Monthly Archives: March 2007

Not So Misguided Economists

Our friend JC Bradbury of Sabernomics responds to the Freakonomics criticism:

Economists most certainly should study important questions. I’ve done plenty of research on topics that have nothing to do with sports—all with more relevant real-world applications—yet that shouldn’t stop me from studying puzzles that intrigue me as an economist. An unanswered puzzle, means there is something about the world that we can’t properly explain. The answer might yield only the acquisition of knowledge about this subject, or it might have indirect applications that can help us solve more important problems….

Read the whole thing.

Insightful Reader

One of the many readers of our friend Don Luskin’s blog sent him this insightful comment:

Now, let me get this straight.

When we are talking about climate change, “consensus” is invoked as the ultimate argument that this is, after all “settled science.” Breaking with that consensus gets one labeled anti-intellectual, anti-science. One is a “denier,” with its interwoven echoes of holocaust deniers and “being in denial” in the pop-psychological sense. It is prima facie evidence of being stupid or in the pay of big energy.

On the other hand, when we are talking about free trade, the argument that “99% of economists since the days of Adam Smith” are free traders, which might be taken to be “consensus,” appears to be unpersuasive…

Indeed.

Everybody’s A Banker

Nicholas Kristoff has written an excellent piece for New York Times ($$) about his experience with microfinance:

For those readers who ask me what they can do to help fight poverty, one option is to sit down at your computer and become a microfinancier.

That’s what I did recently. From my laptop in New York, I lent $25 each to the owner of a TV repair shop in Afghanistan, a baker in Afghanistan, and a single mother running a clothing shop in the Dominican Republic. I did this through www.kiva.org, a Web site that provides information about entrepreneurs in poor countries — their photos, loan proposals and credit history — and allows people to make direct loans to them.

So on my arrival here in Afghanistan, I visited my new business partners to see how they were doing.

On a muddy street in Kabul, Abdul Satar, a bushy-bearded man of 64, was sitting in the window of his bakery selling loaves for 12 cents each. He was astonished when I introduced myself as his banker, but he allowed me to analyze his business plan by sampling his bread: It was delicious.

[...]

A young American couple, Matthew and Jessica Flannery, founded Kiva after they worked in Africa and realized that a major impediment to economic development was the unavailability of credit at any reasonable cost.

“I believe the real solutions to poverty alleviation hinge on bringing capitalism and business to areas where there wasn’t business or where it wasn’t efficient,” Mr. Flannery said. He added: “This doesn’t have to be charity. You can partner with someone who’s halfway around the world.”

This is capitalism at its finest.

You should definitely check out the site.

The Housing Market

Austan Goolsbee tackles the mortgage lending in his latest ‘Economic Scene’ article for The New York Times:

Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.

A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.

These economists followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.

[...]

The traditional causes of foreclosure, even before there was subprime lending, were job loss, divorce and major medical expenses. And the national foreclosure data seem to suggest that these issues remain paramount. The latest numbers show that foreclosures have been concentrated not in places where real estate bubbles have supposedly been popping, but rather in places whose economies have stagnated — the hurricane-torn communities on the Gulf of Mexico and the industrial Midwest states like Ohio, Michigan and Indiana, where the domestic auto industry has suffered. These do not automatically point to subprime lending as the leading cause of foreclosure problems.

Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people. As Professor Rosen explains, “The main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment.” It has allowed them access to mortgages whereas lenders would have once just turned them away.

Read the whole thing.

Misguided Economists?

Noam Scheiber writes in The New Republic:

How was it that these students, who had arrived at the country’s premier economics department [Harvard] intending to solve the world’s most intractable problems – poverty, inequality, unemployment – had ended up facing off in what sometimes felt like an academic parlor game?

With the 2005 publication of Freakonomics, the breezy exposition of Chicago economist Steven D. Levitt’s oeuvre, the rest of the world has come to see that economists are capable of spectacular feats of cleverness – and to a degree I couldn’t imagine back in my poseur days. In the search for what’s known as “clean identification” – a situation in which it’s easy to discern the causal forces in play – Levitt has turned to such offbeat contexts as Japanese sumo-wrestling and the seedy world of Chicago real estate. He has studied racial discrimination on “Weakest Link,” a once-popular game show, and reflected on the scourge of white-collar bagel-filching. This has, in turn, inspired a flurry of imitators, including papers on such topics as point-shaving in college basketball, underused gym memberships, and the parking tickets of U.N. diplomats.

Within the frequently tedious body of economics scholarship, these papers stand out as fantastically entertaining. Judging from the dizzying sales of Freakonomics and the thousands of lecture halls across the country now bursting with econ majors, they’ve also been wildly successful at ginning up interest in the discipline. But it does make you worry: What if, somewhere along the road from Angrist to Levitt to Levitt’s growing list of imitators, all the cleverness has crowded out some of the truly deep questions we rely on economists to answer?

UPDATE: Alex Tabarrok disagrees:

I think Scheiber is off in a few ways. First, he conflates methods and questions. It’s true that clean identification is often found with quirky experiments but a quirky experiment does not necessarily imply a quirky question. Hoxby’s work on education, mentioned above, is asking a big question about the effect of competition on schools. Levitt’s work on crime uses quirks in police assignment as do those of his “pale imitators” (like those guys that used terror alert levels to estimate the effectiveness of police on the street. Ha, ha!) but we spend well over 100 billion dollars a year combating crime so it’s pretty damn important to know how well police, prisons and punishment work. Scheiber criticizes Emily Oster’s work but his criticism has nothing to do with his thesis, Oster’s work on AIDS, missing women and so forth is on big questions. It’s possible to be clever and to think big.

Read the whole thing.

Lose Access?

The Associated Press reports:

Sixty million consumers would lose access to baseball’s television package of out-of-market games if the sport is allowed to strike an exclusive deal with DirecTV, according to Sen. John Kerry.

I am perplexed to how this excludes sixty million customers. Let’s look at the facts…

1.) DirecTV obtains the exclusive rights to “MLB Extra Innings”, which allows viewers to watch out-of-market games. They similarly have exclusive rights to NFL games the the NFL’s “Sunday Ticket”.

2.) DirecTV obtains these rights in an effort to attract customers who value these packages. If a consumer is “exluded” (i.e. doesn’t have DirecTV), he/she can gain access very simply by switching to DirecTV.

3.) The costs of transitioning from cable to satellite are small (if any exist at all). DirecTV routinely gives away its equipment in exchange for an agreement to use their services for 1 year. In addition, many states do not charge taxes on satellite service, whereas they do levy taxes on cable. Local channels, which long impeded the diffusion of satellite services are now available in most markets as well. Thus the tranisition cost is essentially the time cost of making a phone call to DirecTV to obtain their service.

Exclusive deals with certain service providers does not cause the exclusion of customers. If they value “MLB Extra Innings” more than the costs associated with switching to DirecTV then the customer should switch. If not, they should keep their cable service. It is as simple as that.

Run for the hills

The AP reports:

“We’re going to have universal health care when I’m president — there’s no doubt about that. We’re going to get it done,” the New York senator and front-runner for the 2008 nomination said.

Long wait times, fewer treatments, government bureaucrats making decisions…what’s not to love?

HT: QandO

Addition by, well, addition

Gary Shaw, a former boxing promoter, recently formed a mixed martial arts organization that was designed to showcase the best fighters in the world — regarless of their company affiliation. The Fertitta brothers, who own the parent company of the UFC, have decided that they have a better idea to bring the best fighters to one stage. They are buying all the competition. The AP reports:

The majority owners of Ultimate Fighting Championship have agreed to buy their biggest mixed martial arts rival, Pride Fighting Championships, in a deal that will establish megafights among the outfits’ titleholders and possibly attract huge pay-per-view audiences.

Company executives declined to comment on the sales price, but a person familiar with the negotiations told The Associated Press that brothers Lorenzo and Frank Fertitta will purchase the Japan-based Pride for less than $70 million. The person was not authorized to speak to reporters and spoke on condition of anonymity.

[...]

Buying Pride is the latest in a series of acquisitions that the brothers have made in the last six months. Zuffa snapped up World Extreme Cagefighting and World Fighting Alliance last year.

Similar to Pride, buying WFA gave UFC the rights to a popular fighter named Quinton “Rampage” Jackson. Jackson will face UFC’s most popular fighter, Chuck Liddell, the current light heavyweight champ in Las Vegas, on May 26 on PPV.

I have previously highlighted the rise of the UFC since the Fertitta’s took over in 2001 here.

Final Round Scores

Commentators for a recent PGA Tour event wondered allowed why their are less low rounds on Sunday amongst the leaders. Brian Goff of the Sports Economist agrees with Johnny Miller:

Dan Hicks, Miller’s play-by-play colleague, suggested that Tiger’s presence may an intimidating factor. Miller offered a more economics-oriented answer (paraphrased):

“The prize money has grown so much on the PGA tour that now the today’s purse is $8 million with $1.5 million to the winner and $800,000 to second place. $800,000 is a lot of money.”

In essence, Miller suggested an “income effect” as the answer — prize money is so high to support large paychecks for non-winners. I’m not sure that his (and my) perception of few low Sunday rounds near the top of the leaderboard is correct or that the income effect is the answer, but it’s worth investigating.

In a related note, Johnny Miller’s commentating — economic analysis aside — usually creates a substitution effect in my household.

Fed Watch

Barry Ritholtz on what the Fed is really thinking:

When John Berry was at the Washington Post, he could be discretely contacted. He’s now the Fed columnist at Bloomberg, and while I’m sure he maintains his FOMC contacts, we haven’t seen him “break news” like his WaPo days. He primarily does analysis, and he is very insightful as to what the the Fed is thinking. That’s quite valuable, but its not the same as “getting the call.”

These days, that takes place with the WSJ’s Greg Ip. And in a page one article, he lays out what the news is from on high:

“When the Federal Reserve last week altered its post-meeting policy statement to soften the suggestion that it might raise interest rates, Wall Street was confused.

Was the Fed signaling that a rate increase was less likely because the outlook for the economy had darkened? Or was it simply reflecting the reality that interest rates are on hold for now?

The answer to both questions is, yes.”

With no one quoted, and no speech is cited, one has to assume this is straight from the horse’s mouth. The WSJ doesn’t print factual statements about the Fed on the front page without knowing this is precisely what they are thinking. That’s simply not how they roll.