the classic rational actor paradigm. Richard Thaler writes about regulation for not-quite-rational humans:

...lenders could be required to offer some mortgages they call “plain vanilla,” with uniform terms. There might be one vanilla 30-year, fixed-rate mortgage and one five-year, adjustable-rate mortgage. The features of these plain mortgages would be uniform, much as in a standard lease used in most rental agreements.

Lenders would also be free to offer other exotic mortgages ... , but these offerings would receive more intense scrutiny from regulators. ...

But did all of those home buyers, who are now getting their mortgages re-set, really act irrationally?

Bubble in Higher Education?

Our friends over at Organizations and Markets are having an interesting discussion on whether we are in the midst of a higher education bubble that's going to burst sometime soon.

Got Milk?

Milk prices have been dramatically falling over the past year:

Through much of last year, the average milk price hovered around $17 per 100 pounds -- although consumers purchase milk by the gallon, the industry measures by pounds. The bottom fell out of the market when the economy tanked last fall. Prices now hover around $10, according to the California Department of Food and Agriculture. Farmers generally need at least $16, and often more, per 100 pounds to break even, depending on their debt, feed requirements and other factors.

What I haven't seen anywhere is a particularly good explanation for the volatility in prices.