Tyler Cowen's Blog, page 6

Rating colleges and universities by value-added

A new Brookings study by Rothwell and Kulkarni attempts to do just that.  The list of ratings for two-year institutions puts NHTI’s-Concord Community College at the top, followed by a large number of institutions you mostly haven’t heard of.  For four-year institutions the list starts with:

1. Caltech

2. Colgate

3. MIT

4. Rose-Hulman Institute of Technology,

with other surprises to follow.  The Colorado School of Mines does better than Princeton, for instance.  Here is the report itself, here is a story on the report.  I am finding the web site for the rankings is still a little glitchy, let’s hope they fix that soon, or maybe it is just the current volume of traffic.

So what’s the problem with Grexit?

Not for Greece, that is clear, rather for everyone else.  Given bank recapitalization, the introduction of the European Stability Mechanism, European QE, a more general flood of liquidity to European banks, and a burgeoning European economic recovery — by European standards that is — it seems Grexit stands a good chance of being a non-event at the global or even the European level.  After all, Greece is only a small sliver of EU gdp; a few years ago it was only two percent, now presumably it is less.  On top of that, most of the remaining Greek debt is to public sector institutions, not private banks, which ought to limit contagion effects.  Indeed, as Greek bond yields rise, these days the bond yields of the periphery nations do not rise in tandem; some in fact have been falling.

So what’s the problem?

I think 80-20 that Grexit would not become a major macroeconomic problem for other countries, with the possible exception of small Cyprus.  But where does that 20% come from?

If Greek deposit flight forces a form of Grexit, whether whole or partial (capital controls plus scrip?), there is a good chance that markets will in essence “ask” the ECB again just how firmly it stands behind the other troubled eurozone member nations, such as Portugal.  The danger is that the current “creative ambiguity” cannot be disturbed in a useful way.  It might be hard for the ECB to announce that it stands fully behind the other eurozone nations, and in effect promise to monetize any pending default.  The incentive for moral hazard would be too destructive, and besides governments such as that of Spain don’t want to encourage the anti-austerity opposition.  The ECB is therefore likely to make a public commitment less extreme than that.

But neither will “we don’t really stand behind these governments at all” do the trick.  That probably would induce contagion along some other parts of the periphery, maybe more.

The ECB therefore must choose some intermediate point to signal — “we are committed, but member nations still bear fiscal risk.”  In part that is why they have rearranged the ex ante guarantees to fall so firmly upon national central banks, a move which some have compared to turning the euro into a currency board system.  Ex post, of course, the ECB or EU still has the discretionary option of bailing out those central banks, if and when it chooses to do so.  And, following Grexit, they could credibly say “The EU would have bailed out Greece, had an agreement on structural adjustment been reached and previous commitments honored.”  That’s basically a repeat of previous messages and maybe it is good enough.  That is where the 80% comes from.

So which ingredients will shape the new (old) message?: an intelligent but constrained ECB with a highly restrictive charter, a Europe-dedicated and wishing to atone for Grexit but electorally cautious Germany, a bunch of periphery nations which basically want any and all guarantees reserved for themselves and not for opposition parties, and lots of other voices, all mixed into a more or less unprecedented shock surprise in modern financial history.

So will the ECB get the signal right? Did I say 80-20?  Can I change that to…um…70-30?

Seattle police camera sentences to ponder

In Seattle, where a dozen officers started wearing body cameras in a pilot program in December, the department has set up its own YouTube channel, broadcasting a stream of blurred images to protect the privacy of people filmed. Much of this footage is uncontroversial; one scene shows a woman jogging past a group of people and an officer watching her, then having a muted conversation with people whose faces have been obscured.

“We were talking about the video and what to do with it, and someone said, ‘What do people do with police videos?’ ” said Mike Wagers, chief operating officer of the Seattle police. His answer: “They put it on YouTube.”

There is more here, via Michelle Dawson.  The article has more detail on the status of these feeds in various localities, and the debates over how public they should be.

Vietnam, trade, and poverty alleviation

In a specifically Vietnamese context, there is good evidence that more trade with Vietnam will bring more FDI.  A more general political science study shows the same, namely that joining trade agreements boosts FDI and also growth.

Here is an argument (circa 2005) that Vietnam still has too much trade protection.  Here is a good general piece that trade boosts poverty reduction in poorer nations.  Here is supporting evidence specifically on rural Vietnam.

Those are just a few follow-ups on my earlier post on TPP and Vietnam.  By the way, here is Greg Mankiw showing that TPP is in fact a trade agreement.

Craft beer markets in everything

Dogfish Head, for example, has Chicha – a native corn beer that is chewed by the brewers and spit out before being brewed (and boiled – so it’s sterile). The saliva, say the brewers, has enzymes that convert the starches in the corns to sugar.

Earlier this month, Barrels and Bottles Brewery in Golden, CO offered an extra special bitter that was brewed with Peeps, the colored marshmallow candy that marks the Easter season. (90 of them, to be specific.) And just last week, New Belgium teamed up with Ben & Jerry’s ice cream to announce plans to produce a Salted Caramel Brownie Brown Ale (which will go on sale this fall).

…The newly crowned king of stunt beers is Iceland’s Brugghús Steðja. In January, the microbrewery introduced Hvalur 2 – a 5.2% ABV seasonal ale that incorporates the testicles of fin whales into the brewing process. And, believe it or not, that’s not the weirdest part of the ingredient list.

“We consider this beer to be in perfect style of [the Thorri] season,” says Dagbjartur Arilíusson, Steðji’s co-owner. “We get fresh whale testicles from a fin whale and we smoke it in an old Icelandic tradition way, smoked with dry sheep dung.”

There is more here, via the excellent Samir Varma.

Tuesday assorted links

1. Women rating men.

2. The Mariah Carey business model.

3. Ezra Klein on TPP.   And Matt Yglesias on genetic engineering.  I agree with them both.

4. Israel evacuates surrogates from Nepal.

5. Who needs mutual funds?: when bots collude.

6. The new Orhan Pamuk novel comes out in English in October.

The False Prophets of Efficiency Wages

One of the least-convincing tropes of financial journalism is the article explaining how business firms can increase profits and at the same time engage in some conventional, culturally-approved, do-good activity such as improving the environment, saving energy, or helping the poor. The latest version is how to increase profits by increasing wages.

Here is James Surowiecki writing in the New Yorker:

A substantial body of research suggests that it can make sense to pay above-market wages—economists call them “efficiency wages.” If you pay people better, they are more likely to stay, which saves money; job turnover was costing Aetna a hundred and twenty million dollars a year. Better-paid employees tend to work harder, too. The most famous example in business history is Henry Ford’s decision, in 1914, to start paying his workers the then handsome sum of five dollars a day. Working on the Model T assembly line was an unpleasant job. Workers had been quitting in huge numbers or simply not showing up for work. Once Ford started paying better, job turnover and absenteeism plummeted, and productivity and profits rose.

Walter Frick writing in the Harvard Business Review agrees:

The theory of efficiency wages…suggests that firms sometimes have an incentive to pay workers more than the going rate because doing so attracts better candidates, motivates them to work harder, and encourages them to stay at the company longer.

(Similar kinds of stories are offered by Justin Wolfers and Jan Zilinksy and also Paul Krugman).

There are two problems with this story, one obvious and one not-so obvious. The not so-obvious problem is that the economists who developed the theory of efficiency wages (including Shapiro and Stiglitz, Akerlof and Yellen and Yellen) had no illusions that they were helping business firms to discover a new way to increase profits. The economists who developed efficiency wage theory were trying to explain persistent unemployment. Hence the title of Janet Yellen’s famous survey, Efficiency Wage Models of Unemployment.

The question that motivated efficiency wage theory was not why firms should raise wages but why firms don’t cut wages when they should. The answer they gave was that firms don’t cut wages despite unemployment because they fear that workers will respond to lower wages with reduced productivity. Thus, here is Akerlof and Yellen explaining that when workers demand “fair” wages they create unemployment.

…according to the fair wage-effort hypothesis, workers proportionately withdraw effort as their actual wage falls short of their fair wage. Such behavior causes unemployment…

In the original efficiency wage literature there is no wishful thinking–no idea that we can have more of everything that we want without tradeoffs. Instead of being desirable, the efficiency wage is a problem because lower wages would reduce unemployment and be better for the economy as a whole.

Instead of letting us bask in wishful thinking the real efficiency wage theory suggests unpleasant tradeoffs. Yellen, for example, suggests that if it were cheap, greater monitoring of workers would lower unemployment as would allowing workers to take low-pay or no-pay internships for trial periods. In our paper on asymmetric information, Tyler and I make such unpleasant tradeoffs clear:

When employers do not easily observe workers, for example, employers may pay workers unusually high wages, generating a rent. Workers will then work at high levels despite infrequent employer observation, to maintain their future rents (Shapiro and Stiglitz 1984). But those higher wages involved a cost, namely that fewer workers were hired, and the hires that were made often were directed to people who were already known to the firm. Better monitoring of workers will mean that employers will hire more people and furthermore they may be more willing to take chances on risky outsiders, rather than those applicants who come with impeccable pedigree. If the outsider does not work out and produce at an acceptable level, it is easy enough to figure this out and fire them later on.

Notice that the efficiency wage theorists took it for granted that to the extent that firms can increase profits by raising wages they have already done so (hence the persistent unemployment). Firms don’t typically leave $100 bills lying on the ground so the Stiglitz, Akerlof, Yellen assumption makes perfect sense. Thus the more obvious problem with the journalistic account of efficiency wages is that it makes it sound as if the idea that productivity might increase with wages is a revelation that firms have never considered. (See Frick for some implausible stories of why firms might not raise wages even when it is profitable to do so.) In fact, firms routinely track turnover and productivity and they are well aware that higher wages are a possible means to reduce turnover and increase productivity although, as it turns out, not necessarily the most effective means. Indeed, the whole field of workforce science deals with retention, turnover and job satisfaction and the relationship of these to productivity and it does so with more nuance than do most economists. Thus, it’s simply not plausible that large numbers of firms on the existing margin can increase wages, profits and productivity. TANSTAAFL.

In summary, the real theory of efficiency wages is an important and useful theory of persistent unemployment–one that helped earn Stiglitz and Aklerof Nobel prizes and Yellen a plum government job–but the journalistic proponents of “efficiency wages” are false prophets peddling false profits.

Why TPP on IP law is better than you think

I have read and heard many times that TPP will bring harsher intellectual property law than is appropriate for the poorer Asian countries, noting that over time we can expect more of them to join the agreement.  In general poorer countries often benefit from weaker IP enforcement, more copying, and lower prices.  This is standard stuff.

It is less commonly recognized by the critics, however, that tougher IP protection may induce more foreign direct investment.  Why for instance invest in a country which might subject your patents and copyrights to an undesired form of compulsory licensing?  Trade agreements are likely to rule out or restrict such risks.  There will be more cross-border licensing activity as well, if there is tougher IP enforcement.  A company might even set up an R&D facility in a upper-tier developing country.

Carsten Fink and Kwith E. Maskus have an entire volume on these questions, Intellectual Property and Development.  Here is one sample bit from their introduction (pdf):

IPRs are quite important for multinational firms making location decisions among middle-income countries with strong abilities to absorb and learn technology.

You will note however that the effect is not there for poorer countries.  But in general:

…stronger IPRs have a significantly positive effect on total trade.

And this:

The study’s findings support a positive role for IPRs in stimulating enterprise development and innovation in developing countries.

I would say the volume, and the surrounding literature, as a whole provides some positive support for how IP rights may boost economic development, though not overwhelming or unambiguous support.  And the literature does not support a “one size fits all” approach to IP law; in this sense TPP is far from ideal.  But still, the literature does find some very real development benefits when a country moves to tougher IP rights.

But here’s the thing: TPP opponents simply tell us that bad and too tight IP law will be foisted upon the world’s economies.  I see talk of Aaron Schwartz and Mickey Mouse extensions, but I don’t see enough of the critics weighing the costs and benefits, or for that matter even mentioning the possible benefits of extending IP regimes.  I think the benefits of this IP extension may well outweigh the costs, when it comes to the developing nations involved in TPP.  At the very least it seems to me up for grabs.  And I certainly don’t think that voting down TPP this time around is going to lead to a more favorable redo of the agreement, not on IP for sure.

So IP considerations are not weighing nearly as much against TPP as you might think.

My review of *The Rambler*, by Samuel Johnson

Eric Posner’s (with Adrian and Blakey Vermeule) new and excellent venture The New Rambler asked me to write a book review for them.  The impish side of me thought “what book better to review than the old Rambler?”, namely by Samuel Johnson?  Here is the opening of my piece:

A blogger by the ostensible name of “Samuel Johnson” has compiled his previous posts into a book, edited by a supposed W.J. Bate and Albrecht B. Strauss. But the true work here is “Johnson’s,” and the sequential editing, as such, seems to have been done by WordPress. The editorial illusion, of course, is a trick dating from the eighteenth century, as for instance Jonathan Swift and Alexander Pope presented the work of an imaginary Martinus Scriblerus in the 1740s. These Johnson posts claim to date from the early 1750s, a typical blogger’s conceit and misdirection, but the content is too modern and innovative to sustain that illusion for long.

Cutting through the postmodern trappings, Johnson’s blog reflects his ongoing interest in behavioral economics. He is continually skirting the frontier of the latest research insights, although like many bloggers he is lax in providing the proper citations. He writes off the top of his head, though without care for what came before from Thomas Schelling, Jean Tirole, or Cass Sunstein, among other titans of the field. Reading these short pieces is thus a fascinating but often frustrating experience. And as is true for most of the work in behavioral economics, there are insights but a fully fleshed out model, applied consistently to all human choices, is nowhere to be found.

Here is the full review, recommended!

Vignettes of Famous Evolutionary Biologists, Large and Small

From Robert Trivers. Here is Trivers on William Hamilton:

Certainly one of the most creative minds I have ever met in biology. I still remember the day a graduate student came running down the hall saying “Have you heard Hamilton thinks that bacteria use clouds for dispersal? As quick as you can say “Bill Hamilton”, I asked “Has he shown how the bacteria get the rain to fall where they want it to?” And indeed his idea humbled me because ever since I had been coming to Jamaica I had heard rural people tell me “trees draw rain” as in, don’t cut them down, and I had thought to myself you poor benighted souls, you have the correlation right but causality wrong—naturally, where it rains more, trees are more apt to grow. Now Bill suggested they Jamaicans may well have had it right all along—lower temperatures over wooded areas could itself be a useful signal.