Ben Muse

Economics and Alaska

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More on this year's Nobel Prize

Daniel Kahneman won for his work on behavioral psychology and its applications to economics. The late Amos Tversky was Kahneman's partner in this work. Had he lived he would have shared in the prize. I've seen too many Kahneman and Tversky references to ever think of Kahneman alone. The Boston Globe had a column on Tversky recently. Brad Delong has posted it to his web site: Amos Tversky.

Transcript of oral arguments in Eldred v. Ashcroft

Eldred v. Ashcroft is the copyright extension case - the U.S. Supreme Court held oral arguments last week - the transcript is here. I learned about this from the blog The Volokh Conspiracy.

Growing income inequality

Paul Krugman has an article on trends in U.S. income distribution in this Sunday's New York Times Magazine. The article is already posted on the website: "For Richer".

Brad DeLong has posted a short note from Krugman describing his internet sources for the article: "Krugman's Data Sources ".

This year's Nobel prize

More postings on the implications of the work of this year's Nobelists at the blog, "The Volokh Conspiracy": here and here.

For reference, I've linked to a number of other columns and blog postings on the 2002 Nobel here.

Concert ticket price inflation

Alan Krueger notes:
    "If you have gone to a rock 'n' roll concert lately, you probably noticed that the price of tickets has been rising faster than the decibel level. Although concert prices have always grown somewhat faster than inflation, from 1996 to 2001 the average price soared 62 percent, while the Consumer Price Index increased just 13 percent and the price of sporting events, movies and theater rose 24 percent."
in today's New York Times, and asks why. Increased market power in concert promotion? Scalping makes list prices irrelevant? Web music downloads? You have to click here to find out what he thinks: "Music Sales Slump and Rock Fans Pay the Price".

I learned about this from "Great Questions of Economics".

You're not as good as you think you are

People tend to overestimate their own ability and the quality of their judgement. Here's the complete text of a new article in the Journal of Personality and Social Psychology: "Unskilled and Unaware of It: How Difficulties in Recognizing One's Own Incompetence Lead to Inflated Self-Assessments ". Here's the abstract:
    "People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities."
I learned about this at the "One Hand Clapping" blog.

International copyright protection

Today's International Herald Tribune has a short article about U.S. efforts to increase the rigor of international copyright protection, and the implications for economic development and growth in underdeveloped countries:
    "...The economies that were shining success stories of development, from the United States in the 19th century to Japan and its East Asian neighbors such as Taiwan and South Korea in the 20th, took off under systems of weak intellectual property protection. Technology transfer came easily and inexpensively until domestic skills and local industries were advanced enough that stronger intellectual property protections became a matter of self-interest.

    "But, according to the recent report, this kind of economic-development tactic - copying to jump-start an industry - is endangered by the U.S.-led push for stronger intellectual property rights worldwide.

    "The report recommends that the World Trade Organization's treaty on intellectual property rights be made much more flexible so that developing countries from Brazil to Bangladesh can adopt rules more at their own pace..."
Click here for the rest: "On intellectual property, U.S. forgets its own past ".

State fiscal problems

As a group, the states are facing difficult fiscal decisions as tax revenues fall below desired expenditures, forcing painful cutbacks (state constitutions generally (in all cases?) don't allow deficit spending). Alice Rivlin (former director of the Federal Office of Management and Budget, former director of the Congressional Budget Office, and more) has some ideas in this Brookings Institution policy brief: "The State Fiscal Mismatch: Doing More with Less". I learned about this from "Great Questions of Economics".

Yes, Minister

The "Yes, Minister" web page: "The Yes (Prime) Minister Files".

I learned about this from a post on Brad DeLong's blog: "Brad DeLong's Thoughts of the Moment on Economics, and on Other Topics as Well"

Larry Lessig's take on the Eldred v. Ashcroft arguments

Oral arguments were held before the Supreme Court last week in Eldred v. Ashcroft - the court case challenging extensions in copyright protections. Today, Brad DeLong posted Eldred's lawyer Larry Lessig's thoughts on the arguments: "Larry Lessig Explains the Eldred v. Ashcroft Oral Argument ".

Do government economists make mistakes?

How accurate are the estimates of private sector costs incorporated into cost-benefit analyses of environmental regulation? Do government agencies systematically overestimate or underestimate costs? Why?

To seek the answer, analysts with Resources for the Future (RFF) examined 25 case studies of cost estimates, where work subsequent to the implementation of the regulation examined cost of the regulation and compared this ex post estimate to the ex ante estimate produced prior to implementation.

The analysts found a distinct tendency to overestimate regulatory costs. Out of the 25 studies, 12 overestimated the total costs of the regulations, two underestimated the total costs, five were accurate, and in six cases, the analysts were unable to make a determination. Most of the studies were from U.S. Federal actions, three were from the State of California, and three were international.

The evidence tends to conflict with one hypothesis about government regulatory cost estimates – that government agencies underestimate costs deliberately, or instinctively, in order to justify increased regulatory responsibilities, and bureaucratic power. This is evidence that isn't consistent with (but given the small sample size and limited scope of the analysis - doesn't dispose of) theories of bureaucrats as empire builders. The report suggests five classes of possible reasons for the tendency to overestimate.

First: Government economists are not in a good position to predict technological progress in different industries. Cost estimates tend to be made on the basis of what is known about current technologies. “Technological change is, after all, notoriously difficult to predict; all we can say with some confidence, based on historical experience, is that the cost of compliance will decline, but we cannot say at what rate.” (p 17)

Second: There may be a tendency for government analysts to overestimate the effectiveness of a regulation. The case study results showed that, of the 25 cases, analysis overestimated the reduction in pollution nine times, underestimated it four times, accurately estimated it ten times. In two cases the RFF analysts were unable to make a determination. It would be possible to overestimate the effectiveness of a regulation, for example, if enforcement wasn't effective. In these cases, costs of compliance would be overestimated (as would the benefits from the regulation).

Third: A systematic upward bias may be embedded in the nature of the regulatory process. Federal rules are generally subject to the Administrative Procedures Act (APA) which requires a three-part “proposed rule-notice and comment-final rule” process. Cost estimates for the rule would be prepared for the publication of the proposed rule. During the subsequent parts of the process the rule is likely to be modified in ways that reduce the burden on entities that would be subject to it.
    “One study of EPA’s rulemaking process for effluent guidelines between 1972 and 1978 showed a marked asymmetry in the number and nature of comments on the rules … The affected industries generated most of the comments on the regulations, and virtually al the comments on their specific characteristics (costs predicted and emission reductions required). Environmental and public interest groups commented infrequently, and when they did their comments were of a general nature, having more to do with the pace with which regulations were being prepared, rather than the details of particular regulations … Particularly for large, complex rules, changes often involve the exclusion of certain industrial or process subcategories, exclusion of specific waste streams, timing of implementation, and record keeping requirements … The key question is whether the rule changes are always or even systematically captured in the final cost estimates issued by the agency. Especially since rule changes often occur at the very end of the process, sometimes just days before promulgation of the rule, in many cases without the input of agency’s economic experts, our observation is that man of these changes are not captured in the final cost estimates.” (p 19-20)
Fourth: Agency analysts tend to produce “maximum,” rather than “mean,” estimates of compliance costs. This may happen if an agency uses “out-of-date information on installed pollution control equipment.” It may also occur if the agency uses cost information supplied by the regulated industry. The industry has an incentive to supply cost estimates from the high end of the range. Even if it provides high and low estimates, firms may be unwilling “to devote resources to figuring out the best way to comply with a proposal that may or may not be in the final rule.” (pgs 20-21) Another possibility:
    ”In addition, a good deal of health and safety regulation is "technology-based," which means that the regulator identifies an emission-reducing technology and then writes the regulation so that the identified technology can meet it. The language used in industrial pollution control statutes makes clear the importance of feasibility: "Best Practicable Technology," "Best Available Technology Economically Achievable," "Best Conventional Technology" (Clean Water Act); "Best Available Control Technology," "Lowest Achievable Emission Rate" (Clean Air Act). Note the emphasis on technology that is available and achievable, words that impose a responsibility on the Agency to identify a technology in use that can meet the standard the Agency wishes to impose. The cost estimate is, of course, based on the designated technology. Regulated firms are free to meet the standard by any method, and they will use the identified technology only if its costs are lowest of the alternatives. Thus the agency is once again estimating a maximum cost.”
Fifth: Industry is much more likely to comment on or appeal underestimates of costs than overestimates.

Harrington, Winston, Richard D. Morgenstern, and Peter Nelson. “On the Accuracy of Regulatory Cost Estimates.” Resources for the Future. Discussion Paper 99-18. January 1999. 41 pgs. Accessed at on October 14, 2002.

What I'm supposed to teach...

Brad DeLong has a nice posting on what I'm supposed to be teaching, and why it's important for public administrators here: "Failures of Our Educational System ".

Eldred v. Ashcroft

The Supreme Court heard oral arguments in Eldred and Ashcroft, the case challenging elements of a recent copyright law, last week. I posted on the arguments here.

Brad DeLong has posted a summary of the arguments by a person who was there - interesting for the description of oral argument before the Supreme Court, as well as for its description of the arguments of the different sides, and the questions and interests of the justices: "Justice Breyer Asks Interesting Questions on Eldred v. Ashcroft ".

It's all happened before, and its all going to happen again

Anthony Trollope's 19th Century novel about railway speculation and economic boom and bust anticpates events in the early 21st Century. The Minneapolis Fed's magazine The Region this month has a review of several novels with economic themes. Trollope's is one of them. The relevant paragraphs:
    "...for the best commentary on the late 1990s, or for almost any boom-bust period in economic history, there is really only one novel—Anthony Trollope's The Way We Live Now, first published in 1875.

    "Trollope wrote this novel following a return to England from a trip to the colonies. The London to which he returned appalled him: Greed ruled the city's financial institutions and unabashed social climbing marked its inhabitants. This was an era of great speculations gone bad and big bubbles that burst. There was, Trollope writes, “a certain class of dishonesty, dishonesty magnificent in its proportions, and climbing into high places, has become at the same time so rampant and so splendid that men and women will be taught to feel that dishonesty, if it can become splendid, will cease to be abominable.”

    "Hmmm, sounds familiar. But the novel is no rant. It's a precise delineation of a particular age and a class of people that clocks in at 767 pages, Trollope's longest and, critics contend, his best. It also has the merit of describing a railroad swindle, perhaps the best historical allusion to the current troubles in U.S. corporate governance. In addition, the board of directors described in The Way We Live Now is a perfect send-up for the “yes man” boards of today. As Frank Kermode describes the era in his Penguin introduction, it was a time when money begat money without the production of actual goods; which so excited people that they decided to forgo money and create wealth through issuing paper; which meant that promises, or words, became the hottest currency. And with promises as bargaining chips, dishonesty soon attained splendor. The con was on.

    "But there is no cause here to review The Way We Live Now. You don't stay in print for over 125 years and need another glowing review (although, like so many great works, the novel was not appreciated in its day). It was chided by some for its presumptuous title when first published, but it has proven prescient for many a succeeding generation, and likely will remain so.

    "Bottom line: Roberts for economics, Jennings for prose and Trollope for all that and a whole lot more."
Click here for the review (which also covers The Invisible Heart by Russell Roberts, and Moral Hazard by Kate Jennings): Review by David Fettig.

Deflationary Danger

This week's Economist has a short article on the nature of, potential for, and danger from, deflation.
    "...Deflation is not necessarily bad. If falling prices are caused by faster productivity growth, as happened in the late 19th century, then it can go hand in hand with robust growth. On the other hand, if deflation reflects a slump in demand and excess capacity, it can be dangerous, as it was in the 1930s, triggering a downward spiral of demand and prices.

    "Today, both the good and bad sorts of deflation are at work. Some prices are falling because of productivity gains, thanks to information technology. But the weakness of profits suggests that most deflation is now bad, not good. Deflation is particularly harmful when an economy is awash with debt. Total private-sector debt is now much higher than when deflation was last experienced in the 1930s. Falling prices not only increase the real burden of debt, they also make it impossible for a central bank to deliver negative real interest rates, because nominal rates cannot go below zero.

    "If deflation causes real debts to swell, debtors may have to cut spending and sell assets to meet their payments. This can unleash a vicious spiral of falling incomes, asset prices and rising real debt. Irving Fisher, an American economist, described this process in a famous article in 1933 entitled “The Debt-Deflation Theory of Great Depressions”. He described how attempts by individuals to reduce their debt burden by cutting costs could paradoxically cause their debt burden to swell. Unable to increase prices to boost profits, firms have to cut costs, either by reducing labour costs and hence household income or by buying less from other firms. This is sensible for an individual firm, but it reduces demand in the economy, thwarting the desired improvement in profit, leading to another round of cuts and putting further downward pressure on prices..."
Click here: "Of debt, deflation and denial" for the full article.

Institutional economics

Virginia Postrel has a column in today's New York Times on the "new institutional economics":
    "The new institutional economics studies how people arrange their affairs; how they create institutions, including legal sanctions, social norms and organizational structures, to govern their relationships; how those institutions spur or hinder economic growth; and how those institutions improve through trial and error."
Click here to access the article:"Even Without Law, Contracts Can Be Enforced".

I learned about this article from Lynne Kiesling's blog: "The Knowledge Problem".

Eldred v Ashcroft copyright case

The U.S. Supreme Court heard arguments this morning in Eldred v Ashcroft, the case challenging the Sonny Bono copyright extension act. The Washington Post story is here: "High Court Debates Copyright Extension Case " and the New York Times story is here: "Copyright Challenge Heads to Court". I've posted some notes on this case and the economics of copyright earlier - search on the keyword "copyright" on the search engine.

The Oct 10th Economist has an article on Eldred v. Ashcroft, timed for this weeks arguments before the Supreme Court. No details about the argument before the court this week, but a quick review of the story: "Free Mickey Mouse".

Revised October 10.

2003 Nobel Prize in Economics

The 2003 Nobel Prize in Economics was split between two men - Vernon Smith won for his work in experimental econonomcs, while Daniel Kahneman won for his work in applying cognitive pschology to economic analysis. Click here to go to the Nobel Institute's web site for this year's economics prize: "The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2002". You'll find press releases, a paper discussing Smith and Kahneman's contributions, and biographical material.

The Washington Post has a story: "GMU Professor Wins Nobel for Economics", as do the New York Times: "2 Americans Awarded Nobel for Economics", and the L.A. times: "Americans Win Nobels for Economics, Chemistry". On Thursday (10-10) the New York Times had a more detailed article on the importance of this work: "A Nobel That Bridges Economics and Psychology".

The October 10 issue of the Wall Street Journal carried an essay on Vernon Smith's contribution by Lynne Kiesling: "The Market Laboratory". Lynne Kiesling's blog also suggests the following link to an interview with Vernon Smith carried in Reason magazine: "The Experimental Economist Nobel laureate Vernon Smith ". Economics has not traditionally been thought of as one of the experimental sciences; we used to think we had to make use of data that was given to us be events - as in astronomy. Smith pioneered the approach of placing voluntary experimental subjects in conditions where they were faced with different patterns of incentives, and seeing how they react. I use a simplified version of his methods in class to illustrate some issues. A few weeks ago I linked to an article on an experiment in economics, click here: "A new classroom experiment for PADM 625?".Steven Landsburg has a short piece on one of Smith's experiments in Slate: "Phony Generosity. Economics Nobelist Vernon Smith's alarming discovery about human nature.". You can find an accessible and entertaining history of experimental economics by David Warsh here: "The Vital Many". It looks to me like the address for this may change - if you don't see it on the first page you reach, check the archives and look for the column on October 13, 2002. (thanks to a tip from Lynne Kiesling's blog). You can find a column on Smith's 2002 Nobel by Jennifer Zambone here: "Economic Wind Tunnels ". (again, thanks to a tip from Kiesling's blog).

The Houston Chronicle has a nice short piece on the two Nobelists, focusing a little more on Kahneman's contributions: "Irrational spenders take note"
    "Have you ever spent $4 on gasoline driving to a warehouse store to save $3 on paper towels? Or bought an expensive service contract for an appliance that would be cheap to replace and probably won't break...

    "Kahneman, born in Tel Aviv in 1934, a U.S. and Israeli citizen and professor of public affairs at Princeton University, was honored for using insights gained from psychological research to challenge the traditional economic theory that self-interest and rational decision-making govern people's economic choices...

    "Kahneman -- in collaboration with Tversky -- showed that people are incapable of fully analyzing complex situations when the future consequences are uncertain, relying on short cuts or rules of thumb instead.

    "The studies developed the idea of representativeness, in which people are too quick to see patterns in data that are actually random. For instance, an investor may conclude that a fund manager who beat a benchmark index two years in a row is more competent than average investors, whereas the true statistical implication is much weaker."
Revised on October 15