Differences-in-DIfferences explained, albeit with a macroeconomics example

Another great video from MRU.  Teaches students how to "create" natural experiments using non-experimental data.  

To complement this video, try the "Hidden Causality" and "Spurious Correlation" exercises for this free web app described in A Simple Way to Teach Regression.

Costco's profit comes mostly from membership fees

 In 2018, Costco's profit was equal to its membership fees.  In 2020 membership fees were 87% of profit.  These barely profitable prices (only 30¢ out of every $100 in sales is profit) increase demand for Costco membership.   In other words, people pay to become Costco members because they get very good prices, on average.  

HT:  Merle Hazard

Odds of dying from break-through Covid vs. other risks

 

Vaccine inequality

From The Economist:

By late August 2021 around 60% of people in higher-income countries had received at least one dose of a vaccine. In poorer countries only 1% had.

The extended lockdowns have huge costs: 

The need to extend social-distancing measures, loss of revenue from tourism and business travel, and the likelihood of social unrest in the event of a prolonged struggle against the virus, among other factors, will all weigh on their economic trajectory.

 

Why would an air traffic controller deliberately put two planes on a collision course?

In 1974, it became more difficult for air traffic controllers to qualify for "burn out" disability insurance.  They needed some hard evidence that they were actually burned out.  

In response, some deliberately put planes on a collision course to generate "near misses" that would qualify them for disability.  The good news is that they did it in low-traffic periods so that the controller could closely monitor the two flights to make sure that they did not actually collide.  (link to article)

China gives the poor a bigger slice of the proverbial pie, but if it affects incentives...

...it will also make the pie smaller.  

The Economist reports on the efforts of the Chinese government to redistribute income from rich to the poor.  Chairman Xi has pronounced, “We must not allow the gap between rich and poor to get wider.” He seems to be channeling Confucious whose writings he frequently quotes, "a wise leader worries not about poverty but about inequality." 

 If this sounds familiar, it may be because the top 1% in China own 30.6% of household wealth; close to the US figure of 31.4%. The trick will be to redistribute income without muting the incentives that have made China so successful. 

[See earlier posts about the incentive aligning effects of private property in China]

Should physicians be bill collectors?

On the upside, physicians would see the bills as their patients see them, which would remind them of the tradeoffs associated with expensive treatments.

One the downside, physicians have to play the dual role of healer and bill collector.

FROM JAMA:

Through increasing deductibles, coinsurance, and co-payments, the privately insured population in the US is responsible for a larger share of health care out-of-pocket costs. Although many studies have examined the effects on patients, the implications for physicians have received less attention. The increase in cost sharing is forcing many physicians and health systems to take on the role of bill collectors. It is a task for which physician practices are unsuited. The result is a system with substantial administrative burden, frustrated patients struggling with confusing bills, and physicians receiving less compensation. This Viewpoint describes the drivers of this trend, the consequences for physician practices (with a focus on physicians but discussing issues relevant to a range of clinicians), a wave of new companies looking to solve the problem, and what might be done to improve the situation.

HT:  Allison

"Them Geezers is Bleedin' us Dry"

... or so claims a colleague of mine. He was referring specifically to their staunch defense of increased medicare spending. He might have been a bit untactful. I argued that it is likely appropriate to increase transfer payments for the medical care of senior citizens for at least two reasons. First, medical care has increasingly become effective. We have developed more treatments for more conditions and the pace of medical innovation is quite impressive. Or the marginal benefits of a dollar spent here has increased. Second, we are wealthier. We can better afford to subsidize others. Or the marginal cost has fallen. He grudgingly agreed but claimed this is not enough to account for the increase. When he told me expenditures per medicare enrollee increased tenfold, I was incredulous ... until I looked at the numbers. Sure enough, the number of enrollees increased somewhat, but expenditures per enrollee per year increased from ~$1,000 in 1980 to ~$10,000 in 2009. Folks, the automatic increases at this pace just aren't sustainable. I sure wish we could have an honest debate about it.

How did our underfunded public pensions do during the pandemic?

Previous posts have focused on the underfunding of public pensions caused by unrealistically high discount rates, e.g., 7%.  For these "defined benefits" plans, the states and cities usually do not save enough.

For example, if a pension fund needs to pay a teacher $100 in 20 years and uses a 7% discount rate, it must save 100/(1.07)^20=$26.  Then, if it invests $26 and earns a 7% return, the fund will have $100 in 20 years when the employee retires.  

However, if it earns only 4.7%, the fund will have only $26*(1.047)^20=$65, a shortfall of 35%.  

MarketWatch reports on a Boston College study of the effect of the pandemic on defined benefit pensions:

2020 funding of public-pensions to invest sector plans at 74.7%, up from 72.8% last year.

The good performance was due to the huge stockmarket gains.  Instead of using the gains to move to a defined contribution plan, like Wisconsin's, I fear the gains will sow the seeds of the next pension crisis by inducing pensions to increase the discount rate they use.  

Trust only 1/3 of the results from Pscyhology, but 2/3 of the results from behavioral economics

Dan Ariely (psychologist and behavioral economist) was forced to retract a well-cited paper based on fraudulent data. Ariely, a frequent TED Talk speaker and a Wall Street Journal advice columnist, cited the study in lectures and in his New York Times bestseller The (Honest) Truth About Dishonesty: How We Lie to Everyone — Especially Ourselves. We have blogged about Ariely's work and want to warn readers that we may have retract the blog posts, pending the outcome of an internal investigation.  

Professor Ariely's problems are part of a larger "replication crisis." It began when the journal Science found that only 1/3 of the psychology experiments underlying the most cited papers in the field of psychology  could be replicated.  A bigger and more recent study finds much the same thing.  [Behavioral Economics does better than psychology, as 2/3 of the results can be replicated.]

Contributing to the crisis is what is called HARK, Hypothesis After Results Known.  Due to the pressure to publish statistically significant results, researchers do science backward.  They begin by looking for a statistically significant result (p hacking).  Then, they specify an hypothesis to explain it.  Now, good practice requires that researchers register hypotheses before testing them.  Note that a similar problem plagues non-experimental data as well (regression fishing).

We regularly blog about deviations from the rational actor paradigm, and include some of the more useful results in our textbook, notably loss aversion (losses hurt more than gains help), and hyperbolic discounting (overweighting the present).  To the extent that these findings cannot be replicated, we could be wrong.

For the sixth edition, we will do our best to determine whether these Behavioral Economics results can be trusted.  For now, place a 2/3 weight on them being right.  

Grow a pony tail and cut taxes

The strategy employed by the Swedish Finance Minister seems to be working.

He continued to cut taxes and cut welfare-spending to pay for it; he even cut property taxes for the rich to lure entrepreneurs back to Sweden. The last bit was the most unpopular, but for Borg, economic recovery starts with entrepreneurs. If cutting taxes for the rich encouraged risk-taking, then it had to be done. "In most cases, the company would not have been created without the owner," he says. "There would be no Ikea without [Ingvar] Kamprad. We would not have Tetra-Pak without [Ruben] Rausing. They are probably the foremost entrepreneurs we have had in the last few decades, and both moved out of Sweden."

HT:  Carpe Diem

Price transparency at last!

Colleague Larry van Horn's efforts to require negotiated prices between payers (insurance companies) and healthcare providers (doctors, hosptials) be made public are about to bear fruit.   Larry showed that

Even when insurance covers the cost, there is, on average, a 300 percent price variation within a market for the exact same services.

As a special advisor to President Trump, Larry encouraged the President to force the bargaining pairs to make public their negotiated prices.

The first data is now trickling out and the NY Times seems to approve, and gives President Biden credit for not reversing Larry's efforts:

The requirement to publish prices is a rare bipartisan effort: a Trump-era initiative that the Biden administration supports

MEA CULPA:  

17 years ago, when I was Chief Economist at the FTC, I wrote a letter to the California legislature suggesting that price transparency would have the opposite effect.  At the time, my thinking was that (i) transparent prices could facilitate collusion; and (ii) a provider would be more likely to accept a lower price if the provider did not have to disclose it to others.  I was primarily concerned with protecting bargaining competition, and I didn't grasp the perverse incentives of the bargainers.  As the NY Times notes:

The insurer also may not have a strong motivation to [negotiate lower prices], given that the more that is spent on care, the more an insurance company can earn.  

Vanderbilt alum Richard Stephenson is quoted in the Times article and runs Redu Health, a "national self-pay discount network empowers employees and members ... with transparent, upfront pricing."   

We are so busted!

 https://freakonomics.com/podcast/reasons-to-be-cheerful-rebroadcast/

Good but long podcast.  This caught my eye:

BAUMEISTER: …And incidentally, professors complain a whole lot. I remember visiting a university and I was having a conversation like this. I say, “This is a wonderful job,” and so on. And they looked at each other and said, “Well, we never say that out loud. You have to always be complaining. Otherwise, the administration won’t give us a raise. We always have to act like everything’s awful.” 

Economists vs. environmentalists

 Economics and environmentalism are belief systems that shape their adherent's way of thinking about the world.

                                                --Robert H. Nelson (link) 

When I earned my PhD, I started doing God's work (link to funny essay, "The Market as God") at the Justice Department, challenging anticompetitive mergers and putting price-fixers in prison.  My housemate was trying to do the same at the Environmental Protection Agency, using marginal analysis to design incentives to get polluters to face the consequences of their behavior.  If polluters produce up to the point where

    MR=MC

an output tax equal to the harm they cause, T=P, would bring pollution down to the point where the benefits of producing more are equal to its costs, including the costs of pollution.

    MR=MC+T.

There is legitimate debate about the magnitude of P but the principle seems obvious.  But not to [some/many?] environmentalists at the EPA.  They worship another God, and view all pollution as heresy.

In 2009, this debate made it up to the Supreme Court, where the economists prevailed, 6-3:

...the Supreme Court overturned [Sotomayor's earlier appellate decision that straightforward benefit-cost analysis was illegal] in a 6-3 ruling...

For the time being, benefit-cost analysis is OK.  

Training Artificial Intelligence to not discriminate

The top book review on Amazon reduced Prediction Machines to three propositions: 

• Artificial Intelligence (AI) is mostly about prediction 
• The cost and price of prediction is falling, 
• This will increase demand for complementary skills, like judgement and decision making.

As the cost of developing predictions has fallen, tremendous innovation has followed.  For example, AI can identify tumors with much greater accuracy than humans.  

However, AI can also identify race with "frightening" accuracy:

Whatever the algorithms were seeing, they saw it clearly. The software could still predict patient race with high accuracy when x-rays were degraded so that they were unreadable to even a trained eye, or blurred to remove fine detail.

To see how this could create problems, imagine training AI to diagnose and treat patients.  And imagine that the training set reflected the racial disparities sometimes associated with healthcare, i.e., minorities are under-treated or under-diagnosed relative to non-minorities.  With such a training set, the AI would "learn" to continue the disparate treatment.  

The director of medical imaging research at Royal Adelaide Hospital, calls AI's ability to recognize race “the worst superpower.”

House affordability

 

We have blogged extensively about the zoning restrictions that restrict the supply of new homes and raise the price.  

Historical Knockout Auctions

The Journal of Political Economy, one of the more prestigious economics journals, gets submissions of interesting economics related anecdotes for its back cover. The most recent issue contained this:

Collusive Bidding and Intermediary Profits in Congo a Hundred Years Ago

Five traders, who have hurried up in their cars, were waiting for the market to open. The region here has not been conceded; the market is free and the bidding began at once. We were surprised to see it stop almost immediately. But soon we understood that these five gentlemen were making a ring. The first carried off the whole crop for seven francs fifty a kilo, which probably seems a very fair price to the native, who only recently was selling his rubber at three francs; but at Kinshassa, where the traders resell it, it has fetched for some time past between thirty and forty francs, which leaves a very respectable margin. What about our gentlemen? As soon as the business is concluded with the native, they meet together privately in a little room, where another auction begins and they divide the spoil among them. The administrator is powerless against this secret auction, which, with every appearance of being illicit, does not, I am told, come within the power of the law.

[Andre Gide, Travels in the Congo (1927), translated by Dorothy Bussy (Hopewell, NJ: Ecco, 1994), p. 45. See also Daniel Graham and Robert Marshall, “Collusive Bidder Behavior at Single-Object Second-Price and English Auctions,” J.P.E., vol. 95, no. 6 (December 1987), 1217–39]

(Suggested by Laurent Lamy)

A Simple Way to Teach Regression

 A Simple Way to Teach Regression

Vanderbilt Owen Graduate School of Management Research Paper

15 Pages Posted: 10 Jan 2020 Last revised: 5 Aug 2021

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management

Date Written: August 05, 2021

Abstract

This paper introduces a simple free web app that can teach regression to anyone who can point and click. Originally designed to teach Justice Department attorneys enough about regression so that they could cross examine rival experts, the app ``inverts'' the usual pedagogy: instead of showing users how to run regressions on data, it asks them to click on a graph to ``create'' data to achieve a given outcome, like a statistically significant line. Successful completion of each task is rewarded with immediate feedback that reveals the principle behind the exercise. This paper describes short, intuitive exercises to teach: (i) hypothesis testing, statistical significance and confidence intervals, (ii) the difference between correlation and causality, and (iii) how to diagnose functional form mis-specification. These exercises can be completed in just a few minutes.

Keywords: Teaching Regression; statistical significance; correlation vs. causality

JEL Classification: A2 (Economic Education)

Suggested Citation:

Froeb, Luke M., A Simple App to Teach Regression (December 30, 2020). Vanderbilt Owen Graduate School of Management Research Paper, Available at SSRN: https://ssrn.com/abstract=3507142 or http://dx.doi.org/10.2139/ssrn.3507142

Why do 25% of people get so easily duped?

MarginalRevolution.com has the answer:  because they don't "look ahead and reason back," one of the maxims from our textbook.  In the simple game below, solved by backward induction (look ahead to the last move by the third player to see what the second and then the first player should do), 75% of fifth graders learned to look two steps ahead (as the first player) to correctly anticipate what the second and third players would do:

Player 3 is simply asked to match a shape. 

Player 2 earns the most by choosing the color chosen by Player 3. Of course, Player 2 doesn’t know what color Player 3 will choose and so has to reason about Player 3’s actions.

Player 1 earns the most by choosing the same letter as Player 2 but now must reason about Player 2 which involves reasoning about how Player 2 will reason about Player 3. 

Interestingly, women and those interested in STEM do better.  

What my daughter is learning in Rome

We have blogged about the labor market problems in Italy before:

This is why Southern Europe is a mess
Look ahead and reason back:  Italy
If you can measure absenteeism, you can control it

But I never realized how bad it was until I received this e mail from my daughter who is studying in Rome this summer:

Today, in my global practicum class we had a speaker who owns several McDonald's franchises in Rome and he enlightened us on the troubles of being an employer in Italy
 
First of all, he said, all employees who are hired, are hired for life.
They are allotted 6 weeks of paid vacation per year-- even working at Mcdonald's!!!
 
Each employer must pay a 100 percent tax of what he pays to the employee to the government.
 
Each employee has a 6 month paid sick leave per year that they can take with a valid doctors note. (which many tend to pull off with ease)
 
Employees are not allowed to be fired for poor behavior or work ethic, only if they steal or destroy company property.
If the employee is fired and sues the employer, the case is taken to civil court.  Most of these cases can take up to 3 years to be processed, 90% of the time the judge rules in favor of the employee and then the employer must pay 15 months salary for firing them, pay the salary they would have earned during the three years it took the case to be processed, and then must rehire the employee.

So basically no one wants to own or start a business in Italy, but everyone wants a freaking job.

Feel free to forward this to father, I am sure he would be interested, and I thought America was corrupt.

Her semester abroad seems like money well spent.