Monthly Archives: March 2011

Data Trick Illustrated by Freakonomics

The use of data is always tricky.  You can make a point by carefully selecting your data.  Freakonomics make that point below.  In addition, even if you show that X and Y come together, that does prove if low unemployment causes investment or does investment cause low unemployment.  It likely a good idea to think about the biases of any author, even one you like.

Photo: iStockphoto

Sometimes you see the perfect piece of evidence. The scatter plot that is just so. The data line up perfectly. And then you realize, perhaps they’re just too perfect. What you are seeing is advocacy, dressed up as science. Here’s an example, provided by John Taylor (via Greg Mankiw):

Taylor’s conclusion:

The data on spending shares show that the most effective way to reduce unemployment is to raise investment as a share of GDP.

But why begin the scatter plot in 1990? There’s no good reason. In fact, most folks typically download the entire history of available macro data. So let’s see what happens if we extend it back to, say, 1970:

Hmm… What conclusions should we draw about this relationship? And now why do you think Taylor began his sample in 1990?

Actually, we should use all the available data. The chart below goes back to 1948, when these series—in their current form—began:

Now what’s your conclusion?

Here’s Mankiw’s assessment of Taylor’s claim:

There’s no doubt that the strength of the correlation is impressive.
But when you look beyond the cherry-picked sample, the correlation is a decidedly unimpressive -0.14.

Here’s my conclusion: On balance, times in which the investment share is higher, are slightly more likely to be good times. But I’m not sure why. Is it—as Taylor asserts—that high investment shares create good times? Or is it that good times encourage investment? Or is it a third factor—perhaps in good times the government doesn’t need to prime the fiscal pump, and so the investment share is higher? Or is it something else?

Be wary of economists wielding short samples.

State of Japan’s Power Grid


Nice graphic from the Washington Post:



State of Japan’s Power Grid
Barry Ritholtz
Wed, 30 Mar 2011 19:16:09 GMT

Who is Dagny Taggart? Atlas Shrugged Part 1, the Movie, is Coming to Theatres April 15th

I’ve read Atlas Shrugged, and thought it was a good story in two ways.  First, it teaches that people’s professed motives aren’t always their real ones.  Second, it does warn of mindless conformity and politics in one form or another making all decisions.  Otherwise, I’ve always  found her characters to be wooden, and far too preachy of a philosophy that was heartless, ultimately megalomaniacal, as well as Godless.

Furthermore, having seen the fountainhead, the wooden nature of Rand’s character in that film was perhaps greater than in the book.  Difficult as that is to believe.

This post gives me reason enough to want to see the movie.

Who is Dagny Taggart? Atlas Shrugged Part 1, the Movie, is Coming to Theatres April 15th
Fri, 25 Mar 2011 10:43:33 GMT

Atlas Shrugged Part 1, the movie (which depicts the first third of Ayn Rand’s famous novel of ideas) comes into general release on April 15th, and I must say that the following YouTube teaser clip posted by the film’s producers is super-promising:


And philosopher David Kelley (a Princeton graduate and author of a widely used textbook) has seen the film and is impressed:

The completed film was shown today for the first time in a private screening. It is simply beautiful. With a screenplay faithful to the narrative and message of the novel, the adaptation is lushly produced. The acting, cinematography, and score create a powerful experience of the story.

Taylor Schilling is riveting as Dagny Taggart, the woman who manages the Taggart Transcontinental rail system with intelligence and courage while fighting interference from the president of the company, her incompetent brother James (Matthew Marsden), and his political cronies. Schilling is well-matched with Grant Bowler as steel-maker Hank Rearden. As the story opens, Rearden has just started producing a new alloy he invented; and Dagny is his first customer. . . .

For over half a century, Rand’s novel has been a lightning rod for controversy. It has attracted millions of devoted fans—and legions of hostile critics. A poor adaptation could be ignored by both sides. This adaptation can’t be ignored. It is way too good. It is going to turbocharge the debate over Rand’s vision of capitalism as a moral ideal. Whether you love the novel or hate it, Atlas Shrugged Part I is a must-see film.

Blogger and Rand enthusiast, Hans Schantz, also attended an invitation-only screening. He was preparing for a big disappointment, but was more-than-pleasantly surprised:

When I heard my favorite novel was being made into a movie, all the available omens boded ill: a “low-budget” production, with “no-name” stars, made independently – without the adult supervision of a real Hollywood studio, and rushed into production at the last minute to avoid loss of rights. It sounded like a recipe for disaster. . . . 

I began to understand – as I should have from the start – that independence is a virtue. Ayn Rand’s challenging prose would never have made it through the filter of a major studio without having been seriously blunted and adulterated. The resulting film would have been a caricature, not a capturing of the novel.

Further, a modest budget enforces an austere simplicity that enhances, rather than dilutes the message. A film with the “big-name” stars variously associated with the project over the years would have been more about the stars than the story. I admit that, in my mind’s eye, I always envisioned an Atlas Shrugged movie as an elaborately stylized visual blending of 1930’s vintage art-deco technology and film noir set in a pseudo-1950’s world with hardboiled, chain-smoking heroes. The film I foolishly thought I wanted would have been a tragic mistake – a mistake that would have transformed Atlas Shrugged into fantasy and undercut the dramatic relevance of Ayn Rand’s ideas to a modern setting. The Spartan, contemporary production is set in the near future, but that quality only serves to make the message more relevant and the story the star.

And of the Rearden YouTube scene posted above, Hans Schantz writes the following:

The released scene is NOT a fluke. It is not an accident. It is a representative sample. The rest of the film really is that good – better actually, because the individual scenes compliment and reinforce each other to create a harmonious whole, true to Rand’s story, superbly executed, and well done. The casting was outstanding, with no weak links.

Barbara Branden also saw the film and is enthusiastic about it:

I am delighted, overwhelmed, and stunned.

Yesterday, I saw Atlas Shrugged Part I, the movie. In advance, I was tense and worried. What if it was terrible? In that case, no one would consider a remake for years, if ever. I didn’t think it would be terrible, especially after I saw a clip from the film : the scene where Rearden comes home to his family after the first pouring of Rearden Metal. The scene was very good indeed. But….

The movie is not so-so, it is not OK, it is not rather good — it is spectacularly good.

This is all great news. Though not a Randian myself, I have always liked Ayn Rand (her blunt, unapologetic, and self-confident atheism and Apollonian-Promethean vision of what human beings can be are an intoxicating draw for me), and I’ve been hoping to see a successful contemporary screen adaptation of one of her novels. It looks like we’ll have one on April 15th.

And I can’t help but wonder whether the first of the three novel adaptations will make for a feminist film. The first third of Ayn Rand’s novel, after all, focuses on Dagny Taggart, a female Promethean fighting for her place in the public realm (a realm traditionally dominated by men). Instead of asking who John Galt is, this first film in the trilogy might inadvertently ask and answer a very different question (though Randians might cringe):

Who is Hillary Clinton?

I’ll be going to the film asking whether I’d want my daughters, when they reach their teens, seeing it, and whether it might prove empowering for them. Dagny Taggart, in the novel, is a refreshing alternative sexual persona: neither the compliant angel nor empty-headed whore, but the intellectual woman; the business woman; the public woman. (The woman weak and stupid men fear.)

Dagny Taggart, the castrating warrior princess?

We’ll see.

Who is Dagny Taggart? Atlas Shrugged Part 1, the Movie, is Coming to Theatres April 15th
Fri, 25 Mar 2011 10:43:33 GMT

Why don’t Tall People Pay the guy in the Airline Seat in Front to Not Recline on them?

That’s what this post below on Economists do it with Models asks.  (By the way when we say models we mean mathematical or econometric models, not attractive members of the opposite sex.  We’re talking about economists come on!)

I thought it was an interesting question.  The responses in the comments generally seemed to be well, people would think you’re a creep or its just not done.  But that doesn’t explain why the custom.

I think it’s at least partially that the cost of negotiation would be high relative to the benefits, also know as transaction costs.  In the seat case you only have one person that can supply you more legroom, and only one person you can sell it to.  There no multitude of buyers and sellers to quickly establish a market price, and no market.  There’s no single price sell your right to recline to at a price that you know is as good as you’d get.

Furthermore, there could be an incentive to move people around on the plane and that would also impose costs on others beyond the folks wanting more legroom or more space. 

Ideally  a market in space behind the seat would I think result in roughly interspaced, people who don’t mind not reclining with people behind who don’t want anyone reclining into their state and seats with those who want to recline with a person not bothered by that (perhaps a small person who is not going to use a laptop) behind. This might mean a lot of seat switching that could delay takeoff.

Fun With The Coase Theorem, Airplane Seat Edition…
Mon, 14 Mar 2011 22:27:42 GMT

I am firmly of the belief that people intuitively understand economic principles, even if they don’t consciously recognize them as such. Case in point, from The Consumerist:

It *is* quite an idea, Consumerist readers…in fact, it’s closely related to the Coase theorem. The Coase theorem is best illustrated via an example. From Wikipedia:

Coase developed his theory when considering the regulation of radio frequencies. Competing radio stations could use the same frequencies and would therefore interfere with each others’ broadcasts. The problem faced by regulators was how to eliminate interference and allocate frequencies to radio stations efficiently. What Coase proposed in 1959 was that as long as property rights in these frequencies were well defined, it ultimately did not matter if adjacent radio stations interfered with each other by broadcasting in the same frequency band. Furthermore, it did not matter to whom the property rights were granted. His reasoning was that the station able to reap the higher economic gain from broadcasting would have an incentive to pay the other station not to interfere. In the absence of transaction costs, both stations would strike a mutually advantageous deal. It would not matter whether one or the other station had the initial right to broadcast; eventually, the right to broadcast would end up with the party that was able to put it to the most highly valued use. Of course, the parties themselves would care who was granted the rights initially because this allocation would impact their wealth, but the end result of who broadcasts would not change because the parties would trade to the outcome that was overall most efficient. This counterintuitive insight—that the initial imposition of legal entitlement is irrelevant because the parties will eventually reach the same result—is Coase’s invariance thesis.

Now, I’ll take a bit of creative license and modify the example for the situation at hand:

Econgirl developed her theory when considering the regulation of airline seat reclining. Competing airline customers could use the same space and would therefore interfere with each others’ enjoyment of the flight. The problem faced by regulators was how to eliminate interference and allocate space to airline passengers efficiently. What Econgirl proposed in 2011 was that as long as property rights in these spaces were well defined, it ultimately did not matter if adjacent airline passengers interfered with each other by trying to occupy the same space. Furthermore, it did not matter to whom the property rights were granted. Her reasoning was that the passenger able to reap the higher economic gain from taking up space would have an incentive to pay the other passenger to get out of the way. In the absence of transaction costs, both passengers would strike a mutually advantageous deal. It would not matter whether one or the other passenger had the initial right to take up space; eventually, the right to spread out/recline/etc. would end up with the party that was able to put it to the most highly valued use. Of course, the parties themselves would care who was granted the rights initially because this allocation would impact their wealth, but the end result of who takes up space would not change because the parties would trade to the outcome that was overall most efficient.

For example, if reclining your seat is worth $5 to you, but being able to put my laptop on the tray table is only worth $3 to me, it is efficient for you to recline and me to find another place to put my laptop. If we could negotiate and pay each other off, you will end up reclining your seat regardless of what the airline tells us is the “proper” thing to do. However, if the default is for the stewardess to tell you to not be a jackass and keep your seat up, I will end up with somewhere between $3 and $5 in my pocket as a result of the subsequent negotiation. If, on the other hand, the stewardess tells me to suck it up and let you recline, I won’t get squat in compensation except for perhaps another bag of Doritos munchie mix because the stewardess knows that I’m cranky.

It’s important to note that Coase’s argument only holds when there are no costs or barriers to bargaining. In practice, the efficient outcome may not be reached if the guy behind you thinks you’re a big creeper because you try to pay him in return for him not complaining about the position of your seat. Not that I’ve tried or anything. I’m also pretty confident that it’s only a matter of time until the airlines figure out how to capture the payouts for themselves rather than keeping them within the affected parties…which technically doesn’t affect the efficiency of the outcome but certainly affects the distribution of value.

How difficult it is to reach conclusions just on facts!

Cafe Hayek

via Birther Myth.

Republicans and Environmental Progress

Economist’s View

via Republicans and Environmental Progress.

This was more exciting than Econ 202?

Northwestern students watch couple demonstrating sex toy

"It is probably something I will remember for the rest of my life. I can’t say that about my Econ 202 class and the material that I learned there," said Northwestern senior Justin Smith. Smith, 21, said students were told there would be a "sex tour operator" speaking about fetishes after class, but they didn’t initially know there would be a live demonstration.

US Housing Prices, Nominal and Real (1890-2010)


Housing prices trends don’t look the same if you adjust for inflation.


On a side note, the designer of the above, Catherine Mulbrandon over at Visualizing Economics, has a kickstarter campaign to fund production of a new publication on US Income. She does great work and I recommend you donate, if so inclined.

US Housing Prices, Nominal and Real (1890-2010)
Fri, 25 Mar 2011 13:24:00 GMT

“The Problem with Price Gouging Laws”

This always seem an area where most folks don’t get the economict’s point of view.

Michael Giberson

Regulation magazine, Vol. 34, No. 1, Spring 2011

Regulation magazine, Vol. 34, No. 1, Spring 2011

The Spring 2011 issue of Regulation magazine carries my article, “The Problem with Price Gouging Laws.”

One bit:

Economists and policy analysts opposed to price gouging laws have relied on the simple logic of price controls: if you cap price increases during an emergency, you discourage conservation of needed goods at exactly the time they are in high demand. Simultaneously, price caps discourage extraordinary supply efforts that would help bring goods in high demand into the affected area. In a classic case of unintended consequences, the law harms the very people whom lawmakers intend to help. The logic of supply and demand, so clear to economists, has had little effect on price gouging policies.

One of the reasons I’m fascinated by price gouging is that it involves a tight tangle of economics, moralizing, ethics, psychology, law and public policy. Most economists are persuaded by the supply and demand argument. Many non-economists rebel at the idea that merchants should be free to raise prices on goods that are in high demand due to emergencies. Working out good policy in this area presents some interesting challenges.

“The Problem with Price Gouging Laws”
Michael Giberson
Mon, 21 Mar 2011 13:06:41 GMT

IPO Dearth–My Fantasy of Delayed Soviet Revenge

Steven Bainbridges discusses the effect on IPOs of the Sarbanes-Oxley law, noting it’s been bad for small start-ups.  I’ve heard this before, and it also brings to mind this fanciful speculation.  It might make a good movie script.

SOX exists to a large degree because of the political climate after Enron (Which I worked for a time, but only because they bought and eventually sold my company).  I think this was all a vast KGB plot.  They sent Jeff Skilling as mole under the deepest cover.  He created Enron, knowing it would eventually create SOX as a regulatory over reaction that would Sovietize the US economy, leading to slow growth and eventual revenge on the US for winning the cold war.

In yesterday’s WSJ, the lead editorial dealt with the continuing dearth of US IPOs:

Recent news of a potential $25 billion initial public offering for the Web-based bargain hunting company Groupon is an exception because the overall trend is down. Last year 72 venture-capital-backed companies went public in the U.S., according to data from Thomson Reuters and the National Venture Capital Association. Over the last decade, the annual number has never reached 100 and has averaged fewer than 50.

Yes, it’s unrealistic to expect a repeat of the late-1990s Internet boom, when annual IPOs twice exceeded 270. But how about the early 1990s, before the dot-com mania skewed the numbers? The U.S. averaged 160 a year from 1990-1994, three times the current rate.

As the Journal explained, this is a serious problem:

New companies are the lifeblood of a capitalist economy. Every venture-backed start-up that grows into a public company could be the next Google, Intel, Starbucks or Amgen. Venture investment adds up to 0.2% of U.S. GDP, but the revenue of companies created with such investment amounted to 21% of the economy in 2008. The diminished ability of start-ups to hit the long ball with an IPO discourages investments at all the earlier stages. Venture capitalists know they need some equity home runs to offset losses in the thousands of firms that never find a market.

So what’s to blame? The Journal targets Sarbanes-Oxley:

A 2009 survey from the Securities and Exchange Commission speaks volumes. The SEC asked public companies about Sarbox’s infamous Section 404, which mandates an external audit of an internal audit of a company’s financial practices, known as "internal controls," on top of the traditional audits of corporate financial statements. That’s as much bureaucracy as any human should be forced to endure under the Geneva Convention.

Not surprisingly, 70% of small public companies told the SEC that Section 404 has motivated them to consider going private again, and 77% of small foreign firms said the law has motivated them to consider abandoning their U.S. listings.

Unfortunately, there is now an organized constituency that benefits from Sarbanes-Oxley:

… the accountants who profit from Sarbox and the Treasury maintain that the law is merely one of many factors discouraging new public companies. This view is shared by most in Washington because Sarbox was a bipartisan overreaction to the accounting scandals at Enron and WorldCom and was signed by George W. Bush.

You can add to that list the large companies who find it convenient that small potential competitors are priced out of the capital markets. SOX-related costs do not scale well. As a result, the costs tend to be proportionately higher for smaller firms. Sarbanes-Oxley thus has become a barrier to entry protecting large entrenched firms.

I detail all this, as well as other regulatory failures in the IPO market in my article Corporate Governance and U.S. Capital Market Competitiveness, which explains that:

During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.
Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.
This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.

The organized interest groups that support SOX will simply make all that much harder to unwind the ratchet effect.

IPO Dearth
Steve Bainbridge
Wed, 23 Mar 2011 15:15:01 GMT