Right in the Short Run

I was in the supermarket late last night, and I got to thinking.

There once was a world filled with egg-eating people. These people were hard workers; left with little time of their own, they were forced to shop for food during their lunch breaks. It turns out that in this strange world, there were two types of jobs, and each job employed a different type of person. Let’s call these two groups the R’s and the P’s.

Although his job was not simple, every R was lucky enough to get a long lunch break, during which time he went to the market to buy eggs for his family. When an R picked out a carton of eggs, he would inspect it for damage and look for another carton if he saw that an egg or two was broken. Once he found a good carton, he would buy it and return to work. Since the R’s were so diligent about inspecting their eggs, they almost never brought home a cracked one.

The P’s worked hard, but unlike the R’s, their jobs were much more restrictive. Although P’s got a lunch break, it was a lot shorter than that of the R’s. Since P’s needed eggs to feed their family just as much as R’s did, they would use this time to run to the market, too. The P’s found that if they grabbed an egg carton and paid for it, they could get back to work in time, but when they stopped to check for cracked eggs, they would get back to work late. Sometimes P’s who returned late were penalized with docked pay, and the next day these P’s could not even afford to bring home any eggs.

It turned out that quite a few of the cartons contained cracked eggs. Since the P’s were too rushed to open the cartons before they purchased them, P’s frequently purchased these damaged cartons. The eggs were the family’s only food, and when a few eggs were cracked, everyone ate a little bit less, including the children.

After a while, some of the R’s became curious about the lifestyles of the P’s. Eventually, an R went into a P’s home and found some egg cartons, each of which had a cracked egg or two. This R went back home and told his family about what he had seen. The family agreed that the P’s were making poor decisions at the market: cracked eggs were worthless, but the P never bothered to check for them. Furthermore, this R had heard the P complaining about not having enough eggs to feed his children. How silly, thought the R, for this P needs only to check his egg cartons for cracks to be able to provide plenty of eggs for his family.

The R family told their friends, who were also R’s, all about the P household that they had seen. Pretty soon, all the R’s had heard about the way the P’s lived, and none of them could understand it. They are too stupid to purchase eggs for their family! said one. The source of their troubles is their inability to focus on egg checking! claimed another.

So time went on, with the R’s bringing home pristine cartons and feeding their children well, and the P’s bringing home damaged cartons and leaving their children hungry. The R’s knew about the hungry P children, and most of them didn’t like it. But in this world, the R’s felt strongly that all the P’s needed to do was concentrate a little more while shopping at the market. It never occurred to them that the P’s knew just as much as the R’s about how to check their eggs, and that many P’s would have gladly looked inside the cartons if they had the time.

Every once in a while, a P would propose that something be done about the cracked eggs.  One P said that once in a while, some of the R’s should have to give a few eggs to the P’s. Another P thought that P jobs should have a bit longer of a lunch break. But the R’s laughed at these suggestions.

In this world, little was ever done to help the P’s, and in fact the situation continues to this day.

The end.

Submitting an article to a law journal is a simple process: an individual interested in submitting an article goes to the ExpressO website, registers on the website, and selects, out of the 550 journals available, which journals he would like to submit his article to. There is no incentive to restrict submissions to preferred journals, or journals that are more likely to show interest in the paper, since simultaneous submissions are both common and expected. Furthermore, for most students and faculty in large law schools submissions are effectively free, since their law school’s pay a flat fee for use of ExpressO’s system. Luckily, if you are a student the process is made far simpler, since approximately half the journals don’t accept student submissions. Now for the interesting part: The three most important things journal editors want to see are:

The author’s C.V. (81%) A cover letter (68%) And finally, if you have the time, an abstract (a pathetic 48%).

Some editors emphasize the importance of including a list of prior publications as well.

Bottom line, as long as you’re a professor in a top law school with a heavy list of publications behind you, the content of your paper doesn’t really matter (as long as you can manage the cover letter).

In the past few days, we’ve gotten two tasty treats of trade skepticism. The first comes from Dani Rodrik, who has always been a bit heterodox. Here’s an excerpt:

The Cheerleaders’ Threat to Global Trade: [N]o country’s growth prospects are significantly constrained by a lack of openness in the international economy. … Closed markets may have been a fundamental problem during the 1950s and 1960s; it is hard to believe they still are. The greatest risk to globalisation is elsewhere. It lies in the prospect that national governments’ room for manoeuvre will shrink to such levels that they will be unable to deliver the policies that their electorates want and need in order to buy into the global economy.

Globalisation’s soft underbelly is the imbalance between the national scope of governments and the global nature of markets. A healthy economic system necessitates a delicate compromise between these two. Go too much in one direction and you have protectionism and autarky. Go too much in the other and you have an unstable world economy with little social and political support from those it is supposed to help.

The article has been mentioned at MaxSpeak and Brad Delong’s site. Perhaps one of the ways that the liberalizers go to far is by refusing to limit the scope of liberalization. The case for opening to trade is far stronger than the case for opening to international capital, but liberalizers insist that the two go hand in hand. A larger problem is the notion that free traders should support free trade agreements, even though these agreements require signatories to take on policies that have nothing to do with trade, like recognizing intellectual property and opening to foreign investment.

Next up is Alan Blinder:

Pain From Free Trade Spurs Second Thoughts: Mr. Blinder, whose trenchant writing style and phrase-making add to his influence, remains an implacable opponent of tariffs and trade barriers. But now he is saying loudly that a new industrial revolution — communication technology that allows services to be delivered electronically from afar — will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That’s more than double the total of workers employed in manufacturing today. The job insecurity those workers face today is “only the tip of a very big iceberg,” Mr. Blinder says.

…

[H]e says the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge. He wants government to do far more for displaced workers than the few months of retraining it offers today. He thinks the U.S. education system must be revamped so it prepares workers for jobs that can’t easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.

I am skeptical that we can identify which jobs won’t be going offshore. There are some that clearly won’t be leaving — plumbers, mechanics, and so on — but others for which it will be unclear whether offshoring is possible. Should we really discourage people from going into these uncertain fields of work?

Does anyone remember the supposed death of the information technology worker? Supposedly there were too many computer guys and programmers chasing jobs that would only tomorrow be entirely outsourced to India and the Czech Republic. While many programmers still worry that their job will leave them for another continent, the IT slump went away shortly after the economy emerged from the 2001 recession. The lesson I took from watching this happen was that the media frequently overstates the degree to which industries are susceptible to international migration, and that an industry can experience outsourcing while still growing domestically.

But I think Professor Blinder’s point about revamping the education system is an important one. This is particularly relevant for people whose jobs were outsourced. While Trade Adjustment Assistance is good, a large scale worker retraining program could be very helpful for those who lose, or fear losing, from international competition.

For much better informed commentary, there is Andrew Samwick, who discusses the Blinder article, and Brad Delong, who reposts nearly the whole article for your reading enjoyment. Also see Greg Mankiw.

There is some pretty interesting research being done in Economics & Psychology over at NYU. Economic theorist Andrew Caplin and Mark Dean are working on an axiomatic approach to neuroeconomics, together with the help of Paul Glimcher.

Reinforcement learning theory has produced important insights into economic behavior. Intriguingly, neuroscientists recently discovered a plausible mechanism through which reinforcement may be encoded in the brain. Yet their resulting “dopaminergic reward prediction error” hypothesis has not yet been incorporated into economics. We develop an axiomatic model that characterizes the empirical implications of this theory for an idealized data set comprising both neuroscientific measurements and choices. Our axiomatization removes the language barrier between economics and neuroscience. This will allow “neuroeconomic” experimental protocols to be developed appropriate to the questions motivating economic, as opposed to purely neuroscientific, interest in learning.

In the words of a good friend, “it’s really strange to see ‘dopamine’ and ‘metric space’ in the same sentence”.

Whether integrating experimental psychology and brain imaging results into economic theory will have practical value remains to be seen. However, in my limited comprehension of the field, it seems ripe with potential. For instance, neuroscience results on inter-temporal discounting and status-quo bias in decision-making could be translated into the language of decision theory. By axiomatizing some of the experimental results into the economic theory, models may better articulate and predict consumer behavior.

A little bit of background on myself: I love computers, and I love economics. Unfortunately, the two disciplines mix pretty infrequently. That’s why I let out a little yelp when I found this paper, called “Fact-Free Learning” by Enriqueta Aragones, Itzhak Gilboa, Andrew Postlewaite, and David Schmeidler. The paper is trying to present a model of how we understand information that is already available to us. Sometimes, we figure out something new by looking at the data we have in a new light — fact-free learning!

But fact-free learning is tough. The real breakthroughs are often unexpected, and they may happen slowly. The authors argue that some familiar tools of economics and computer science, when brought together, can explain this phenomenon. Before I get into their argument, I need to explain something called complexity, because the central argument of the paper relies on it.

Computational complexity is the study of how computer algorithms scale as the size of the problem they are trying to solve increases. Usually we are looking for some sort of bound on the amount of time it will take the algorithm to finish, given a problem of size n.

Some algorithms may not scale so well. Seriously, they might not scale so well. We’re not entirely sure! (Why? Wikipedia explains.) This class of algorithms is called NP, and we are pretty sure that any implementation of an NP-hard problem will end up taking a few lifespans-of-the-universes to complete for even a small size input.

Now let’s get back to the paper. Remember how I said that it brought together tools of both computer science and economics? Well, the economic tool these fellows bring to the table is the regression. Say you have information on lots of variables, and you want to see which variables explain some phenomenon. If you pick out a few of these variables, you can regress the measure of the phenomenon on those variables to determine which variables are relevant.

But what if you can only use a few variables — say k — in the regression at once? Then you might want to run the regression with every possible combination of k variables, looking for the one that does the best job explaining the phenomenon. The authors argue that this process — finding the set of k variables that does the best job explaining a phenomenon in a regression — is a lot like fact-free learning. But there’s a catch:

Linear regression is a structured and relatively well-understood problem, and one may hope that, using clever algorithms that employ statistical analysis, the best set of k regressors can be found without actually testing all (mCk) subsets. Our main result is that this is not the case. Formally, we prove that finding whether k regressors can obtain a prespecified value of R2, r, is, in the language of computer science, NP-Complete. Moreover, we show that this problem is hard (NP-Complete) for every positive value of r.

The implication is that fact-free learning is really difficult for computers. And if it’s difficult for computers, it’s probably really difficult for people too!

Once upon a time, Abhijit Banerjee (MIT), Angust Deaton (Princeton), Nora Lustig (UNDP), and Ken Rogoff (Harvard), together with a number of my favorite economists including Daron Acemoglu (MIT), Marianne Bertrand (Chicago), Peter Diamond (MIT), Esther Duflo (MIT), Michael Kremer (Harvard), and Chris Udry (Yale) got together and had a party!

What did they do at this party? Being nerdy genius academic types, they wrote a paper. Specifically, they evaluated World Bank research from 1998 to 2005. Here is an excerpt:

Bank researchers have also done extremely visible work on globalization, on aid effectiveness, and on growth and poverty In many ways they have been the leaders on these issues. But the panel had substantial criticisms of the way that this research was used to proselytize on behalf of Bank policy, often without taking a balanced view of the evidence, and without expressing appropriate skepticism. Internal research that was favorable to Bank positions was given great prominence, and unfavorable research ignored. There were similar criticisms of the Bank’s work on pensions, which produced a great deal that was useful, but where balance was lost in favor of advocacy. In these cases, we believe that there was a serious failure of the checks and balances that should separate advocacy and research.

While that passage is certainly not indicative of the overall findings of the committee, it is the juiciest. Perez Hilton would be proud.

In the first of a two-part post, we look at the reflections of NYU economist Debraj Ray about new developments in development economics, in this old paper from 2000. In the second part we will look at Abhijit Banerjee’s reflections on where development economics is headed as of 2007.

In recent years, the subject has made excellent use of economic theory, econometric methods, sociology, anthropology, political science and demography and has burgeoned into one of the liveliest areas of research in all the social sciences. And about time too: the study of economic development is probably the most challenging in all of economics, and provided we are patient about getting to “the bottom line” and the “policy implications”, it can have enormous payoffs.

The main trend I would like to try and document is a move — welcome, in my opinion — away from a traditional preoccupation with the notion of convergence. This is the basic notion that given certain parameters, say savings or fertility rates, economies inevitably move towards some steady state. If these parameters are the same across economies, then in the long run all economies converge to one another.

Ray then goes on to offer a number of theories that refute the conditional convergence hypothesis. These theories argue that “societies that are fundamentally similar in all respects might behave differently, and persistently so”.

Ray offers two reasons for his criticism of convergence theory. First, he contends that economies can exhibit multiple equilibria. “Simultaneously, such societies may display low savings rates or “cultures of corruption”, but this latter set of features cannot be related causally to the former.”

Second, Ray maintains that historical configurations may be important to development trajectories. In particular, two countries can face almost identical values of parameters relevant in growth models and yet proceed down strikingly distinct trajectories due to their differing initial conditions.

Of course what ultimately matters are the policy recommendations stemming from a theory of development. Ray’s theories promote one-time intervention policies that push the country into a new (and more desirable) equilibrium, while the old-guard convergence theories would require permanent shifts in relevant parameters.

In his annual review of law school rankings, Professor Brian Leiter decided to publish an exceptionally puzzling metric as a supposed measure of law school faculty quality: Number of SSRN downloads of work done by a school’s faculty.

The use of this metric is puzzling for a large number of reasons, though two of them stand out:

1. The ranking method is clearly manipulable to a ludicrous extent (insert image of law professor downloading his own work frantically).
2. The measure does not include a ratio, but rather a straight up number, thus a small law school with high quality faculty would be penalized with respect to a large law school with a large number of faculty.

The second critique seems to be born out in the rankings themselves, with Stanford Yale and Chicago all placing below Harvard Texas and Columbia. To be fair, Professor Leiter himself acknowledges the questionable value of this metric, though given the already low quality of information available in the law school rankings market, a topic Professor Leiter has often commented on, some more detailed criticisms seem appropriate.

We present a model of coarse thinking, in which individuals group situations into categories, and transfer the informational content of a given message from situations in a category where it is useful to those where it is not. The model explains how uninformative messages can be persuasive, particularly in low involvement situations, and how objectively informative messages can be dropped by the persuader without the audience assuming the worst. The model sheds light on product branding, the structure of product attributes, and several puzzling aspects of mutual fund advertising.

The abstract of Sendhil Mullainathan, Joshua Schwartzstein, and Andrei Schleifer’s recent paper entitled Coarse Thinking and Persuasion.

The paper produces some comforting results:

The model sheds light on a number of phenomena. Most importantly, it explains how uninformative persuasion can be effective, especially in low involvement situations, such as evaluating cheap goods or political candidates. The model also helps understand the pervasive phenomenon of persuaders’ omitting bad payoff-relevant news from their messages. Both uninformative persuasion and omission of data are possible in our model even if the audience takes into account the strategy of the persuader.

Hopefully heuristics and persuasion literature will become more popular in coming years.

Thank god for Tyler Cowen, whose NY Times column makes me think hard about my belief in single payer health care (See also Tyler’s summary):

The monitoring, marketing and overhead costs of private insurance are what allow more expensive medical treatments through the door. It is precisely because competing insurance companies spend money evaluating the appropriateness of claims that they are willing to pay for so many heart bypasses, extra tests, private hospital rooms and CT scans.

…

When it comes to these discretionary benefits, European systems are more likely to make people wait for them, more likely to make the service inconvenient or uncomfortable, or simply not make the services available in the first place. All of these features discourage those who don’t really need care, and, of course, some people simply go elsewhere and pay out of their own pockets. Either way, the overhead costs have been shifted onto patients and their families.

But not all overhead costs get shifted. Yes, the rationing function that the insurance company accomplishes by rejecting claims gets moved, at least in part, to the individual. But what about other costs like advertising? Mark Thoma provides a long list of ways in which single payer will save money.

One of the big gains from single-payer which Thoma leaves out (although his list is quite comprehensive!) comes from giving the uninsured more efficient avenues to deal with health problems. Most states require emergency rooms to provide care to anyone who shows up, regardless of their ability to pay. For the uninsured, going to the emergency room with a life threatening health problem frequently ends up replacing a doctor’s visit because of some minor discomfort.

It is not hard to imagine scenarios where seeing a doctor early in the stages of an illness would cost far less to society than calling 911 with an emergency. In these situations, a universal health insurance scheme would save society resources — it would be more efficient! As Paul Krugman noted some time ago:

What would happen if Medicare was expanded to cover everyone? You might think that the nation would spend more on health care, since this would mean covering 46 million Americans who are currently uninsured. But the uninsured already receive some medical care at public expense — for example, treatment in emergency rooms that would have been both cheaper and more effective if provided in doctors’ offices.

(The catch is that a single payer system is sufficient but not necessary to solve this problem. Universal insurance is both necessary and sufficient. Patch-up plans like the one in Massachusetts will do the trick by simply forcing everyone to become insured.)