Right in the Short Run

Earlier this year Andrew Gelman and co. came up with a new argument solving the voting paradox, based on social preferences (the paradox of voting: if you are rational, you will realize that the probability of affecting the outcome of a vote is negligible, while the costs are often considerable. Yet still people vote regularly).

Social preference is basically the idea that individuals incorporate other people’s utility into their considerations.

Gelman argues that if individuals take into consideration the impact of a vote’s outcome on other individual’s in society, as well as themselves, voting may indeed be rational.

A recent experimental paper by Fisman, Kariv and Markovits shows that some people do indeed have social preferences.

Voters, congratulations.

Roland Fryer strikes again, this time with Michael Greenstone. The paper entitled “The Causes and Consequences of Attending Historically Black Colleges and Universities” as the following abstract:

Until the 1960s, Historically Black Colleges and Universities (HBCUs) were practically the only institutions of higher learning open to Blacks in the US. Using nationally representative data files from 1970s and 1990s college attendees, we find that in the 1970s HBCU matriculation was associated with higher wages and an increased probability of graduation, relative to attending a Traditionally White Institution (TWI). By the 1990s, however, there is a wage penalty, resulting in a 20% decline in the relative wages of HBCU graduates between the two decades. We also analyze the College and Beyond’s 1976 and 1989 samples of matriculates which allows us to focus on two of the most elite HBCUs. Between the 1970s and 1990s, HBCU students report statistically significant declines in the proportion that would choose the same college again, preparation for getting along with other racial groups, and development of leadership skills, relative to black students in TWIs. On the positive side, HBCU attendees became relatively more likely to be engaged in social, political, and philanthropic activities. The data provide modest support for the possibility that HBCUs’ relative decline in wages is partially due to improvements in TWIs’ effectiveness at educating blacks. The data contradict a number of other intuitive explanations, including relative decline in pre-college credentials (e.g., SAT scores) of students attending HBCUs and expenditures per student at HBCUs.

A fun read.

Of course not, I just wanted to get your attention. In a recent N.Y. Times article, Krugman argues that

Outsourcing of the government’s responsibilities - not to panels of supposed wise men, but to private companies with the right connections - has been one of the hallmarks of his administration. And privatization through outsourcing is one reason the administration has failed on so many fronts.

Krugman then proceeds to give a list of failed government outsourcing programs, most of which are related to defense.

Krugman suggests a reason for the failures of these privatization efforts

In fact, the private company will almost surely do a worse job if its political connections insulate it from accountability - which has, of course, consistently been the case under Mr. Bush.

Mr. Krugman, you are clearly at least partially correct. Yet clearly there are situations where government outsourcing is in fact effective. For instance, the Trump Ice Skating Rink in Central Park - New York City wasted millions of dollars attempting to construct the rink, over a total of six years. Donald Trump then took over the job, finishing it ahead of time, and for less than a million dollars.

So when outsource?

Although there are probably many relevant factors to consider, an important one is clearly specialization. In areas such as defense, where the government has long specialized, outsourcing may indeed be an unwise move. Yet in areas such as entertainment, clearly the government is outmatched by private industry.

Another important factor is (as the ever perceptive Krugman mentioned) accountability.

So I have a question: What about airline security? As things stand, it’s true that the government has more experience in many security related matters. But what about securing an airport filled with constant civilian activity?

Dean Baker has something to say about Thailand’s decision to invalidate patents on certain AIDS and cancer drugs:

Newsweek has an article this week about Thailand’s decision to issue compulsory licenses for a number of important drugs. By eliminating patent monopolies on several AIDS drugs, as well as a few other medications, Thailand was able to reduce prices by close to two-thirds.

Naturally, the drug industry is furious over the possibility that their patent monopolies may not be protected. Newsweek apparently shares the drug industry’s anger, telling readers that “advocates of free trade see Thailand’s move as a big threat.”

Actually, any real advocate of free trade, almost by definition, would have to applaud Thailand’s action. After all, the Thai government is eliminating a government imposed monopoly and allowing drugs to sell at prices that are much closer to their free market level.

Dean is right that free trade and patents have nothing to do with each other. If anything, patents inhibit free trade by restricting the legal flow of generics. But so what? Advocates of free trade rarely advocate that everything should be traded freely. By Dean’s logic, free traders are hypocritical if they think hard drugs should be illegal. And that would make for a lot of hypocrites.

As for the utility of invalidating patents, there are problems with this method of making treatment cheaper. Holding the selection of drugs fixed, invalidating a drug’s patent enables a nation to produce the drug cheaply and treat its citizens better. But what about over time, when the potential profitability of drugs drives research decisions, and ultimately the selection of drugs available to treat diseases?

The expected profits of research come mainly from the developed world, where countries are rich enough to pay the high prices that pharma charges for its medications. Developing countries are usually too poor to pay very much, and even if they might be able to pay, they may invalidate patents to avoid pharma’s markups. (To pharma, the possibility that countries refuse to honor patents simply reduces expected profitability.)

I’m sure Dean would agree that some relatively inexpensive research could provide enormous benefits for the developing world. For example, research might find AIDS drugs that were better suited to environments with few doctors, or medication that did a better job of protecting children against malaria. But these drugs would have no market in the developed world. Pharma sees no profitability coming from developing world specific treatments, and so pharma doesn’t bother spending money on research that would alleviate developing world problems.

Dean would probably respond that the government should be doing this research. Actually, I agree with Dean that having the government doing R&D could be an avenue of getting cheap new drugs for the poor. But invalidating patents doesn’t help the government do research, and it hurts the long run usefulness of the private sector in producing life-saving medication.

(PGL at AngryBear has some commentary as well.)

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.