Tyler Cowen's Blog, page 55

Broadband Norwegian average is over

Here is the new paper by Akerman, Gaarder, and Mogstad on how Norwegian broadband access has helped the higher earners and largely hurt unskilled labor:

Does adoption of broadband internet in firms enhance labor productivity and increase wages? And is this technological change skill biased or factor neutral? We exploit rich Norwegian data to answer these questions. A public program with limited funding rolled out broadband access points, and provides plausibly exogenous variation in the availability and adoption of broadband internet in firms. Our results suggest that broadband internet improves (worsens) the labor outcomes and productivity of skilled (unskilled) workers. We explore several possible explanations for the skill complementarity of broadband internet. We find suggestive evidence that broadband adoption in firms complements skilled workers in executing nonroutine abstract tasks, and substitutes for unskilled workers in performing routine tasks. Taken together, our findings have important implications for the ongoing policy debate over government investment in broadband infrastructure to encourage productivity and wage growth.

The emphasis is added by this blogger, not from the authors.

The commodification and litigation of niños

Here is the latest:

It was not what Derek Nash expected to find in his 5-year-old’s school bag: A bill demanding a “no-show fee” for another child’s birthday party.

Nash said the bill from another parent sought 15.95 pounds ($24.00) because his son Alex had not attended the party at a ski center in Plymouth, southwest England.

Nash told the BBC on Monday he had initially accepted the party invitation, but later realized Alex was supposed to visit his grandparents that day. He said he did not have contact details to let the other family know.

The birthday boy’s mother, Julie Lawrence, told the BBC that her contact details were on the party invitation.

Nash says Lawrence has threatened him with small claims court but he has no plans so far to pay.

The link is here.  And here is yet another account.  I thank Drew for the pointer.

Assorted links

1. How good was the Caliphate anyway?

2. “How to get out of jail early in China: buy an investor’s idea and patent it.”

3. Removing fish from a surreal abandoned Thai shopping mall.  That’s what this blog is all about.

4. David Brooks on the community college plan.  And data on sugar daddies and colleges and their geographic distribution.

5. “Researchers interested to see whether Germans will treat robot as well as Canadians.”

6. A silly poll about best novel of the new century.

7. The dating auction.

Think Tank Bias in Political Donations

Tom VanAntwerp looks at political donations by the staff of the top-ten think tanks. Some findings:

Think tank employees overwhelmingly give to Democratic causes. Nearly 78% of all political contributions from think tank employees went to Democrats. 208 think tank employees gave a total of  $452,589 to Democrats in 2012;

Discussions of bias via donor base don’t match actual employee partisanship.Comparing the most obviously ideological think tanks, employees of both Heritage Foundation and Center for American Progress gave vastly more to political groups than did employees of Cato Institute. While the Wikipedia discussion of Cato’s funders was over three times longer than the same discussion for either Heritage or CAP, only 3.5% of Cato’s employees made partisan donations compared to 8.7% for Heritage and 8.2% for CAP. The total amount Cato employees gave was also dwarfed by Heritage and CAP employees: $10,200 versus $76,653 and $100,747.

In another post, VanAntwerp shows that even though the staff at Cato don’t give very much to politicians and are not especially partisan by other think tank standards, media discussion’s of Cato’s funding and funders are far more common and extensive than that of any other think tank. My guess is that conservatives give Heritage a pass, liberals give Brookings, CAP, and Pew a pass but both liberals and conservatives are suspicious of Cato. Liberals think Cato is in bed with the corporations, conservatives think Cato is in bed with gays and marijuana users. Both sides think Cato is with the opposition and, as a result, Cato generates lots of media discussion about funding “bias.”

 

Claims about farm animals

From a 2007 piece by Matheny and Leahy:

Campaigns directed toward pigs and cattle, however, could have a negative welfare effect by shifting consumption to poultry and fish products, which provide significantly less food per animal life-year. In fact, removing only poultry, eggs, and farmed fish from the diets of one hundred people would affect more animals than turning ninety-nine people vegan. If it is easier for consumers to shift consumption among animal products than to eschew all animal products, then this arithmetic has implications for both welfarist and abolitionist strategies.

That is from Natalie Cargill.  And the article is informative throughout.  You will note however that when it comes to environmental impact, red meat from the larger animals is typically the much larger problem.  So which do you care about more, animal welfare or the environment?  Or are you only willing to talk about margins where both improve?  By the way:

In the United States, there are only 220 veterinarians responsible for the care of more than nine billion farm animals.

Which economic theories are especially widely misunderstood?

A lot of them are, actually.  The efficient markets hypothesis might be one, as I’m not sure I understand it myself!  (Would the existence of just one investor “beating the market” disprove it?  Probably not, but then how many are needed?  How many of them have to beat the market “for the right reasons”?  And for how long?  How many dimensions exactly does this problem consist of?)

But today I’ll nominate Rudi Dornbusch’s exchange rate overshooting model.  When I see it cited, and I mean by professional economists or economics writers, more than half the time  people seem to get it wrong.  They use it to refer to all sorts of back and forth exchange rate movements, whereas the Dornbusch logic requires that the overshooting be in line with covered interest parity and thus the subsequent adjustment of the exchange rate is both expected and predicted by interest rate differentials in advance.  That’s hardly ever how it happens.

What else?  How about real balance effects and price level determination, as analyzed by Patinkin, Pesek and Saving, Harry Johnson, and others in the 1960s and 70s?  Most people get the right answer, but if you push them on it they fall apart, quivering and begging for mercy.  “Hey bud, that explanation sounded nice!  How about applying it to the difference between inside and outside money?  How does that shake out?”  Talk about microaggression.

Most economists do pretty well stating the Modigliani-Miller theorem.  They do less well when you ask them how it relates to the infamous “spanning condition,” which indeed it does.

Paul Krugman has remarked a few times on how many economists seem to get Ricardian Equivalence wrong.

At least half the time, in casual conversation, economists seem to forget that for a normal indirect utility function consumers are not risk-averse in terms of prices.

How about a Fisher effect question:? “If people expect prices to go up in the future, why don’t a lot of those prices go up right now?”  Thereby removing much of the inflation premium from the nominal interest rate.  Oops.

Or try this one: “Why is the interest rate a market price which can be expected to rise (fall) in the future, without rising (falling) now in anticipation of the future change? After all, liquid cash doesn’t have much of a storage cost.”  Unpack all of that in two sentences or less and set it straight.  Deadly.

Most economists who don’t do finance don’t know much finance.

Can one economist in forty properly define the “independence of irrelevant alternatives” axiom behind the Arrow Impossibility Theorem, taking care not to confuse intra- and inter-profile versions of the theorem, the latter of course being canonical?  Me thinketh not.  Wikipedia gets pretty close but is not fully clear.  The typical mistake is to think it is about “taking something off the menu,” and a resulting invariance of choice, when in fact the pairwise ordering alone should contain all of the relevant information.  Ah, but how exactly are those two conditions related?

How many people can define “rational expectations” correctly?  Is it: a) the market forecast is right on average, b) individual errors are serially uncorrelated over time, c) market forecast errors are serially uncorrelated over time, d) individual errors are normally distributed, symmetric around the mean, or e) individuals know the “correct model” of the economy (with what specificity?  That of God in the Quran?).  Maybe all of the above?  Some of the above?  Let’s put this one on the SAT.

Time consistency vs. subgame perfection anyone?

Sometimes economists confuse “the law of large numbers” with the potential risk benefits from subdivision of a gamble into many smaller parts.  Arrow himself made this mistake at least once.

How many people can get all of those right?  And how many other common but frequently misunderstood propositions in economics can you think of?  Nothing partisan or policy-based please, and please leave macroeconomics aside, let’s stick to analytics for this exercise.  I’ve already covered the Heckscher-Ohlin theorem.

I am sure this post contains several errors.

Assorted links

1. www.executedtoday.com.

2. Should airlines with more first-class passengers be given the rights to land first?

3. Why the OxFam wealth figures are not very reliable.  Hint: look at consumption too.

4. An argument that school spending really matters after all.

5. Scott Alexander link splat.

6. What do economists know about love, marriage, divorce, bargaining, and all that stuff?  The difficulty of recontracting is perhaps a relevant point here.  From Samir V.

7. Does this mean the ECB is out of the Troika?

Were poor people to blame for the housing crisis?

When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007.

There is also this:

Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at DTI levels in line with borrower income.

That is from the new NBER working paper by Adelino, Schoar, and Severino.  In other words, poor people (or various ethnic groups, in some accounts) were not primarily at fault for the wave of mortgage defaults precipitating the financial crisis.  The biggest problems came in zip codes where home prices were having large run-ups.  Their conclusion is:

These results are consistent with an interpretation where house price expectations led lenders and buyers to buy into an unfolding bubble based on inflated asset values, rather than a change in the lending technology.

Changes in policy, of course, also for this context would count as “a change in the lending technology.”

The Danish domino?

The Danish central bank has cut its deposit rate even deeper into negative territory as it fights to keep its currency peg against the euro steady ahead of an expected sovereign quantitative easing programme from the European Central Bank.

The Swiss National Bank last week threw in the towel on its currency ceiling versus the euro, heightening interest in Denmark’s longer-standing peg.

To lessen the attraction of depositing money in Denmark the central bank lowered its deposit rate from minus 0.05 per cent to minus 0.2 per cent, according to a statement from the bank.

It is wrong to claim that Switzerland and Denmark (and Cyprus?) are the first countries to leave the eurozone, but not uninstructive either.  There is more here, hat tip goes to my Twitter feed, and a bit more detail here.  This is further evidence that credibility, for central banks, is an international public good and thus arguably undersupplied.  And if the Danes cut their peg, I am loathe to call this a “mistake” (even though it likely will hurt their economy), rather it would be an inevitability.

Addendum: Scott Sumner comments.

Our future

There actually are tremendous fixed costs to developing a good decision-making structure, and CEO talent is scarce. These super-managers, or management super-cultures, can handle a sixth line of business more effectively than other managers can handle a first.

That is from Arnold Kling, note that he is presenting such a hypothesis not endorsing it.  Arnold is himself skeptical when it comes to economies of scope.