Nudge the Vote

by Sasha Issenberg

New York Times
October 29, 2010

Over the past few days, thousands of Democratic-leaning voters nationwide — including the young people, minorities and unmarried women who were a crucial part of Barack Obama’s 2008 coalition and whom the party is desperate to rouse again on Tuesday — received a message in their mailboxes that effectively said: we’re keeping an eye on you. The mailers are the handiwork of Hal Malchow, a political consultant who is acting on a theory that first intrigued him four years ago. Before the 2006 Michigan gubernatorial primary, three political scientists isolated a group of voters and mailed them copies of their voting histories, listing the elections in which they participated and those they missed. Included were their neighbors’ voting histories, too, along with a warning: after the polls closed, everyone would get an updated set.

After the primary, the academics examined the voter rolls and were startled by the potency of peer pressure as a motivational tool. The mailer was 10 times better at turning nonvoters into voters than the typical piece of pre-election mail whose effectiveness has ever been measured. Malchow, a 58-year-old former Mississippi securities lawyer who managed Al Gore’s first Senate campaign and went on to start a direct-mail firm, read the academics’ study and wanted to put the device to work. But he had trouble persuading his firm’s clients — which over the years have included the Democratic National Committee and the A.F.L.-C.I.O. — to incorporate such a tactic into their get-out-the-vote programs. All feared a backlash from citizens who might regard the mailer as a threat from someone seeking their vote.

Then, as New Jersey prepared to elect its governor last fall, Malchow experimented with less ominous language, an idea he adopted from the Fordham political scientist Costas Panagopoulos. He removed all mention of neighbors and offered instead an expression of gratitude for having voted in the past — while still making it clear that recipients’ voting habits would continue to be monitored. “We hope to be able to thank you in the future for being the kind of citizen who makes our democracy work,” read the letter to more than 11,000 New Jerseyites.

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Corporate constitutions

Economist
October 28, 2010

“Revolutions” can take place in surprising places. The past decade has seen nothing less than a revolution in the command centres of capitalism: corporate boardrooms. The ancien régime of club ties and long lunches has been swept aside, and replaced by a new order based on transparency and accountability.

The new order has its roots in the work of sans-culottes such as Sir Adrian Cadbury in the 1990s. But it was given a powerful shove in 2001-02 by debacles at Enron and WorldCom, and the subsequent Sarbanes-Oxley legislation. Reformers in America and elsewhere argued that checks and balances were just as important in the corporate realm as they are in politics. Companies needed to have powerful shareholders and independent directors to keep a watchful eye on managers. In 2009 both the New York Stock Exchange and the NASDAQ demanded that companies should have a majority of independent directors.

Booz & Company’s annual survey of the world’s biggest public companies shows how far-reaching this revolution has been. Firms now routinely separate the jobs of chairman and chief executive: in 2009 less than 12% of incoming CEOs were also made chairmen, compared with 48% in 2002. CEOs are held accountable for their performance—and turfed out if they fail to perform, with the average length of tenure dropping from 8.1 years in 2000 to 6.3 years today. Companies have turned to a new class of professional directors, and would-be directors sign up for bespoke courses at business schools because Sarbanes-Oxley makes them personally liable for the accounts that they sign.

This model is quickly becoming the norm around the world. But is it quite as robust as the reformers claim? The financial crisis of 2007-08 provided the toughest possible test. Some firms weathered it much better than others: America’s Citigroup and Switzerland’s UBS experienced severe losses whereas JPMorgan Chase and Credit Suisse (also in America and Switzerland respectively) suffered far less damage.

Corporate reformers immediately seized on the crisis as yet more proof of their arguments. Banks had always been badly managed, they argued. And banking CEOs were past masters at bamboozling shareholders and directors. Nell Minow, one of the most industrious of the reformers, flatly declared that “the recent volatility” proved that the “need for better corporate governance has never been clearer or more pressing.”

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Sex.sells: The world's most expensive domain names

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Causing More Harm than Good: Conflict-of-Interest Rules Thwart Medical Progress

by Richard Epstein

Forbes
October 26, 2010

In the abstract, just about everyone favors the rapid development and deployment of new pharmaceuticals and medical devices. But when the question turns on how to organize these vital activities, universities, hospitals, and government agencies often adopt strategies that undermine this basic objective. The increased severity of conflict of interest regulation of firms developing drugs and medical devices offers a powerful illustration of the unfortunate recent trends in this area.

More concretely, these two industries are now facing a two-pronged attack. As regards the creation of new knowledge, a wide range of public and private regulations now curb cooperation among research scientists in the industry, the academy, and government. As regards the dissemination of information about new drugs and devices, pharmaceutical companies are subject to increasingly stringent rules on the types of promotional practices that they can use to market their new products. Together, these costly regulatory initiatives spell lower rates of innovation and slower dissemination of newer products.

In a recent report that I prepared for the Manhattan Institute, I seek to develop, at length, the downside of the strong, present push to add more teeth into conflict of interest regulation. It is useful to set out the key steps in the argument as it applies to new drug and device development.

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Happiness rethink

by Tim Harford

Financial Times
October 22, 2010

For many years the received wisdom in economics has been much the same as that in Buddhism: money doesn’t make you happy (see, for instance, “The Seven Secrets of a Happy Life”, FT Weekend Magazine, August 28/29).

I should probably modify my statement though. Economists who study the subject have tended to believe that beyond some minimum, absolute income has little effect on happiness. In any given society, the rich tend to be happier than the poor, but citizens of rich countries are not notably happier than citizens of middle-income countries, and while we are richer than our parents were at our age, we are no happier.

This finding has been called the Easterlin Paradox, after Richard Easterlin, the economist who first observed it back in the 1970s. The paradox has an explanation: what matters is keeping up with the Joneses. If we care only about our place in society, the pattern Easterlin discovered in the data is readily explained.

But two recent pieces of research suggest a different conclusion. “The concept of happiness has to be reorganised,” says Daniel Kahneman, a psychologist who won the Nobel memorial prize in economics in 2002. Much happiness research focuses on “life satisfaction”, where researchers ask people whether they’re satisfied with life as a whole. But Kahneman studies mood: do people, moment by moment, feel content, relaxed or joyful – or stressed, depressed or frustrated?

Kahneman and Angus Deaton, in research published in August in the Proceedings of the National Academy of Sciences, looked at these two measures of happiness in half a million responses to a daily survey of Americans. They found that money is correlated with life satisfaction, but beyond an income of about $75,000, it doesn’t improve your mood: so whether or not Easterlin is right depends on what you mean by happiness.

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Read the Paper by Sacks, Stevenson and Wolfers [Ungated]

Gender arbitrage in South Korea: Profiting from sexism

Economist
October 21, 2010

“Do you know you have to give everything to become a TV announcer?” These words cost Kang Yong-seok, a member of South Korea’s parliament, his membership of the ruling Grand National Party in July. His insinuation that a woman must sleep her way to the top to work in television embarrassed his colleagues and set off a national debate about sexism.

Working women in South Korea earn 63% of what men do. Not all of this is the result of discrimination, but some must be. South Korean women face social pressure to quit when they have children, making it hard to stay on the career fast track. Many large companies have no women at all in senior jobs.

This creates an obvious opportunity. If female talent is undervalued, it should be plentiful and relatively cheap. Firms that hire more women should reap a competitive advantage. And indeed, there is evidence that one type of employer is doing just that.

Jordan Siegel of Harvard Business School reports that foreign multinationals are recruiting large numbers of educated Korean women. In South Korea, lifting the proportion of a firm’s managers who are female by ten percentage points raises its return on assets by one percentage point, Mr Siegel estimates.

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A rational choice

by Burke Frank and Asher Klein

University of Chicago Magazine
September-October 2010

This past June Gary S. Becker, AM’53, PhD’55, Chicago’s University professor in economics, sociology, and Chicago Booth, was awarded the Alumni Association’s highest honor, the Alumni Medal, for a career spent broadening the scope of economic research. It is hardly his first honor; the Princeton graduate also won the John Bates Clark Medal, given to the best U.S. economist under 40, in 1967; the 1992 Nobel Memorial Prize in Economic Sciences; and the Presidential Medal of Freedom in 2007. His studies of human capital, familial relations, crime, and workplace discrimination pioneered an explosion of economic research. A University of Chicago professor since 1970, he also writes a weekly politics and economics blog with Seventh Circuit Federal Appellate Judge and Law School Senior Lecturer Richard Posner. They started the blog in December 2004, after Becker ended 19 years as a BusinessWeek columnist. Collected here are samples of Becker’s thoughts on his work and life.

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Gary Becker's Books

Companies aren’t charities

Economist
October 21, 2010

Steve Coogan, a British comedian, once told a joke about David Beckham, a footballer who is unlikely to win a Nobel prize for physics: “They say, ‘Oh, David Beckham—he’s not very clever.’ Yeah. They don’t say, ‘Stephen Hawking—shit at football.’” Successful corporations are like Mr Beckham. Both excel at one thing: in Mr Beckham’s case, kicking a ball; in the corporations’ case, making profits. They may also be reasonably adept at other things, such as modelling sunglasses or forming task forces to solve environmental problems. But their chief contribution to society comes from their area of specialisation.

Ann Bernstein, the head of a South African think-tank called the Centre for Development and Enterprise, thinks that advocates of corporate social responsibility (CSR) tend to miss this point. In her new book, “The Case for Business in Developing Economies”, she stresses the ways companies benefit society simply by going about their normal business. In a free and competitive market, firms profit by selling goods or services to willing customers. To stay in business, they must offer lower prices or higher quality than their competitors. Those that fail disappear. Those that succeed spread prosperity. Shareholders receive dividends. Employees earn wages. Suppliers win contracts. Ordinary people gain access to luxuries that would have made Cecil Rhodes gasp, such as television, air-conditioning and antibiotics.

These are not new arguments, but Ms Bernstein makes them fresh by writing from an African perspective. Citizens of rich countries often fret about the occasional harm that corporations do, yet take for granted the prosperity they create. People in developing countries do not have that luxury.

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The Diamond, Mortensen and Pissarides Nobel: Search and market frictions

by Barbara Petrongolo
October 15, 2010

The 2010 Nobel Prize in Economics has been awarded to Peter Diamond, Dale Mortensen, and Christopher Pissarides "for their analysis of markets with search frictions". This column explains how their research relates to fundamental economic issues that are both at the core of the wellbeing of society at large and now near the top of many policymakers’ agendas.

Various forms of imperfections or “frictions” characterise most real-world transactions. The coexistence of buyers and sellers in a given market, who can in principle agree on a price, may not be sufficient for immediate trade, as both buyers and sellers may need to invest in a costly search process in order to locate matching partners, and eventually need to agree to enter a transaction rather than wait for better trading opportunities. These frictions derive from several sources, including imperfect information about trading partners, heterogeneous demand and supply, slow mobility, coordination failures and other similar factors. The importance these factors in driving market outcomes is a key issue for understanding such diverse markets as those for a job, a house, and a spouse.

The 2010 Nobel Prize in Economics has been awarded to Peter Diamond, Dale Mortensen, and Christopher Pissarides "for their analysis of markets with search frictions". Search theory provides a versatile framework for understanding market outcomes in a variety of situations in which trade is complex. One key lesson is that, with search frictions, markets fail to clear at all points in time – some buyers and/or sellers remain unmatched. Another important implication is that, when access to information is costly and trade opportunities are infrequent, not all traders may trade at the same market price, leading to dispersion in equilibrium prices. Finally, decentralised equilibrium may be inefficient in a search market, if individuals engage in “too much” or “too little” search, and in this case policy intervention may improve on what markets alone would be able to achieve.

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Capitalism Saved the Miners

by Daniel Henninger

Wall Street Journal
October 14, 2010

It needs to be said. The rescue of the Chilean miners is a smashing victory for free-market capitalism.

Amid the boundless human joy of the miners' liberation, it may seem churlish to make such a claim. It is churlish. These are churlish times, and the stakes are high.

In the United States, with 9.6% unemployment, a notably angry electorate will go to the polls shortly and dump one political party in favor of the other, on which no love is lost. The president of the U.S. is campaigning across the country making this statement at nearly every stop:

"The basic idea is that if we put our blind faith in the market and we let corporations do whatever they want and we leave everybody else to fend for themselves, then America somehow automatically is going to grow and prosper."

Uh, yeah. That's a caricature of the basic idea, but basically that's right. Ask the miners.

If those miners had been trapped a half-mile down like this 25 years ago anywhere on earth, they would be dead. What happened over the past 25 years that meant the difference between life and death for those men?

Short answer: the Center Rock drill bit.

This is the miracle bit that drilled down to the trapped miners. Center Rock Inc. is a private company in Berlin, Pa. It has 74 employees. The drill's rig came from Schramm Inc. in West Chester, Pa. Seeing the disaster, Center Rock's president, Brandon Fisher, called the Chileans to offer his drill. Chile accepted. The miners are alive.

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The Spousal Safety Net

by Nancy Folbre

New York Times
October 12, 2010

In today’s economy, men are lucky if they have a wife in their portfolio. Traditional women’s jobs have been hit less hard by recession than men’s jobs. Many married women have softened the financial impact of their husbands’ unemployment by finding jobs or increasing their hours of paid work.

As a result, dual-earner households are becoming more dual. A recent briefing paper by Kristin Smith of the Carsey Institute of the University of New Hampshire documents a sharp uptick in historical trends. Wives now contribute 47 percent of family income in married-couple households where the wives are employed.

Professor Smith explains that increased reliance on wives’ earnings largely reflects a recession-related decline in men’s employment and earnings.

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The Work Behind the Nobel Prize

by Edward L. Glaeser

New York Times
October 11, 2010

This year’s Nobel Memorial Prize in Economic Science (formally the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) was awarded today to Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides for their research on “markets with search frictions,” which means any setting where buyers and sellers don’t automatically find each other. Search models are relevant in many settings, including dating, used cars and housing, but above all, these models help us make sense of unemployment.

As the United States unemployment rate has remained above 9.4 percent since May 2009, the prize manages both to honor timeless research on core economic questions and to highlight the ways in which economics addresses a most timely global problem.

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See also:

The Official Web Site of the Nobel Prize

Articles in New York Times and Economist.

Research profiles of the three laureates by Tyler Cowen: Peter A. Diamond, Dale T. Mortensen and Christopher A. Pissarides.

"The Diamond-Mortensen-Pissarides Contribution to Economics" by Robert Shimer

Steven Levitt (NYT) on Peter Diamond

Books by the 2010 Nobel Laureates in Economic Science

I Can Afford Higher Taxes. But They’ll Make Me Work Less

by N. Gregory Mankiw

New York Times
October 9, 2010

An important issue dividing the political parties is whether to raise taxes on those earning more than $250,000 a year. Democrats say these taxpayers can afford to chip in a bit more. Republicans say raising taxes on those who already face the highest marginal tax rates will hurt the economy.

So I thought it might be useful to do a case study on one of these high-income taxpayers. Fortunately, I have one handy: me.

As a professor at Harvard and the author of some popular textbooks, I am comfortably in the income range that would be hit by this tax increase. I have been thinking — narcissistically, to be sure — about how higher taxes would affect me. Maybe these thoughts can shed some light on some of the broader policy issues.

First, I have to acknowledge that the Democrats are right about one thing: I can afford to pay more in taxes. My income is not in the same league as superstar actors and hedge fund managers, but I have been very lucky nonetheless. Unlike many other Americans, I don’t have trouble making ends meet.

Indeed, I could go so far as to say I am almost completely sated. One reason is that I don’t aspire for much more than a typical upper-middle-class lifestyle. I don’t fly around on a private jet. I have little desire to own a yacht or a Ferrari. I own only one home, in which I have lived since 1987. Paying an extra few percent in taxes wouldn’t create a lot of hardship.

Nonetheless, as Republicans emphasize, taxes influence the decisions I make. I am regularly offered opportunities to earn extra money. It could be by talking to a business group, consulting on a legal case, giving a guest lecture, teaching summer school or writing an article. I turn down most but accept a few.

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see also this and then this

How Much Does the Market Organization of Economic Life Matter?

Grasping Reality with Both Hands
The Semi-Daily Journal of Economist J. Bradford DeLong
October 7, 2010

How much does the use of markets as a decentralized social planning mechanism for economic life matter? How much richer are we because we live in a market economy rather than in a command-and-control bureaucratic economy?

We are fortunate--if that is the word--to be able to answer this question because the twentieth century provided us with a natural experiment in the form of High Stalinist central planning. Karl Marx, you see, completely missed the utility of markets as devices for providing decision makers with proper incentives and for achieving allocative efficiency. (Why he missed this is, I think, a result of his crazy metaphysics of value, but I won't go there today.) He saw markets only as surplus extraction devices--ways to quickly and fully separate the powerless from the value that they had created and that ought to have been theirs.

So when the Communists took over, they followed Marx and said: "we don't want no stinking markets in our economies." This naturally raised the question of how they were then to coordinate economic activity. And they hit on the clever plan of attempting to reproduce the Rathenau-Ludendorff Imperial German war economy of World War I. And they did so.

In 1989, the Iron Curtain came down, and we could see what a difference it made as we could examine levels of material well-being on both sides of the Curtain. This is as close to a perfect natural experiment as anyone could wish: the Iron Curtain's location was determined by where Stalin's and Mao's and Giap's armies marched--which is as exogenous to other determinants of economic well-being as anyone could wish.

Here are the results:

Material Well-Being in 1991: Matched Countries on Both Sides of the Iron Curtain

Eschewing markets robs you of between 80% and 90% of your potential economic productivity.

Now you can argue that the difference in human well-being is less than this gap in material wealth. Cuba, after all, has a high life expectancy and a low level of inequality.

Or you can argue that the difference in human well-being is much, much greater than this gap in material wealth:

Put me down on the much, much greater side of the argument.

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Corruption Alive and Well in Legal Systems Across the Globe

Wall Street Journal
October 4, 2010

Two organizations — the International Bar Association and the Organization for Economic Cooperation and Development — on Monday issued the results of a survey on lawyers and international corruption.

The findings are sobering.

More than a fifth of lawyers working in 95 jurisdictions around the world have been approached to act as an agent in a transaction that involved international corruption.

Furthermore, of the 642 lawyers who responded to an online survey between June 15 and July 5, nearly a third said a lawyer they know has been involved in international corruption.

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