Economics – Page 250 – artdiamondblog.com

The Difference Between Being a University President and Being a Cabinet Officer

At a dinner last week to announce the winner of the business book of the year award, Lawrence H. Summers, the former Treasury secretary, poked fun at his tenure as the president of Harvard. . . .

Specifically, he said he was woefully naïve when he had been first asked to describe the difference between being a university president and being a cabinet officer. ”I guess I didn’t get it right in the answer I gave in my first year or two,” he said, ”because I used to say, ‘Well, in Washington, it’s so political; there’s organized opposition to everything.’ ”

For the full story, see:

JANE L. LEVERE. "OPENERS: SUITS; HARVARD EDUCATION." The New York Times, Section 3 (Sun., October 29, 2006): 2.

(Note: ellipsis added.)

Schumpeterian Alan Greenspan Receives Second Richest Book Advance Ever Paid

Why is this man smiling? (Alan Greenspan has reason to grin.) Source of photo: online version of the NYT article cited below.

I believe that the market for economists is imperfectly competitive, since the supply and demand for academics is highly regulated by governmental and quasi-governmental institutions. But it is interesting that the second highest book advance ever paid is going to Alan Greenspan. Greenspan is a practical, eclectic, economist who believes that Schumpeter’s process of creative destruction is important for understanding the workings of a capitalist economy.

(p. C1) Alan Greenspan, the former chairman of the Federal Reserve, has agreed to sell his memoir for an advance of more than $8.5 million, according to people involved in the negotiations, making a deal that appears to give him the second-largest advance ever paid for a nonfiction book.

. . .

(p. C8) Mr. Greenspan’s advance ranks second only to the more than $10 million paid to former President Bill Clinton for his memoir, "My Life," which was published in June 2004. Pope John Paul II received an advance of $8.5 million in 1994 for his book, "Crossing the Threshold of Hope," and Senator Hillary Rodham Clinton received an $8 million advance for her memoir, "Living History," published in 2003.

For the full story, see:

EDWARD WYATT. "Greenspan’s Book Deal Is Said to Be Among the Richest." The New York Times (Weds., March 8, 2006): C1 & C8.

Barney Frank on Schumpeter’s “Great Concept”

Barney Frank. Source of photo: http://www.house.gov/frank/welcome.html

Policy-makers are often enthused by the innovation unleashed by Schumpeter’s process of creative destruction, but draw back out of fear of the destruction of jobs. In the passage below, Barney Frank expresses that fear.

I think that there are answers to the fear. More and better jobs are created, than destroyed; workers can invest in general skills that do not depreciate, and retool the specific skills that do depreciate; and conscientious workers suffer from lack of recognition and upward mobility, when creative destruction is stiffled. The pain is less than usually thought, and the gain is greater.

One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don’t care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don’t see that they’re going to be part of the new creation.

Source:

Transcript of remarks delivered at the National Press Club on "Wages" by Democratic Representative Barney Frank of Massachusetts, on January 3, 2007.

Increase in Minimum Wage, Decreases Employment Among Low-Skill Workers

Basic price theory seems to imply that raising the minimum wage, will result in greater unemployment. Almost all economists accepted this conclusion until several years ago, when some empirical results seemed to challenge it. Now there is active debate.

Here is the abstract of a relevant, just-published, article in the leading journal in the field of labor economics:

We infer the employment response to a minimum wage change by calibrating a model of employment for the restaurant industry. Whereas perfect competition implies that employment falls and prices rise after a minimum wage increase, the monopsony model potentially implies the opposite. We show that estimated price responses are consistent with the competitive model. We place fairly tight bounds on the employment response, with the most plausible parameter values suggesting that a 10% increase in the minimum wage lowers low-skill employment by 2%-4% and total restaurant employment by 1%-3%.

The article reference is:

Aaronson, Daniel, and Eric French. "Product Market Evidence on the Employment Effects of the Minimum Wage." Journal of Labor Economics 25, no. 1 (Jan. 2007): 167-200.

Becker on Friedman

Source of graphic: http://www.ideachannel.com/Friedman.htm

David Levy has noted in an email that at the reception to preview the new Friedman documentary, Gary Becker gave a great presentation on Milton Friedman, and it was a great shame that no one recorded it. I feel especially guilty, because I had thought of recording it, and had even brought a small camera that would have (badly) done the job. But the room was dark and crowded, and by the time the talk started, I was in conversation a long way from where Becker started speaking.

Levy suggests that maybe those of us who were there, should record our memories of what Becker said. I like that idea, and will record mine here.

Becker started out by saying to Bob Chitester that he wasn’t sure that the documentary did justice to Friedman. (Chitester was the producer, I think, of the original Free to Choose series, and a moving force behind the new Friedman documentary, to be first shown on PBS on January 29th, 2007.)

Becker mentioned that Friedman was a missionary. He would talk economics to anyone–if a taxi driver made a mistaken comment about economics, Friedman would set him straight.

Becker mentioned that while Friedman liked to argue about ideas, he never saw him be mean to anyone.

Becker mentioned that a friend of his taking Friedman’s price theory class (I think Becker may have said the friend was Gregory Chow?) asked Becker how he could keep asking questions in Becker’s class, when Friedman would keep showing the ways in which Becker was mistaken.

Becker mentioned that he talked to Friedman a few days before his death, and that they even talked a little economics.

Becker emphasized that Friedman had been both a great economist, and had made an enormous difference in the world, in particular in making the world more free.

Some background: Becker spoke about Friedman at two sessions at the Allied Social Sciences Association meetings in Chicago in early January. One was in the afternoon (about 2:30 PM?) of January 5, 2007, and also included Robert Lucas, and Tom Sargent. I missed that session because I wanted to attend a session featuring the research program of Robert Fogel on longevity. The second session, at 6:00 – 7:30 PM on Sat., January 6, 2007 was at a reception sponsored by the University of Chicago to preview the new documentary on Friedman. I attended this reception through Becker’s presentation, but did not stay for the documentary preview. My friend Luis Locay attended both sessions, and told me that some, but not all, of the stories Becker told were similar in both sessions. Locay also mentioned that Becker appeared to get more choked-up at the session on January 5, 2007.

Hugely Wasteful Health-Care Spending

Source of book image: http://www.encounterbooks.com/books/cure/

Milton Friedman is gone now, but the new book reviewed below, includes a forward written by him. Friedman can be praised for many reasons; a minor one is that he was tireless and generous in offering praise and support for others who were seeking to better understand free markets.

About 10 years ago, I broke my leg playing basketball. After I came out of surgery, with a cast stretching from my ankle to the top of my leg, an orderly asked me whether I had ever used crutches before. I hadn’t, so he showed me what to do, swinging through them from one end of the room to the other. The whole lesson lasted about 90 seconds. When I got my hospital bill, I saw that I had been charged $150 for "gait training on crutches." I did what all insured Americans do: I forwarded the bill to my insurance company. Why should I care? I wasn’t paying for it.

One of the problems with American health care, as David Gratzer notes in "The Cure," is precisely a payment system that takes the patient out of the equation. In the early 1960s, the average American paid out of pocket one of every two dollars that he spent on health care; today the figure is one dollar in seven. The inevitable effect is hugely wasteful spending (and inflated hospital bills like mine). In fact, per-patient costs have gone up almost exactly in inverse proportion to the share of spending borne by the consumer.

Dr. Gratzer cites a remarkable Rand Corp. study that tracked health-care spending by 2,000 families over eight years. The families who got free health care spent 40% more than the families with cost-sharing arrangements. And yet the health outcomes for the two groups were the same. The lesson: Market-based health insurance systems, such as health savings accounts, cut out inefficiencies and lower costs without compromising quality.

. . .

. . . : America is clearly at a crossroads in medical care. Within the next decade we will get either some version of Hillary-care or more free-market medicine, starting with universally available health savings accounts. Let’s hope that our nation’s policy makers read "The Cure" before they decide. They will learn that the government route flattens costs only by holding back the pace of technology, artificially controlling its price and rationing its use. That is not a prescription for better health.

For the full review, see:

STEPHEN MOORE. "BOOKS; The Market and Its Medicine." The Wall Street Journal (Tues., By December 5, 2006; Page D6.

The reference to the book under review, is:

Dr. David Gratzer. The Cure: How Capitalism Can Save American Health Care. Encounter Books, 2006. (233 pages, $25.94)

Risk Diversification Only Works If Risks are Random

Source of book image: http://www.inbubblewrap.com/2006/08/should_i_do_it_should_i.php

According to Mr. Apgar, managing director of the Corporate Executive Board and a former McKinsey consultant, the problem is that our traditional tool set deals only with random risk. Equity prices, interest rates, natural catastrophes — all operate, more or less, as perfect markets, distributing risk with equal probability among all the players. No one consistently knows more about what drives these phenomena than anyone else. We can bear or hedge these risks in the secure sense that competitors don’t have an inside lead on the future.

. . .

In real business, though, many of the risks that can potentially wipe us out are non-random — what Mr. Apgar calls "learnable risks" — involving customers, technologies, marketing strategies, supplier relationships and so on. The challenge is not just to learn, quickly, enough about them to survive but to determine whether someone else can learn about them even faster and thus put us out of business.

. . .

. . . Mr. Apgar also explains how to perform a "risk audit," judging a company’s current projects by how they diversify total risk or demonstrate risk intelligence. Here is where his program differs most widely from conventional wisdom — because, as he notes, risk diversification is no virtue if the risks are non-random and we have little intelligence of any of them. If you don’t know much about poisonous snakes, keeping several different species won’t make you any safer.

Like liberty, risk intelligence demands eternal vigilance — and for the same reason: threats evolve. Mr. Apgar’s analysis of the life cycle of a business risk is particularly fruitful. He notes that a successful company needs to maintain a risk pipeline, constantly probing into areas where it has higher risk intelligence and opportunities for real diversification — just as technology and pharmaceutical companies need a proportion of blue-sky research to innovate into the future.

For the full review, see:

MICHAEL KAPLAN. "BOOKS; The Hazards of Fortune." Wall Street Journal (Fri., December 8, 2006): W6.

(Note: ellipses added.)

Diverse Civic Groups Support Fee for Driving in Manhattan

A year ago, officials from a prominent civic group floated a proposal to reduce traffic by levying a $7 fee on cars and trucks driving below 60th Street, but they found themselves treated not like visionary crusaders but like bird flu patients when policy makers at City Hall said very firmly that such a change was not on the mayor’s agenda for his second term.

Now a diverse array of civic and community groups — including such unlikely allies as conservative scholars and take-back-the-streets cycling advocates — are cautiously moving to raise the subject again in the hope of overcoming the resistance of New Yorkers and their political leaders.

. . .

The coalition wants more speed bumps on neighborhood streets and a crackdown on illegal parking, but it also asks that the city study congestion pricing.

”That is the gorilla in the room and, among all the measures we’re discussing, it has the most potential for reducing traffic,” said Paul Steely White, the director of Transportation Alternatives.

. . .

Advocates of congestion pricing are reluctant to make specific proposals on how it could be carried out in New York, but they often point to London as an example of a successful program.

Championed by an activist mayor, London’s program began in early 2003 and has significantly reduced traffic and sped up bus lines. London drivers must pay as much as $19 a day to enter the road pricing zone in the city center. They can pay in a variety of ways, including online, by phone, by mail or at designated shops or gas stations. Cameras around the congestion zone read vehicle license plates and feed the numbers to a computer that checks to see who paid their fees. Those who have not paid can be fined.

For the full story, see:

WILLIAM NEUMAN. "Bigger Push for Charging Drivers Who Use the Busiest Streets." The New York Times (Fri., November 24, 2006): C9.

(Note: ellipses added.)

“Forgotten not for lack of importance, but for lack of theoretical frame-works”

A paper by current head of the President’s Council of Economic Advisors, Ed Lazear, is significant for what it says near the end about economists forgetting facts, because the facts do not fit into current theory.

(p. 260) Human capital theory is primarily a supply-side approach that focuses on the characteristics and skills of the individual workers. It pays far less attention to the environments in which workers work. As such, the human capital framework has led researchers to focus on one class of questions, but to ignore others. Specifically, little attention has been paid to the jobs in which workers are employed.

(p. 263) The fact that some jobs and some job characteristics are more likely to lead to promotions than other jobs is not surprising. But the analysis suggests that other ways of thinking about wage determination, namely, through job selection, may have been unduly ignored in the past.

. . .

Researchers have begun to make jobs rather than individuals the unit of analysis. This change of focus can illuminate new issues and provide answers to questions that were once posed and forgotten. The questions were forgotten not for lack of importance, but for lack of theoretical frame-works. The theory is now developed and awaits confirmation in the data.

For the full paper, see:

Lazear, Edward P. "A Jobs-Based Analysis of Labor Markets." American Economic Review 85, no. 2 (May 1995): 260-265.

(Note: elipsis added.)

Career Opportunities for Economists

Econ major, and rap recording artist, Stat Quo. So who says economists aren’t cool? Source of photo: http://www.statquo.com/

According to Wikipedia, up and coming rap artist Stat Quo earned a 3.54 gpa, while majoring in economics at the University of Florida. How’s that for refuting the stereotypes about economists?

See: http://en.wikipedia.org/wiki/Stat_Quo

“Atlas May Actually Decide to Shrug”

(p. A16) During the recent off-year elections, the president repeatedly pointed to the booming economy and noted that his tax cuts were responsible. With growth strong and unemployment low despite the ending of the stock-market bubble, terrorist attacks and the war in Iraq, he had every reason to be proud. Moreover, both economic theory and the actual timing of the economic revival support his claims regarding the tax cuts.

That is why it is so odd that rumors swarm around Washington that the president may be willing to raise taxes as part of a "deal" on entitlement reform. In particular, the rumors suggest the president might be willing to get rid of the provision that caps the income level used to compute Social Security taxes and benefits. These rumors aren’t without substance; last year the president would not rule out raising the cap when asked.

Doing so would raise the marginal tax rate on the entrepreneurs that Mr. Bush credits for having led the economic recovery by more than 10 percentage points. The new effective rate would be five percentage points above the level when he took office. Moreover, in 2011, the rate would go up a further 4.3 percentage points to an effective 53% marginal rate on entrepreneurial income. The president would thus be not just raising taxes on entrepreneurs to well above the levels that prevailed in the Clinton administration, but to a rate higher than that which prevailed in the Carter administration. Most of the improved incentives for entrepreneurship and work brought about under Reagan would be repealed.

. . .

Last year an entrepreneur similar to me would have paid federal taxes equal to 33.9% of total income.

. . .

Don’t make it too tough on him, or Atlas may actually decide to shrug.

For the full commentary, see:

LAWRENCE B. LINDSEY. "Compromised." Wall Street Journal (Mon., November 20, 2006): A16.

(Note: the ellipses are added.)

The last line of the commentary is a not-so-veiled allusion to:

Rand, Ayn. Atlas Shrugged. New York: Random House, 1957.