What's behind the VA's problems?

The Veterans Administration managers are rewarded for short wait times for patients.  What the Inspector General discovered is that VA managers manipulated the system by recording  shorter wait dates using a variety of schemes.  This allowed them to earn bonuses tied to short wait times, without actually having to deliver short wait times.

Here is a video describing how the managers manipulated the system.

BOTTOM LINE:  if you use a performance evaluation metric, like wait times, make sure that managers cannot manipulate it.

HT:  Walter & Jack

What's going on in the EU?

All the countries, save Germany (which is doing well because the currency union keeps its exports cheap) have elected anti-EU candidates. There is a lot of speculation about what it all means. I like the WSJ's take:

The best achievements of European institutions have all stemmed from removing restrictions—to trade, travel, residency and financial transactions. But for at least 30 years, the EU has mainly been in the business of imposing restrictions on everything from the judicial sentences that national courts can impose to the shape of the vegetables that Europeans get to eat. Stealth Europe transmogrified into Busybody Europe.

Is college a bubble?: LISTEN TO THIS BEFORE YOU GO TO COLLEGE!

Glenn Roynolds, author of the popular instapundit blog thinks higher education, and college in particular, shares characteristics of an asset bubble: rapid price increases and borrowing to finance it. His advice for students: (i) do not borrow; and (ii) major in something that will pay (engineering or nursing, not women's studies or art history)

Upside-down science

Funny cartoon that illustrates a paper I wrote:

A Theory of Competitive Framing

Luke Froeb 

Vanderbilt University - Strategy and Business Economics

Bernhard Ganglmair 

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Steven Tschantz 

Vanderbilt University - Department of Mathematics
March 24, 2014

Vanderbilt Owen Graduate School of Management Research Paper No. 2371768
Vanderbilt Law and Economics Research Paper No. 14-13 
Abstract:      

In adversarial contests, we observe seemingly inconsistent claims about factual or scientific evidence. In this paper, we build a model that can explain the existence and effects of such claims. To do this, we turn scientific inquiry upside down. Instead of objective truth seekers who formulate hypotheses and then gather evidence to test them, we model behavior by self-interested parties who strategically choose hypotheses to influence a decision maker – after the evidence has already been produced and discovered. We show that equilibrium decisions are biased away from the best explanation, and the bias favors the party making the more extreme claim.

Keywords: framing, evidence-based decision making, adversarial justice, Bayesian hypothesis testing, litigation games, expert testimony

JEL Classification: C11, C72, D72, K41, L22

Is suburban living a normal good?

As the economy improves, the WSJ has an article documenting slowing growth of urban centers, and faster growth in the suburbs.

This reverses the trend in the great recession, where urban areas, which have denser and lower-cost housing, grew faster.

On its face, it seems as if surburban living is something that higher income people want.  However, the sluggish growth in the economy makes it unlikely that we see anything like the migrations that occurred during the 1950's:

Anything resembling the post-World War II trend of Americans streaming to the suburbs appears unlikely given the difficulties many debt-strapped young Americans face in buying a home. Still, the Census numbers show a cooling off in the growth rate of urban dwellers.

.

Macroeconomics made easy

What happens to wages in Denver when demand for Denver housing increases?

Housing prices increase, leading homebuilders to build more houses.  This increases demand for construction labor, which increases wages.

These are equilibrium changes, modeled with simple demand and supply curves in the housing and labor markets.  

However, before equilibrium is reached, "shortages" for labor will drive up costs, which feedback into house prices, which decrease housing demand.  In addition, the difficulty of hiring labor may increase the time it takes to build a house, which reduces demand for new houses (consumers want houses built more quickly).

That shortage of skilled labor in many markets has spurred contractors to boost pay scales, often to boom-time levels and beyond—expenses that have been passed on to buyers for as long as they will tolerate the higher prices. In recent months, buyers finally have balked, resulting in sluggish sales of new homes so far this spring. 

A labor shortage tends to hit home buyers both with higher prices and expensive delays, said David Crowe, chief economist of the National Association of Home Builders. "It's a direct impact on the cost of the home because you have to pay more for the resources to build it," he said. "And it's an indirect increase because it delays final delivery of the home, and that costs money, too."

BOTTOM LINE: economists use demand and supply analysis to model equilibrium changes, but the process of reaching equilibrium can be quite messy and time consuming.    

How do you uncover the truth?

Simple, design schemes so that people will reveal it to you.  Never assume that people will give you un-slanted information, unless they have an incentive to do so.

The Freakonomics blog takes a look at Adverse Selection.

Will the world run out of resources?

Only if you ask an ecologist.

"We are using 50% more resources than the Earth can sustainably produce, and unless we change course, that number will grow fast—by 2030, even two planets will not be enough," says Jim Leape, director general of the World Wide Fund for Nature International (formerly the World Wildlife Fund).

To get the right answer, ask an economist.  They will point out that when a good gets scarce, its price increases, which gives consumers an incentive to conserve or find substitutes, and producers an incentive to find more of it.

Until about 10 years ago, it was reasonable to expect that natural gas might run out in a few short decades and oil soon thereafter. If that were to happen, agricultural yields would plummet, and the world would be faced with a stark dilemma: Plow up all the remaining rain forest to grow food, or starve. 

But thanks to fracking and the shale revolution, peak oil and gas have been postponed. They will run out one day, but only in the sense that you will run out of Atlantic Ocean one day if you take a rowboat west out of a harbor in Ireland. Just as you are likely to stop rowing long before you bump into Newfoundland, so we may well find cheap substitutes for fossil fuels long before they run out.