Economics – Page 245 – artdiamondblog.com

The End of “the Road to Socialism”

The frenetic pace of productive work at a Chavez socialist farm cooperative in Santa Barbara, Venezuela. Souce of photo: online version of the NYT article quoted and cited below.

(p. A1) Mr. Chávez’s supporters have formed thousands of state-financed cooperatives to wrest farms and cattle ranches from private owners. Landowners say compensation is hard to obtain. Local officials describe the land seizures as paving stones on “the road to socialism.”

. . .

(p. A10) But while some of the newly settled farming communities are euphoric, landowners are jittery. Economists say the land reform may have the opposite effect of what Mr. Chavez intends, and make the country more dependent on imported food than before.

The uncertainties and disruptions of the land seizures have led to lower investment by some farmers. Production of some foods has been relatively flat, adding to shortages of items like sugar, economists say.

For the full story, see:

SIMON ROMERO. "Clash of Hope and Fear As Venezuela Seizes Land." The New York Times (Thurs., May 17, 2007): A1 & A10.

(Note: ellipsis added.)

Let There Be Light

One of Mark Bent’s solar flashlights stuck in a wall to illuminate a classroom in Africa. Source of the photo: http://bogolight.com/images/success6.jpg

What Africa most needs, to grow and prosper, is to eject kleptocratic war-lord governments, and to embrace property rights and the free market. But in the meantime, maybe handing out some solar powered flashlights can make some modest improvements in how some people live.

The story excerpted below is an example of private, entrepreneur-donor-involved, give-while-you-live philanthropy that holds a greater promise of actually doing some good in the world, than other sorts of philanthropy, or than government foreign aid.

FUGNIDO, Ethiopia — At 10 p.m. in a sweltering refugee camp here in western Ethiopia, a group of foreigners was making its way past thatch-roofed huts when a tall, rail-thin man approached a silver-haired American and took hold of his hands.

The man, a Sudanese refugee, announced that his wife had just given birth, and the boy would be honored with the visitor’s name. After several awkward translation attempts of “Mark Bent,” it was settled. “Mar,” he said, will grow up hearing stories of his namesake, the man who handed out flashlights powered by the sun.

Since August 2005, when visits to an Eritrean village prompted him to research global access to artificial light, Mr. Bent, 49, a former foreign service officer and Houston oilman, has spent $250,000 to develop and manufacture a solar-powered flashlight.

His invention gives up to seven hours of light on a daily solar recharge and can last nearly three years between replacements of three AA batteries costing 80 cents.

Over the last year, he said, he and corporate benefactors like Exxon Mobil have donated 10,500 flashlights to United Nations refugee camps and African aid charities.

Another 10,000 have been provided through a sales program, and 10,000 more have just arrived in Houston awaiting distribution by his company, SunNight Solar.

“I find it hard sometimes to explain the scope of the problems in these camps with no light,” Mr. Bent said. “If you’re an environmentalist you think about it in terms of discarded batteries and coal and wood burning and kerosene smoke; if you’re a feminist you think of it in terms of security for women and preventing sexual abuse and violence; if you’re an educator you think about it in terms of helping children and adults study at night.”

Here at Fugnido, at one of six camps housing more than 21,000 refugees 550 miles west of Addis Ababa, the Ethiopian capital, Peter Gatkuoth, a Sudanese refugee, wrote on “the importance of Solor.”

“In case of thief, we open our solor and the thief ran away,” he wrote. “If there is a sick person at night we will took him with the solor to health center.”

A shurta, or guard, who called himself just John, said, “I used the light to scare away wild animals.” Others said lights were hung above school desks for children and adults to study after the day’s work.

For the full story, see:

Will Connors and Ralph Blumenthal. "Letting Africa’s Sun Deliver the Luxury of Light to the Poor." The New York Times, Section 1 (Sun., May 20, 2007): 8.

(Note: the title of the article on line was: "Solar Flashlight Lets Africa’s Sun Deliver the Luxury of Light to the Poorest Villages.")

Source of map: online version of the NYT article cited above.

Firms Install Internal Betting Markets for Better Forecasting

Charles Plott, of Cal Tech, co-authored a nifty study several years ago in which he installed a betting market inside of Hewlett Packard to do internal forecasting. The nifty part was that the forecasts produced by the betting market were generally more accurate than the official forecasts that HP’s official forecasters were producing.

The likely reason is not that the official forecasters were stupid or incompetent, but that they were under considerable pressure by corporate higher-ups to spin the forecasts in a favorable way. In contrast, the participants in the internal betting market remained anonymous, and received higher payoffs, the more accurate their forecasts turned out to have been.

The result was not surprising, once you think it through. But what I did find surprising was that HP didn’t keep the betting market going, after the Plott study was finished. (From a long-run perspective, top management should benefit more from accurate forecasts, than from consistently optimistic forecasts.)

In any case, the excerpt from the commentary below indicates that some other companies have gotten the point:

(p. C1) Over the last few years, Intrade — with headquarters in Dublin, where the gambling laws are loose — has become the biggest success story among a new crop of prediction markets. The world’s largest steel maker, Arcelor Mittal, now runs an internal market allowing its executives to predict the price of steel. Best Buy (p. C6) has started a market for employees to guess which DVDs and video game consoles, among other products, will be popular. Google and Eli Lilly have similar markets. The idea is to let a company’s decision-makers benefit from the collective, if often hidden, knowledge of their employees.

But there’s a broader point here, too. For a couple of centuries now, long before Intrade or even the Internet existed, financial markets have been making it easier to bet on what the future will bring.

In the mid-1800s, contracts tied to the future price of wheat, pigs and other commodities began to change hands. In 1972, the Chicago Mercantile Exchange introduced futures for foreign exchange rates. Treasury bonds tied to the future rate of inflation came along in the 1990s, and last year, the Merc began selling contracts based on the direction of house prices in 10 big metropolitan areas.

In every case, the market price reflects the sum of the traders’ knowledge — about the extent of the housing bubble in Los Angeles, for instance, or the likely size of next year’s wheat crop. . . .

N. Gregory Mankiw, a former adviser to President Bush, who has written about Intrade on his blog, explains it this way: ”Everybody has information from their own little corner of the universe, and they’d like to know the information from every other corner of the universe. What these markets do is provide a vehicle that reflects all that information.”

For the full commentary, see:

DAVID LEONHARDT. "ECONOMIX; Odds Are, They’ll Know ’08 Winner." The New York Times (Weds., February 14, 2007): C1 & C8.

(Note: ellipsis added.)

Why New York City Needs Wal-Mart

(p. 7) . . . an enduring mystery of the retail economic world: why don’t people in New York City want a Wal-Mart in Midtown?

Manhattan is the most underserved market I have ever seen for retail customers. There really is nowhere for bargains on ordinary household goods and groceries in the whole borough. Yes, I know unions hate Wal-Mart. But not every New Yorker is in a union, and every New Yorker needs food and paper towels. (I, by the way, am a member of three unions: the Screen Actors Guild, the American Federation of Television and Radio Artists, and the Writers Guild of America, West. How many unions is Mayor Michael Bloomberg in?)

Don’t the consumers deserve a break, too? I know Wal-Mart is not hip, slick and cool. It’s for people who have to live within a budget, not for people who see movies with subtitles and have houses on Martha’s Vineyard (or would like to). But don’t working-class people deserve bargains on their daily bread?

To keep Wal-Mart out of New York — or my home, Los Angeles — is simply to inflict a snobby class prejudice on working people. Why they and their representatives put up with this classist, ”let them eat Whole Foods” nonsense is yet another mystery, and one that could be solved if politicians really cared about consumers.

For the full commentary, see:

BEN STEIN. "EVERYBODY’S BUSINESS; Assorted Mysteries of Economic Life." The New York Times, Section 3 (Sun., May 13, 2007): 7.

(Note: ellipsis added.)

Total Retirement Assets Will Increase, Even as Baby Boomers Retire

Source of graph: online version of the NYT article cited below.

WILL stocks suffer a multidecade bear market as the baby-boom generation sells its shares to support its retirement? Some have predicted such an outcome, but a new study — which projects huge growth in 401(k) assets in future decades — paints a far more sanguine picture.

The study, “New Estimates of the Future Path of 401(k) Assets,” has been circulating since earlier this month as a working paper from the National Bureau of Economic Research. Its authors are James M. Poterba, chairman of the economics department at the Massachusetts Institute of Technology; Steven F. Venti, an economics professor at Dartmouth; and David A. Wise, a professor of political economy at Harvard. A version is at www.nber.org/papers/w13083.

Despite the baby boomers’ liquidation of retirement assets in coming decades, the study estimates that the total size of 401(k) plans will nevertheless grow markedly. That forecast may come as a surprise to some people, the professors concede, because 401(k)’s now represent only a modest fraction of a typical retiree’s total wealth. But the professors point out that 401(k) plans have existed only since the early 1980s; by the time that today’s younger workers retire, they will have had many more years to contribute to their 401(k)’s than current retirees have had.

For the full commentary, see:

MARK HULBERT. "STRATEGIES; Baby Boomers Are Cashing In. So What?" The New York Times, Section 3 (Sun., May 27, 2007): 5.

“The Engine of Prosperity is Technological Progress”

Steve sometimes writes clever, entertaining essays on issues of little policy importance (like whether a rational person should stand still, or move forward, on escalators). But in the piece excerpted below, he does a great job of discussing the biggest policy issue of them all: what drives economic progress?

Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture — but none of that stuff had much effect on the quality of people’s lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.

Then — just a couple of hundred years ago, maybe 10 generations — people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world.

Then it got even better. By the 20th century, per capita real incomes, that is, incomes adjusted for inflation, were growing at 1.5% per year, on average, and for the past half century they’ve been growing at about 2.3%. If you’re earning a modest middle-class income of $50,000 a year, and if you expect your children, 25 years from now, to occupy that same modest rung on the economic ladder, then with a 2.3% growth rate, they’ll be earning the inflation-adjusted equivalent of $89,000 a year. Their children, another 25 years down the line, will earn $158,000 a year.

Against a backdrop like that, the temporary ups and downs of the business cycle seem fantastically minor. In the 1930s, we had a Great Depression, when income levels fell back to where they had been 20 years earlier. For a few years, people had to live the way their parents had always lived, and they found it almost intolerable. The underlying expectation — that the present is supposed to be better than the past — is a new phenomenon in history. No 18th-century politician would have asked "Are you better off than you were four years ago?" because it never would have occurred to anyone that they ought to be better off than they were four years ago.

. . .

The source of this wealth — the engine of prosperity — is technological progress. And the engine of technological progress is ideas — not just the ideas from engineering laboratories, but also ideas like new methods of crop rotation, or just-in-time inventory management.

For the full commentary, see:

STEVEN LANDSBURG. "A Brief History of Economic Time." The Wall Street Journal (Sat., June 9, 2007): A8.

(Note: ellipsis added.)

The Courage of Milton Friedman

The following two paragraphs are from a paper I am currently working on.

Milton Friedman wrote a Newsweek column many years ago that caused a firestorm of anger among his colleagues in the economics profession. Friedman’s argument was that, in general, the government is not going to do a good job of identifying the best and most productively innovative economists. In particular, he argued that economics funding by the National Science Foundation (NSF) had made the economics profession more mathematical than was appropriate.

Even his ‘Chicago’ colleagues, who were otherwise inclined to be sympathetic to his work, were appalled: Robert Lucas wrote against Friedman in the New York Times, and Zvi Griliches spoke against him before Congress.

Not too long after Friedman’s article came out, I praised it during one of the sessions of a Liberty Fund colloquium held in California. After the session, a very distinguished economist came up to me, and started talking about the Friedman article in a very irritated and animated manner. He said that what Friedman wrote in the article, might be true, but he shouldn’t have written it in a public forum.[i] He said that within the NSF, the physicists have always been opposed to funding economics, and that Friedman’s article gave the physicists just the ammunition they needed. I remember distinctly that after this conversation, the distinguished economist got into his very large and very expensive car and drove off. To the cynical, it may also be worth mentioning that this economist had received very substantial funding from the NSF.

I also remember mentioning to George Stigler my disappointment that Lucas had written contra Friedman, and Stigler gave me his cynical smile, and said that I should have expected that Lucas, and the rest of the profession, would defend NSF funding.

[i] Most of the conversation I remember in broad terms, but specifically, I remember he said something very close to: ‘Friedman shouldn’t air the profession’s dirty laundry in public.’

The reference for the Friedman article, is:

Friedman, Milton. "An Open Letter on Grants." Newsweek, May 18 1981, 99.

Private Companies Beat Government in Accessible and Affordable Health Care

A CVS pharmacy MinuteClinic. Source of photo: online version of the WSJ article cited below.

It’s Friday evening and you suspect that your child might have strep throat or a worsening ear infection. Do you bundle him up and wait half the night in an emergency room? Or do you suffer through the weekend and hope that you can get an appointment with your pediatrician on Monday — taking time off your job to drive across town for another wait in the doctor’s office?

Every parent has faced this dilemma. But now there are new options, courtesy of the competitive marketplace. You might instead be able to take a quick trip on Friday night to a RediClinic in the nearby Wal-Mart or a MinuteClinic at CVS, where you will be seen by a nurse practitioner within 15 minutes, most likely getting a prescription that you can have filled right there. Cost of the visit? Generally between $40 and $60.

These new retail health clinics are opening in big box stores and local pharmacies around the country to treat common maladies at prices lower than a typical doctor’s visit and much lower than the emergency room. No appointment necessary. Open daytime, evenings and weekends. Most take insurance.

Much like the response to Hurricane Katrina, private companies are far ahead of the government in answering Americans’ needs, this time for more accessible and more affordable health care. Political leaders across the country seeking to expand government’s role in health care should take note.

For the full commentary, see:

GRACE-MARIE TURNER. "Customer Health Care." The Wall Street Journal (Mon., May 14, 2007): A17.

Why Coke Cost a Nickel for 60 Years

The excerpt below is from a WSJ summary of a May 11, 2007 Slate article.

A serving of Coca-Cola cost a nickel for 60 years — an example that illustrates the disadvantages of price stability, Tim Harford writes.

. . . Prices won’t accurately reflect a product’s demand and the cost of producing it. If, for example, the relative price of a car "can’t fall when demand does, sales will collapse." If wages can’t fall in a recession, unemployment will rise.

The case of Coke, Mr. Harford says, is an example of the main reason companies choose to keep prices constant in the face of dramatic rises and falls in costs: the hassle of changing a product’s price can be very high. Coke kept its price constant from 1886 through the mid-1940s, even as the price of sugar tripled after World War I and then fell slightly, and after the product went from being taxed as a medicine to taxed as a soft drink. Part of Coke’s problem was that it sold many of its bottles in vending machines that accepted only nickels. A price increase would have meant either building new vending machines or doubling the price of Coke, neither of which made financial sense.

For the full summary, see:

"Informed Reader; ECONOMICS; The Cost of Raising Prices Can Prove Too High to Pay." The Wall Street Journal (Mon., May 14, 2007): B7.

A Public Choice Theory of “Taxonomic Inflation”

The excerpt below is from a WSJ summary of an article that appeared in The Economist on May 19, 2007.

Scientists have taken to upgrading animals once thought to be subspecies into full-fledged species, in what the Economist says is an overzealous attempt to boost conservation of seemingly rare animals.

Sometimes, the reclassification of animals into their own species category is warranted, as new research reveals once-obscured markers that differentiate certain beasts. But lately, the weekly says, primatologists have been suffering from "taxonomic inflation."

. . .

. . . One reason is that by fragmenting animal groups, the number of rare species increases, boosting animal-conservation claims. At the same time, having a greater number of species boosts the chances that a habitat can pursue a legal designation as a protected area.

For the full summary, see:

"Informed Reader; NATURE; Species Inflation May Infect Over-Eager Conservationists." The Wall Street Journal (Sat., May 19, 2007): A6.

(Note: ellipsis added.)

Incentives Matter in Medicine, But Profit is Not the Problem

Source of graphic: online version of the NYT article quoted and cited below.

In the article excerpted below, the profit motive in medicine is painted as the villain of the piece. But the problem is not the profit motive. The problem is that government occupational licensing and regulation in medicine raises barriers to entry for low-cost competitors to enter, innovate, and compete.

(p. A1) Two of the world’s largest drug companies are paying hundreds of millions of dollars to doctors every year in return for giving their patients anemia medicines, which regulators now say may be unsafe at commonly used doses.

The payments are legal, but very few people outside of the doctors who receive them are aware of their size. Critics, including prominent cancer and kidney doctors, say the payments give physicians an incentive to prescribe the medicines at levels that might increase patients’ risks of heart attacks or strokes.

Industry analysts estimate that such payments — to cancer doctors and the other big users of the drugs, kidney dialysis centers — total hundreds of millions of dollars a year and are an important source of profit for doctors and the centers.

For the full story, see:

ALEX BERENSON and ANDREW POLLACK. "Doctors Reap Millions for Anemia Drugs." The New York Times (Weds., May 9, 2007): A1 & C4.

Bernice Wilson’s kidney dialysis treatment includes the anti-anemia drug Epogen. Source of photo: online version of the NYT article quoted and cited above.