The Great Cyberheist

by James Verini

New York Times Magazine
November 10, 2010

One night in July 2003, a little before midnight, a plainclothes N.Y.P.D. detective, investigating a series of car thefts in upper Manhattan, followed a suspicious-looking young man with long, stringy hair and a nose ring into the A.T.M. lobby of a bank. Pretending to use one of the machines, the detective watched as the man pulled a debit card from his pocket and withdrew hundreds of dollars in cash. Then he pulled out another card and did the same thing. Then another, and another. The guy wasn’t stealing cars, but the detective figured he was stealing something.

Indeed, the young man was in the act of “cashing out,” as he would later admit. He had programmed a stack of blank debit cards with stolen card numbers and was withdrawing as much cash as he could from each account. He was doing this just before 12 a.m., because that’s when daily withdrawal limits end, and a “casher” can double his take with another withdrawal a few minutes later. To throw off anyone who might later look at surveillance footage, the young man was wearing a woman’s wig and a costume-jewelry nose ring. The detective asked his name, and though the man went by many aliases on the Internet — sometimes he was cumbajohny, sometimes segvec, but his favorite was soupnazi — he politely told the truth. “Albert Gonzalez,” he said.

After Gonzalez was arrested, word quickly made its way to the New Jersey U.S. attorney’s office in Newark, which, along with agents from the Secret Service’s Electronic Crimes Task Force, had been investigating credit- and debit-card fraud involving cashers in the area, without much luck. Gonzalez was debriefed and soon found to be a rare catch. Not only did he have data on millions of card accounts stored on the computer back in his New Jersey apartment, but he also had a knack for patiently explaining his expertise in online card fraud. As one former Secret Service agent told me, Gonzalez was extremely intelligent. “He knew computers. He knew fraud. He was good.”

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What, No Dead Babies?

by Jacob Sullum

Reason
November 11, 2010

Yesterday the Food and Drug Administration proposed new, bigger, colorized, and illustrated cigarette warning labels. The theory behind the labels, required by the Family Smoking Prevention and Tobacco Control Act, is that people already know that smoking is bad for them, but they need to be reminded good and hard. The FDA is suggesting a few possible illustrations for each of nine rotating warnings. Below are a few of my favorites.

By contrast, comic-book-style warnings like the one showing a premature infant in an incubator have an air of unreality that undermines the FDA's point, as do the secondhand smoke warnings that show smokers breathing directly into the faces of babies and old ladies. The illustrations showing what you can do when you quit smoking (blow bubbles, wear a T-shirt bragging about your feat, clog your toilet with cigarettes) can be charitably described as uninspired. And I am not buying the second strokes-and-heart-disease guy. Is he having a heart attack or a stroke? The hand to his head suggests a stroke, while the hand to his chest suggests a heart attack (although it's on the wrong side of his chest). Maybe he's having both—or it could be indigestion combined with a migraine. He's got to go.

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Wal-Mart Says ‘Try This On’: Free Shipping

New York Times
November 11, 2010

For years, Wal-Mart has used its clout as the nation’s largest retailer to squeeze competitors with rock-bottom prices in its stores. Now it is trying to throw a holiday knockout punch online.

Starting Thursday, Wal-Mart Stores plans to offer free shipping on its Web site, with no minimum purchase, on almost 60,000 gift items, including many toys and electronics. The offer will run through Dec. 20, when Wal-Mart said it might consider other free-shipping deals.

“Everyone’s trying to figure out how we can serve a customer that’s trying to save every penny they can,” said Steve Nave, senior vice president and general manager of Walmart.com. “It’s the most competitive offer out there, and we’re pretty excited about it.”

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Can't Buy You Love

by Jacob Sullum

Reason
November 10, 2010

Two months ago, The New York Times reported that "Democratic officials" believed "corporate interests, newly emboldened by regulatory changes," were trying to "buy the election." But it turned out the election was not for sale—at least, not to the highest bidder.

According to data collected by the Center for Responsive Politics, Democrats and Republicans each shelled out $1.6 billion during this election cycle, including spending by candidates, parties, party committees, and independent groups. In terms of spending, the two parties were evenly matched. But that is not how it looked on election night.

A closer look provides further evidence that Republicans did not win by outspending their opponents. They got substantially more votes in House races, where they spent less than Democrats yet picked up more than 60 seats (and control of the chamber), than they did in Senate races, where they spent more than Democrats and added half a dozen seats.

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Even a filthy habit deserves a fair hearing

by John Kay

Financial Times
November 9, 2010

Like me, you probably disapprove of drinking and driving and dislike it when people smoke. So, like me, you may have been impressed by reports that reducing Britain’s limit on blood alcohol content for drivers would save several hundred lives a year and that the ban on smoking in public places has significantly reduced the incidence of heart attacks among non-smokers. But then I looked at the evidence for these claims.

Most analysis of the association between drinking and road accidents is based on investigation of blood alcohol levels in victims of fatal road accidents. One conclusion jumps out from these data. Most people who have been drinking and are killed on the road are not close to the limit. They are drunk. Two-thirds of victims of fatal road accidents who were over the legal limit had blood alcohol levels more than twice the legal limit. Many of them had consumed much more.

The claim that reducing the legal limit would save many lives is entirely based on the belief that such a measure would have a big effect on the behaviour of people who are already well above the legal limit. The principal evidence for this claim is a study undertaken in South Australia. But the incidence of drunk driving in South Australia was then 10 times the current figure in the UK. Australia used to have a culture of the drive-in bottle shop, which would fill your car boot with cans of beer. A raft of policies have sensibly addressed the issue. The social context is so different that Australian experience is almost irrelevant.

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How Donald Shoup Will Find You a Parking Spot

Reason TV
November 9, 2010

Can't find curb-side parking? UCLA economist Donald Shoup can find you a space.

Professor Shoup is the author of The High Cost of Free Parking, and points out that, "just because the driver doesn't pay for parking doesn't mean the cost goes away."

In addition to making it harder to find a spot when you need one, "free" parking exacerbates other problems, from pollution to traffic congestion. Using the power of market pricing, Shoup explains how to fix the parking mess in three steps.

Cities from San Fransisco to Washington, DC are already adopting Shoup's reforms.

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Some judges chastise banks over foreclosure paperwork

Washington Post
November 9, 2010

A year ago, Long Island Judge Jeffrey Spinner concluded that a mortgage company's paperwork in a foreclosure case was so flawed and its behavior in negotiations with the borrower so "repugnant" that he erased the family's $292,500 debt and gave the house back for free.

The judgment in favor of the homeowner, Diane Yano-Horoski, which is being appealed, has alarmed the nation's biggest lenders, who say it could establish a dramatic new legal precedent and roil the nation's foreclosure system.

It is not the only case that has big banks worried. Spinner and some of colleagues in the New York City area estimate they are dismissing 20 to 50 percent of foreclosure cases on the basis of sloppy or fraudulent paperwork filed by lenders.

Their decisions illustrate the central role lower court judges will have in resolving the country's foreclosure debacle. The mess came to light after lawsuits and media reports showed lenders were routinely filing shoddy or fraudulent papers to seize the homes of borrowers who had missed payments.

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Why is America so rich?

Economist
November 9, 2010

Economic gloom and doom aside, America remains the world's richest large country. It's generally estimated to have a per capita GDP level around $45,000, while the richest European nations manage only a $40,000 or so per capita GDP (setting aside low population, oil-rich states like Norway). Wealth underlies America's sense of itself as a special country, and it's also cited as evidence that America is better than other economies on a range of variables, from economic freedom to optimism to business savvy to work ethic.

But why exactly is America so rich? Karl Smith ventures an explanation:

I am going to go pretty conventional on this one and say a combination of three big factors


1. The Common Law
2. Massive Immigration
3. The Great Scientific Exodus during WWII


You’ll notice that four of the top five countries in the Human Development Index have the Common Law and the top, Norway, is a awash in oil. Without the petro-kronors they probably wouldn’t be so hot.


You’ll also notice that 3 of the top 4, again with Norway the odd man out, are immigrant nations. The founder effect here should be clear.


The bonus from the great exodus is definitely waning. Most of our hey-day German and Jewish scientists are dying off, but its still given us a boost that lingers to this day. There is no fundamental reason why the US should be the center of the scientific world but for a time it was the only place in the world safe for many scientists.

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Anti-Smoking Programs Are Slashed

Wall Street Journal
November 9, 2010

Many cash-strapped U.S. states are slashing budgets for tobacco-prevention programs, raising alarms among public-health groups as the nation's progress toward getting adult smokers to quit has stalled.

The adult smoking rate was 20.6% in 2009, the same as a year earlier and largely unchanged since 2004, according to the Centers for Disease Control and Prevention. That amounted to 46.6 million adult smokers in 2009.

States have cut their combined funding for smoking prevention in the current fiscal year to the lowest level since 1999, according to data gathered by a coalition of antismoking groups for a report that will be released later this month.

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How to Fix a Broken Marketplace

Harvard Business School Working Knowledge
November 8, 2010

An economic handyman of sorts, Alvin E. Roth fixes broken markets.

As a pioneer in the field of market design, the Harvard Business School professor cofounded a kidney donation matching system for New England, corrected public school choice programs in New York and Boston, and tackled the market for new medical residents, economists, and lawyers. (Last week, Forbes magazine named him one of the world's "seven most powerful new economists.")

"Market design is the engineering part of game theory," Roth explains. "It's the underlying science of how the details work and how the parts fit together. We deal with much more complicated games than the game theory usually deals with."

In short, Roth has determined that successful marketplaces require three key elements. "They must be thick, uncongested, and safe," he says.

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Corruption as a barrier to entry

by Nauro F. Campos, Saul Estrin and Eugenio Proto

Vox
November 8, 2010

Conventional wisdom says that corruption hurts the economy because it taxes investment and weakens public services. This column presents evidence from interviews with CEOs in Brazil. It argues that corruption acts as a barrier to entry, with potential entrants put off by the uncertainty over what bribes to pay and when to pay them.

Corruption is often viewed as having a negative effect on economic performance. Mauro (1995) considers it as a tax on investment while Goulder, Parry and Burtraw (1997) suggest bribes may reduce public service provision because they substitute for taxation.

While some argue that corruption can “grease the wheels of growth” by addressing inefficiencies created by government intervention (Méon and Sekkat 2005), the econometric evidence supporting a negative effect is overwhelming (see Bardham, 1997, and Pande, 2008, for authoritative surveys). Despite this body of evidence, the exact mechanisms through which the harmful effect of corruption operates onto enterprise and national economic performance are still not fully understood. This column summarises recent research presenting a different mechanism and econometric evidence of its importance.

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Marek Kaminski. "Games Prisoners Play: The Tragicomic Worlds of Polish Prison"

On March 11, 1985, a van was pulled over in Warsaw for a routine traffic check that turned out to be anything but routine. Inside was Marek Kaminski, a Warsaw University student who also ran an underground press for Solidarity. The police discovered illegal books in the vehicle, and in a matter of hours five secret police escorted Kaminski to jail. A sociology and mathematics major one day, Kaminski was the next a political prisoner trying to adjust to a bizarre and dangerous new world. This remarkable book represents his attempts to understand that world.

As a coping strategy until he won his freedom half a year later by faking serious illness, Kaminski took clandestine notes on prison subculture. Much later, he discovered the key to unlocking that culture--game theory. Prison first appeared an irrational world of unpredictable violence and arbitrary codes of conduct. But as Kaminski shows in riveting detail, prisoners, to survive and prosper, have to master strategic decision-making. A clever move can shorten a sentence; a bad decision can lead to rape, beating, or social isolation. Much of the confusion in interpreting prison behavior, he argues, arises from a failure to understand that inmates are driven not by pathological emotion but by predictable and rational calculations.

Kaminski presents unsparing accounts of initiation rituals, secret codes, caste structures, prison sex, self-injuries, and of the humor that makes this brutal world more bearable. This is a work of unusual power, originality, and eloquence, with implications for understanding human behavior far beyond the walls of one Polish prison.

Marek M. Kaminski is Assistant Professor of Political Science and Mathematical Behavioral Science at the University of California, Irvine. Between 1982 and 1989 he managed Solidarity's underground publishing house STOP.

Written with refreshing directness--funny and horrible by turns--and complemented by delightful illustrations, Games Prisoners Play . . . makes a highly original contribution to the literature on prisons. The book will also prove valuable for introducing game theory. . . . There could be no better advertisement for rational choice.

Michael Biggs, American Journal of Sociology

Games Prisoners Play is not just a superb description of prison life but also a provocative analysis of why the choices prisoners make under difficult circumstances are rational. The lens through which Kaminski views these choices is elementary game theory, which he uses to elucidate the subtleties of different strategic situations in a highly imaginative way. This book ranks with only a handful of works I know of that apply game theory, in depth, to unusual subjects and end up enriching both the subject and the theory.

Steven J. Brams, New York University, author of Theory of Moves
and coauthor of Fair Division: From Cake-Cutting to Dispute Resolution

An exceptionally interesting book, and a very engaging read, Games Prisoners Play is bound to make a major impact on scholarship in the field. I would be very surprised if it did not become a staple reference for any study of prison life for years to come.

Diego Gambetta, author of The Sicilian Mafia

A terrific achievement. Marek Kaminski combines a unique 'fieldwork' in Polish prisons with insightful models of prisoners' behavior. This is an exceptional contribution to the ethnography of prison life and an imaginative application of game theory. It is also a memoir in its own right.

Federico Varese, author of The Russian Mafia

Economic Freedom of the World: 2010 Annual Report

The foundations of economic freedom are personal choice, voluntary exchange, and open markets. As Adam Smith, Milton Friedman, and Friedrich Hayek have stressed, freedom of exchange and market coordination provide the fuel for economic progress. Without exchange and entrepreneurial activity coordinated through markets, modern living standards would be impossible.

Potentially advantageous exchanges do not always occur. Their realization is dependent on the presence of sound money, rule of law, and security of property rights, among other factors. Economic Freedom of the World seeks to measure the consistency of the institutions and policies of various countries with voluntary exchange and the other dimensions of economic freedom. The report is copublished by the Cato Institute, the Fraser Institute in Canada and more than 70 think tanks around the world.

View an interactive map of economic freedom

This year's report notes that economic freedom suffered its first setback in decades. The average economic freedom score rose from 5.55 (out of 10) in 1980 to 6.70 in 2007, but fell back to 6.67 in 2008, the most recent year for which data are available. Of the 123 countries with chain-linked ratings in 2007 and 2008, 88 exhibited rating decreases and only 35 recorded rating increases. In this year’s index, Hong Kong retains the highest rating for economic freedom, 9.05 out of 10, followed by Singapore, New Zealand, Switzerland, Chile, the United States, Canada, Australia, Mauritius, and the United Kingdom.

This year's report also contains new research showing the impact of economic freedom on unemployment rates and homicides. According to Horst Feldmann, more economic freedom appears to reduce joblessness, and the magnitude of the effect seems to be substantial, especially among young people. Edward Peter Stringham and John Levendis examine the effect of economic freedom on rates of homicide in Venezuela, Colombia, South Africa, Latvia, and Lithuania. The results suggest that increases in economic freedom lead to decreases in homicides.

The first Economic Freedom of the World Report, published in 1996, was the result of a decade of research by a team which included several Nobel Laureates and over 60 other leading scholars in a broad range of fields, from economics to political science, and from law to philosophy. This is the 14th edition of Economic Freedom of the World and this year's publication ranks 141 nations for 2008, the most recent year for which data are available.

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The Cost of a Vote Goes Up

by Eduardo Porter

New York Times
November 6, 2010

The votes are in; the money has been counted. We can start assessing the damage to American democracy caused by the Supreme Court’s decision to allow corporations, unions and their lobby groups a free hand to deploy their money to elect the candidates of their choice. Already one thing seems certain: Votes are getting more expensive.

In the midterm elections four years ago, candidates and their friends spent a little over $2.8 billion, according to the Center for Responsive Politics, to garner some 86 million votes. The cost was about $33 per voter. Data from this week’s election is still coming in. But it seems that total spending will hit $4 billion, which would make this year’s voters about $10 more expensive.

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The Pitfalls of Calculating Bad Behavior's True Cost

by Carl Bialik

Wall Street Journal
November 6, 2010

Warning: You might get sticker shock from reading several recent health studies.

A murder costs society $17.25 million, or about 50 times an armed robbery, according to a research team from Iowa State University. A paper from Spain put the average "price" of a pack of cigarettes for men at about $150. And a group of U.K. health experts considered a range of social, economic and health costs when trying to determine which recreational drug was most harmful. Alcohol won.

Sticker shock is the point of these studies, which attempt to classify societal ills in terms anyone can understand. By assigning a price tag that sums up medical, economic and other burdens, researchers are hoping to influence policy makers who weigh spending on these concerns against other priorities. And if a high dollar figure captures the public's attention, as all the recent studies did, so much the better.

"Sometimes for these studies, their main purpose is shock value," says Kenneth Warner, dean of the University of Michigan's school of public health.

That doesn't mean the studies lack merit. Crime and drugs that shorten lifespans or diminish quality of life impose real costs in productivity and medical spending, say economists. But measuring these costs can be tricky, especially when it comes to assigning value to a year of human life. The recent studies had varying levels of success grappling with these issues.

Looking at five major crimes—murder; rape; armed robbery; aggravated assault; burglary—Iowa State researchers estimated the costs to victims, to the judicial system, and to the economy from loss of productivity from the perpetrator. Then they tacked on a more-subjective measure, willingness to pay, which attempts to quantify how much an average American would spend to avoid experiencing these crimes. Derived from surveys on spending on personal security, the measure was meant to capture the negative experience of the crime itself. For all five crimes, it represented the bulk of the cost.

Willingness-to-pay estimates trouble some researchers because people might overestimate how much they would actually spend.

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Cabby Capitalism

by Anne Kadet

Wall Street Journal
November 6, 2010

I remember the first time I heard a cabby brag about his genius medallion investment. In just five years, the value of his city-issued taxi operator's license had tripled, to $300,000. "Boy," I thought. "I really should look into that."

Yes, I really should have. Since 2001, the value of a corporate medallion (the kind you can own without personally driving a cab) quadrupled, to $825,000. Values have risen so steeply that the combined value of the city's 13,237 medallions now tops $10 billion. That's bigger than J.C. Penney, bigger than Whole Foods, bigger than ConAgra. If New York medallions traded on the NYSE, they'd qualify as a large-cap stock.

Not surprisingly, with all that money driving around, there's a whole cottage industry in place to support medallion investors. New York boasts 26 licensed medallion brokers and 69 medallion-leasing agents. We've even got a slew of lenders and a midsize bank dedicated to—you guessed it—medallion loans.

Medallion Financial (Nasdaq: TAXI) has a tagline: "In niches there are riches," and President Andrew Murstein says business is booming. Since his father, Alvin, a former fleet operator, founded the bank back in the 1950s, it's made $5 billion in medallion-backed loans, with zero losses. It's hard to repossess a house, but it's easy to repossess a medallion: You just hire a repo man to pluck it off the taxi's hood.

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Estate Tax Issue Offers Quick Test for Congress

by Richard Thaler

New York Times
November 6, 2010

After their election victory on Tuesday, Republican leaders in the House promised progress on many fronts, including a turn toward more fiscal discipline and less economic uncertainty.

They have a chance to start work on these goals almost immediately, because the lame-duck Congress soon will face a pressing issue that directly concerns both themes: the estate tax.

The uncertainty imbedded in this tax was actually written into the law in 2001 by a Republican-controlled Congress.

In what some wags have called the “throw momma from the train” provision, the law stipulated that the estate tax would disappear in 2010, only to reappear in 2011 at the lower exemption level and higher rates that were in place in 2001. (To give proper credit, this provision should really be called the “planned Bush tax increase.”) The law has made 2010 the best time for tax-conscious rich people to die

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A sense of fair play does pay

by Tim Harford

Financial Times
November 5, 2010

I recently had the dubious pleasure of having to deal with someone who is successful and indeed popular, and yet a stubborn, selfish bully when he thinks nobody is looking. It moved me to speculate on an old question: do nice guys finish first, or last?

No doubt whole libraries are filled with psychological and historical research on the topic. To an economist, the natural way to understand such questions is to turn to game theory, which is a way of turning decisions into a simplified mathematical format. Specifically, game-theoretic decisions are those with more than one player, where each player’s choices alter the other players’ incentives.

In one of the simplest games, “Ultimatum”, one player (Abby) receives an envelope containing 100 one-dollar bills. She has to decide how much to offer to the second player (Zach). Zach either accepts this ultimatum, or both players lose everything. If Zach is motivated only by cash, then a single dollar will be enough to get him to agree. Real people have other concerns, and when the game is played in the laboratory, the first player usually offers a more even split, and tends to regret it if her offer is too miserly.

Ultimatum is a fascinating game: Molly Crockett of the University of Cambridge is part of a team examining whether people play Ultimatum differently when drugs are used to lower their serotonin levels. (They do, rejecting more unfair offers.) John List of the University of Chicago has shown that what people offer and accept is highly sensitive to the experimental context – for instance, whether the initial money was perceived as having been earned.

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Money doesn't buy many wins for self-funded candidates

Washington Post
November 4, 2010

Wealthy future candidates, take note: It turns out that most of the time, money really can't buy you political happiness.

Tuesday's midterms featured an unusually large crop of moguls who sought to ease their way into power by pouring millions of their own dollars into their campaigns. In most cases, they failed spectacularly.

The most obvious - and jaw-dropping - example came in the California gubernatorial race, where Republican Meg Whitman spent $175 million of her eBay fortune to lose badly to former Democratic governor Jerry Brown. That works out to about $57 for each of the roughly 3 million votes she won.

As GOP consultant Alex Castellanos quipped on CNN: "I could have lost that race for only $80 million."

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Richard Thaler on Behavioral Economics

University of California at Berkeley
Institute of International Studies
October 19, 2010

Conversations with History
Conversations host Harry Kreisler welcomes Professor Richard H. Thaler for a discussion of behavioral economics. Professor Thaler discusses theory in economics, how observed human behavior points to anomalies that contradict what theory predicts will happen, and the implications of behavioral economics for public policy including its contribution to understanding the 2008 economic collapse and to shaping future regulation.

Truth in Media: Competition and Truth in the Market for News

Capital Ideas
October 2010

Research by Matthew Gentzkow and Jesse M. Shapiro

Matthew Gentzkow is Professor of Economics and Neubauer Family Faculty Fellow at the University of Chicago Booth School of Business.

Jesse M. Shapiro is Professor of Economics and Robert King Steel Faculty Fellow at the University of Chicago Booth School of Business.

Competition between news outlets can bring their audience closer to the truth, but consumers' own preference for news that is more entertaining than informative may push them further away.

If news outlets fail to report the truth, can more competition in news markets help? The more points of view that are heard and defended, the more likely that people's beliefs will converge to the truth. However, many have questioned whether press competition is truly beneficial. Some cite Britain's BBC as an example of a high-quality public news network that is insulated from traditional product market competition. Others have argued that increased market pressure can sometimes lead to cutbacks in reporting and editorial quality and that falsehoods can persist for a long time despite intense competition among news outlets.

To evaluate to what extent competition leads to more accurate reporting, a study titled "Competition and Truth in the Market for News" by Chicago Booth professors Matthew Gentzkow and Jesse M. Shapiro brings together evidence from the authors' own work as well as other research on how increasing the number of independently owned media firms can affect various distortions that keep news outlets from reporting the truth. These distortions can come from either the supply side or the demand side of the media market.

Without competition, governments can manipulate the news and news providers can manipulate their audience by promoting their own agendas. Moreover, a media outlet with few or no competitors will have little incentive to invest in providing timely and accurate coverage. As a result, competition can help promote press independence, diversity of views, and investment in quality reporting by providing incentives that remove such supply-side distortions.

On the other hand, the power of competition to discipline biases that originate from the demand side of the news market is more ambiguous. If consumers actually prefer biased news because it confirms their prior beliefs or if they demand less socially relevant news—such as car chases and celebrity scandals—then competition may actually exacerbate these preferences by providing only the kind of news coverage that people want.

This is especially true if consumers read or listen to news that "slants" to their beliefs partly out of a desire to be entertained. On the other hand, if consumers choose like-minded sources because they truly believe that these are more accurate, then competition can still keep media outlets somewhat honest if they know that a rival firm can expose them for reporting something that is too far from the truth.

The idea that giving consumers what they want may lead to an abundance of less socially relevant news may be a powerful argument against competition in the media. While this cost must be weighed against the benefits of preserving independence and diversity of views in the press, it is unclear that a regulatory agency would be successful at making people consume the type of news that the government deems important. "That would rely on government doing a better job of figuring out what news people should hear and then forcing them to hear that news," says Gentzkow. "It is not obvious that the government is going to be very good at that."

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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 Kahneman and Angus

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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Read the Paper

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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Read the Study