Pick your poison

The "core" of my econ phd classes forced me to put this blog on hold, but to track me down I've got two new (better?) web presences.
My academic site, with research and all that serious-like jazz:
https://netfiles.uiuc.edu/dwiczer/www/
My new blog, a joint venture with the little bro:
http://cornonthecharles.blogspot.com

Hope you take a click and track me down.

It's not that you're lazy: society *lets* you act lazy

All the way from Spain, home of siestas and some of the most strike-happy unions in the OECD, Josep Pijoan-Mas presented his paper:
The Effects of Labor Market Conditions on Working Time: the US-EU Experience
My first, unenlightening, response was that this work is fascinating. He's got a search model for unemployment that shows tight labor markets and wage inequality encourage longer hours. He considers human capital as the accumulation of actual work experience, so by working longer, people even increase their work effectiveness. For a grad student living like a Dickensian pauper in a work-house , this theory has a lot of appeal -- even if it doesn't promise that the gruel gets any better.
A non-intuitive aspect is that seemingly capricious intra-skill level wage inequality encourages longer hours. It's almost a page out of the British public school book: by arbitrarily picking winners, it makes all the underlings work harder in every aspect because they don't know which of their efforts are actually rewarded. Maybe NBC/BBC's The Office might have some real work-place insight.
M. Pijoan-Mas was careful to emphasize that he's not trying to explain the difference in employment rates between countries, but rather that he's explaining the difference in working hours. In his framework, high unemployment reduces working hours for those employed. Incidentally, he introduces a device I find particularly intriguing. The unemployed enjoy this "benefit" while they're unemployed, which may be government or private insurance or familial support. In his work this benefit falls linearly over time, and helps solve the minimum wage offer at which the unemployed begin working again. I wonder if this is a place where Akerlof's touted "social norms" whereby society has an asymmetric role in determining these types of payoffs: its disapproval is more akin to a binary effect than a continuum. In this context, perhaps the pain of Americans wispering about the lazy neighbors push people back into the labor market and accelerate the working-hour effect. It's just an idea, but I can't fully develop it as my Brazilian buds will start to talk if I haven't finished this simulation.

We're from the government and we're here to help...rear your child

"It takes a village to raise a child," and where we don't have villages we've got government. I've been spending a lot of time with econ graduates students who are new parents and, as in all parts of life, there is a certain fascination with scientific efficiency in this task. The do some peculiar things, like teaching their pre-lingual children sign language to initiate communication before muscle control is refined enough for verbalization. There are, of course many parents who are less informed, and many argue that the government needs to interfere in the interest of their children.
My childhood neighbor recently wrote in to the Chicago Tribune decrying government regulation of toy safety. She's adopted a radical libertarianism in college, and it seems pretty clear that her gut-aversion to government intervention of any kind has prevented her from seeing exception, when government can improve things. She misses some basic economic idea here: information asymmetry and bounded rationality of the actors. She thinks that parents can chose toys which are known to be safe instead of risky ones, but there's an information asymmetry, so parents don't *know* which are surely safe. As with any Bayesian game, they form probabilistic expectations and therein punish all manufactures. Of any toy there's a 5% ex ante chance of shoddy manufacture. The 5% bad ones, which are 100% certain to be bad, cannot be separated from the good ones at the aisle, so they are all discounted as potentially unsafe. The incentive is for manufactures to cut costs, because they are not punished, and free ride on their more conscientious competitors.
The other issue she's missing is what might be termed 'social responsibility, wherein children can't chose for themselves, so we must all play a role. I have sympathy for those argue that government shouldn't impose a level of risk aversion. If there's a risk associated, a rational individual should be able to balance marginal benefit against risk of marginal loss rather than government dictating that the potential loss outweighs the benefit and therefore individuals should not even have the choice. However, children don't have the capacity to make this choice and government serves its "village" role.
But this morning I saw another role that government serves in child-rearing: filling market failure in TV services. Children don't buy many goods, nor respond well to advertising, so private markets would under provide TV programs without PBS. And, I'm pleased to report, they do a damn fine job. Specifically teaching scarcity.
The scene: friendly rainforest animals lead your child in a fun dancing rollick. Then, after a few minutes of pure bliss, the lead puppet says "that's all the music I've got" and the show is over. And we've just learned scarcity. We enjoyed this service while it lasted, but there's no more, all gone, and no tantrum will bring it back. All we can do is bide time until tomorrow, and then appreciate this scarce pleasure all the more.
This is far preferable to the old 'money doesn't grow on trees' crap that parents have traditional fed kids. Sure money is scarce, but kids have no nominal concept (this seems to resurface at the PhD economist level). Instead of teaching money's value, we should be teaching goods' value. And somehow, in this subtle way, a government organization has mastered the idea. A bit ironic that those who know only 'soft-budgets' and artificial targets would be leading kids in the first step towards understanding bottom lines, efficient allocations and rationing. So hooray for government and villages, the children will thank us when they're older.

Black Swans poop too

With the success of "The Black Swan," I think I'll have to write my own book on the subject of randomness. I'll title it "An interesting adventure in stochastic phenomena, aka a random run" and start with a story from this morning:
I've had a sore leg that's kept me from running outside in the mornings, as I usually do. However, the pain is not so predictable, and seems to randomly intensify and abate. This morning it was subdued and, another random factor in place, it was a beautiful day. I decided to run to the South farms, where there's a significant, correlation between the temperature and the smell of cow dung. This being a cool morning, I rationally expected a relatively pleasant olfactory experience. I was wrong, Poseidon had blown a cruel wind, laced with malfeasance towards my nostrils.
Nevertheless, as I ran I listened to a few podcasts on my mp3 player. One of which was a Bloomberg interview with Nicholas Taleb, author of "The Black Swan" about how unexpected events happen at greater frequency than we would expect (a bit of tautology there) and frequently the idea of normally distributed random shocks grossly underestimate the impact of observations at the tails. The subtitle is "The impact of the highly improbable."
And then: IMPACT. Not a tree in 25 yards, nor any power lines overhead, a large, white piece of bird shit falls suddenly on my arm as it is in mid-swing.
I guess the 'normal distribution' doesn't take into consideration anomalies caused by God's ironic sense of humor.

Lowered expectations: Israeli 'model' for Iraqi sucess

The BBC reports that George Bush cited Israel as a *model* for Iraq. I'm not usually given to criticizing management of the Iraqi quagmire. Frankly, it's just not such an interesting subject. Most agree that we haven't done a good job, but I'm reluctant to weigh in because I don't have a good understanding on failing states.
However, Bush's comparison here is particularly bad on several fronts.
The most obvious is that which inspires this post's title: when "success" includes the Israeli situation of relentless violence that's, well, warped. For years the media made fun of Clinton for playing word games about the definition of of "is," but Bush is not playing a slippery lawyer trick, he's betraying the ideals of peace processes, nation building, and the thousands of soldiers fighting for Iraq's future. The whole Iraqi venture has been characterized by shifting targets: sometimes we're rooting out al qaeda, sometimes terrorism in general, sometimes state-sponsored WMD; once we were protecting Kurds from Sunni and Shi'a, then we were protecting peaceful Shi'a from violent Sunni, then the minority Sunni from majority Shi'a. Once we were building a peaceful order, functioning state and civil society. Now, it seems that we'll take one of those three. George Bush is right to praise Israel for a remarkable feat, but wrong to insinuate that it could be reproducible or optimal in anyway. Says Bush:

"In places like Israel, terrorists have taken innocent human life for years in suicide attacks.

"The difference is that Israel is a functioning democracy and it's not prevented from carrying out its responsibilities. And that's a good indicator of success that we're looking for in Iraq."

Israel is irreproducible in any other context, and Bush does everyone a great disservice by hinting that we could model Iraq's future on this very peculiar Israeli present. Israel has a culture that encourages communal, national sentiment from its Jewish majority. Institutions like the army promote egalitarian unity, graft free governance and meritocracy. The shared settler tradition, collective feeling of victimization and (perhaps) even the cultural thread of overbearing Jewish mother' help Israelis relate to each other, and founds a common mission. Moreover, this common mission is not just continued existence of their state, nor the environ for individual success the "common mission" is both "common," i.e. success is only by bring home every Marine (or shooting those that fall, if you Bibi), and a "mission." This "mission" is why merely providing basic state services is not the definition of success. True, the mission cannot be accomplished without collecting the trash and repairing the roads, but it goes further: the most common foreign listers on the NASDAQ, researching game theory and string theory: basically being contributing more than their share to global prosperity and human advancement.
At no time, did peaceful Iraq have such a mission, nor a sense of commonality. They did, at some times, build roads and collect the trash. However, in Israel, these tasks are done in the face of great obstacles because they are necessary for an even greater task. It's much more difficult to motivate oneself to overcome great obstacles, risking life and limb when the end goal is menial. Any good political scientist of development economist will say that boring tasks like sanitation and transport are essential, but they lack the romance that motivate and thus they're more easily forgotten when violence makes them seem trivial. In looking at Israel Bush mistakes the means for the ends: in Israel functioning democracy is the means to a "common mission," and so it's carried despite violent insurgents. In Iraq the meager task is the end, and therefore a completely different model. If Bush really wants an Israeli model for Iraq he needs a messianic figure that could elevate the civil conscious, else he should find a more realistic model: could I (ironically) suggest Nigeria?

Yes, Minister: Political Ecomedy

From 1980-1984 one of Maggie Thatcher's favourite (sic, for dramatic effect) BBC comedies was "Yes Minister," which chronicled the misadventures of Jim Hacker, a new minister navigating the British civil service. The running gag was the conflict between Hacker's politically motivated effort to cut bureaucratic waste while his Permanent Secretary, Sir Humphrey ,obfuscated and schemed to prevent any such progress. Even through this cynicism, both are also motivated by a 'duty' to govern in the interest of the 'people.' I've been fascinated with the show since I discovered $1 foreign rentals on Mondays at That's Rentertainment. Hacker was a graduate of LSE and a "political economist," but nevertheless expressed the crudest protectionism and populism. Moreover, his sense of 'duty' was often more attuned to the PM's wishes or his constituency's than any high-minded ideals. Sir Humphrey, a bureaucratic lifer, was a rent-seeking exemplar whose idea of growth was a larger department budget and his own access to 'the corridors of power' (nicely emblamized by some tea salon where he meets other power brokers).

I'm not sure how well a situational comedy can serve as a straw man, but I can't help thinking about it now whenever I read about government's role. Dani Rodrik has a wonderful 2002 paper called "Feasible Globalization," which he's recently referenced when discussing Martin Wolf's piece in FT about globalization and finance. Rodrik posits an essential incompatibility between unfettered global trade and a 'minimalist' intergovernmental regulations. It's something of a revitalized impossibility theorem, that he says we can have at most two of three regimes: (1) the nation-state system, (2) democratic politics, and (3) full economic integration.

Minister Hacker and John Edwards both provide ample evidence why economic integration might be at odds with democratic politics, if we interpret "democratic" as "open to opportunist populists." Sir Humphrey demonstrates another pitfall: whereby institutions come to serve themselves, rather than their electorate. Neither of these observations is insightful, and the very commonness of their wisdom made them subject to comedic caricature. However, these were subtler characters, and their tenuous ability to actually accomplish their goals allowed 4 glorious seasons. Rodrik misses something when he tethers characters to their particular steme to advance his impossibility proposition.
Selon Rodrik:
"Indeed, now that formal restrictions on trade and investment have mostly disappeared, regulatory and jurisdictional discontinuities created by heterogeneous national institutions constitute the most important barriers to international commerce." It's these 'heterogeneous national institutions' which arise to preform necessary roles of government in diverse circumstances. His example: 'investor protection' may be accomplished by Western style property rights or whatever the Chinese have. I don't disagree that different cultural realities require different institutional engineering. However, he seems to miss people's ability to adapt.
The reason that Hacker and Humphrey were able to work their way to the next episode was that Hacker, uncharacteristically, discovered some bureaucratic competency and Humphrey, equally out-of-character, discovered some humane panache. Both had idiosyncrasies developed in their starkly different backgrounds, but both worked together in the end. Just because they were idiosyncratic to start only made the episode last a good 30 minutes while the viewer sweats.
The same is seen in the Doha round and international finance. Muslims have sharia law that prohibits interest, and financial types worried about unleashing their capital...until the sukuk and boom in sharia-compatible instruments. On Bloomberg's "On The Economy," Gary Hufbauer was confident that every ultimately-successful GATT negotiation was on the verge of breakdown, and Doha should be no different. Stubborn Brazilians and Indians are not permanently so and work-arounds seem to develop. It's really a nuanced and insightful argument by Rodrik, that heterogeneous institutions develop within nation states, but he carries this into a fundamental belief that heterogeneity of internal policy translates into policy incompatibility on the international stage. Nation-states might create idiosyncrasies, democracies might cultivate idiots and globalization requires conformity and rationality, but in the end we are not caricatures of nor prisoners to our adjectives.

What the hotel heiress teaches us about American inequality

Always attuned to press absurdity, John Stewart chronicle's CNN's "reluctant" coverage of the Paris Hilton saga. In one of its trademark montages, the Daly Show shows a day's worth of coverage saturation. But more absurd than their fascination is how the journalists took every opportunity to distance themselves from the story, to remind viewers that the story was "unworthy" of their professional integrity.

As with any joke, it's no longer funny when intellectually dissected, but there's a very important social phenomenon revealed here: inequality is no longer about income. Class in America is always a difficult concept because intergenerational social dynamisim is integral to our cultural myth (that's quite a packed sentence, perhaps read it twice). Americans hate 'class' as it defines one group as a priori superior to another, but in CNN's self-loathing we see evidence of pervasive social stratification. This form of 'class' is not defined by an external, quantitative factor, rather it's self-defined. Taking CNN's example, elite is self-defined by separation from the mean of society.

In its Sunday magazine, the NY Times has studied income inequality, and basically published much without any new news. However, they highlight the clear trend towards greater disparity:

But they never did. Instead, the rich kept getting richer. Across the spectrum of American society, the higher your income category, the more your income continued to grow. And for a quarter-century, albeit with zigs and zags along the way, that rich-get-richer pattern has held. The figures are striking. In 2004, according to the Congressional Budget Office’s latest official analysis, households in the lowest quintile of the country were making only 2 percent more (adjusted for inflation) than they were in 1979. Those in the next quintile managed only an 11 percent rise. And the middle group was up 15 percent. Do you sense a pattern? The income of families in the fourth quintile — upper-middle-class folks with an average yearly income of $82,000 — rose by 23 percent. Only when you get to the top quintile were the gains truly big — 63 percent.

Numbers like that have made inequality a hot topic, not only for liberals but also for Bush administration officials like Henry Paulson, the secretary of the Treasury. The press is full of stories of the outlandish wages of the superrich, like the 25 hedge-fund managers who each earned at least $240 million last year (the top dog took home $1.7 billion). Democrats are giving tougher scrutiny to trade bills and are now thinking the unthinkable: tax hikes for the rich. Inequality “isn’t good as an economic matter,” says Steven Rattner, an investment manager and contributor to Democratic politicians, “and it’s not good as a moral or social matter.” Writing in The Boston Globe, the columnist James Carroll said the current economic system is “eroding democracy” by awarding a larger share of the economic pie to the very rich and “impoverishing more and more human beings.”

There is a fundamental premise behind this article: we do not base class on income. As income becomes more dispersed, has class also? I think it'd be unrealistic to say that in the past quarter-century the social structure of the country has become more unequal in line with the economic one. This inconsistency adds to our worries: incomes are becoming more unequal, but our idea of social standing is not tied to this sole statistics. If income inequality continues this trend, will it overshadow other factors threaten our social fabric?

CNN anchors are certainly not in the top 1% or earners who's income has surged, but they self-identify as elite. This dovetails nicely with a discussion on Mankiw's blog about the merit of an MBA against a PhD. The Professor's interlocutor talks of an MBA's greater "bang for the buck." Other commenters fire back that there are other criteria, and one of them must be the social standing afforded by a PhD. Like, the CNN anchors who define their place by its isolation from their commercial interests, the cable-subscription paying viewers. In the PhD's case, lifetime earnings are knowingly sacrificed and an ivory tower chosen over Main Street. "We, of the hooded order, are not so base as to concern with money - instead we care of important ideas." It is the same sentiment as the journalistic annotations on CNN's Paris Hilton coverage. These sorts of declarations become more important as income inequality rises and threatens to trump other measures of prestige. If money talks, and even more money shouts, those who had loud speakers crank up their volume.

A statesman acting statesman-like

With a sprawling piece in The Economist, Tony Blair addresses some parting words to the world public. He starts with something of a political truism: elections focus on domestic issues, but ruling quickly turns attention on international issues. It'd be uninteresting if he just parroted the usual rhetoric about how we're an interconnected, interdependent, communal, flat, globalized world. Instead, he takes this fact as a starting point and saves us the grandiloquence. From there, it's a discussion of the ramifications:

"We all talk of interdependence being the defining characteristic of the modern world. But often we fail to see the fundamental implications of such a statement. It means we have a clear self-interest as a nation in what happens the world over. And because mass media and communication convey powerful images in an instant across the globe, it dictates that struggles are fought as much through propaganda, ideas and values as through conventional means, military or diplomatic."

What follows is a list that combines bons mots with real policy positions. The overarching position is that we're in a fight of values of Liberalism versus Authoritarianism. He's careful to distinguish that it's not West versus Islam, though points that this is often where the conflict flares. Liberalism's precepts are basic human rights and Authoritarianism in its current Islamic extremist incarnation, perverts the faith. However, though he's certainly an true believer, he does not believe the other side are cynically utilizing a mass opiate: they are equally convicted and, according to Blair, planning to 'outlast' their practical, transient and materialist adversaries.

His position may be controversial, but it's right. It's simplistic to use opportunism to motivate Islamic extremism, but natural experiments have demonstrated their conviction. The Islamic Courts in Somolia are a recent example, who were driven out but declined power sharing and continued political shelter, instead they favored struggle.

Given his position, what to do? As befits an international outlook, he believes in activist foreign policy.

"We will not succeed simply by military or security means. It is a political challenge. Terrorism recruits adherents on the basis of an appeal to human emotion. It can be countered only by a better, more profound, well-articulated counter-appeal."

He doesn't hedge his support of military action in Iraq, but he's going beyond to stress the importance of dialog. Selon Blair, this is a winning strategy because Liberalism has a universal appeal. But here's where I think he runs into trouble. If the adversaries are willing to die for their cause, I doubt we can get a good audience with them. Somehow he thinks that we can stand atop the hills and from our megaphone, "We should point out that those killing Muslims by terror are actually other Muslims and that doing so is completely contrary to the teachings of the Koran."

Interaction just doesn't take shape in essay form. Rather, he should be advocating "implicit"dialog: understanding that comes through repeated interaction. This takes the form of economic and cultural exchange. He has an acute understanding of the complexity of problems, but does not recognize the relative simplicity of their solution. If we can debate for hours about the veracity of our respective positions, it doesn't mean that reconciliation will only come from more hours of debate. Rather, reconciliation is not by getting militants to cross the line from one camp to the other. Reconciliation does not require any mass persuasion. Instead, reconciliation only requires that the sides stop killing each other. Frequently, active argument will only remind someone why he's toting his gun in the first place. Instead, he'll drop it when he's forgotten his qualm. This process is often faster than expected, facilitated only bye the reality of day to day interaction.

Who could love a beast so hideous?

Shrek proves it, some of us have hideous beasts dwelling inside of beautiful shells. Of course, not all of us will go on an animated adventure with a golden-hearted monster to discover this true form. Luckily, Political Compass has a short, painless questionnaire to help with the introspection.
Their schtick is nothing new: the old, one dimensional continuum was inadequate to characterize anyone's political beliefs. The Left versus Right summarized a citizen's desired level of government involvement, but doesn't allow for different ideas about the economic and social role of government. In the new political science we expand from one dimension to two! Of course, this raises the obvious sort of slippery slope problem: if two dimensions is better than one, why not three? Leaving that aside, no set of questions could fully reflect the inner complexity of one's (my) brilliant political agenda.
Still, here are my results. Now you know exactly how to discount my views in the future.

Economic Left/Right: 1.63
Social Libertarian/Authoritarian: -4.36

Economics helps to sell beanie-babies

In the late 1970's, when the trailblazers of auction theory endlessly toiled in their ivory towers, they could never have anticipated that all their beautiful proofs would be put towards the efficient exchange of collectible, creature-shaped beanbags. Of course, eBay is no longer just a repository of attic fillers, and in the last ten years, its become the greatest empirical test of the theory and has even raised new issues by observing actual behaviors.
In Slate this week, Tim Hartford reviews theory's relation to newly proliferating auctions. Particularly, "Is eBay Rational" argues that experience has shown that the number of participants in an auction is partly determined by the rules of the auction, whereas theory typically takes it as exogenous. Reserve price, set by the seller to put a floor on the possible prices, seems to have some justification even in very early game theoretical papers. Myerson's, Optimal Auction Design establishes the efficiency of such a mechanism, but also show why it should be "secret." He expects that the reservation price should be amongst the highest bids, though if this aspect of the mechanism were common knowledge, those with low bids simply wouldn't bother.
Certainly, bidders with very low values will never actually win the auction, but throughout game theory we've been aware that "off-equilibrium path" actions are important for determining the equilibrium. Even though they won't win, additional low bids help more competitive bids hone in and add to the efficiency of the mechanism. However, when Myerson introduced his reserve price, he considered N (the number of bidders) exogenous and, perhaps unrealistically, assumed that potential participants would not try and speculate about this value.
Hartford highlights another paper that actually addresses this issue:

"Auction theory offers an argument that a secret reserve price is better. A secret reserve price allows bidders to see each other's gradually ascending bids and thus draw confidence that they are not alone in prizing the item. Even though the bids are too low to beat the reserve, they serve an important purpose of reassuring bidders that others are also interested. An open reserve price on eBay makes that reassurance impossible; nobody can submit a bid below the open reserve, and lacking any signs of confidence from other bidders, nobody may submit a bid above it either.

There are too many imponderables to tell whether this theoretical argument is what really counts in practice. So, ! Katkar and Reiley put the theory to the test by simply selling 50 matched pairs of collectible Pokemon cards, half with an open reserve price and half with a secret reserve price of the same level. Their conclusion, contrary to the theoretic argument, is that secret reserve prices are counterproductive. Far from stimulating interest, they seem to put bidders off, perhaps out of fear that a secret reserve is secret because it is far too high. Not wishing to waste their time, many of them just click "back" on their browsers and find somewhere else to bid."

This probably does not end the debate, and different mechanisms are probably better suited for different goods and audiences (though from pure theory a broad category should have "revenue equivalence"). Hartford concludes:
"The conclusion may not shake the world, but the method is important. David Reiley was one of the first economists to realize that the Internet was generating vast amounts of researchable data. Now that data, from sites ranging from eBay and Amazon to Match.com, is enriching the study of economics."
He could not have hit the nail more squarely on the head. We used to speculate as to the nature of economic transactions in the real world, but economists don't really get into the real world much. We now have a proliferation of new types of forums with traceable transactions. Sciences flourish when there's a constructive interplay between theory and empirical checks and computer technology is auguring both these sides for economics.

C/O The Economist's blog, Free Exchange:

I HAVE been mulling today an aphorism, generally attributed to Kenneth Boulding: "Economics has gotten so rigorous we've all got rigor mortis."

As technology and mathematical techniques have evolved, the frontier of economic research has gotten quite technical—so technical, in fact, that it has become inaccessible to the untrained. Early great economists such as Adam Smith and David Ricardo expressed their sophisticated ideas to the masses without fancy equations; now you need an undergraduate math degree just to keep up with the basic literature.

Yet I would argue that mathematics has actually made the field, in some ways more accessible. During my first year of graduate school, one of my professors, Xavier Sala-i-Martin, said the nature of progress in any field (including economic research) can evolve in one of two ways.

1. All the good ideas have been discovered early, leaving later researchers to develop ever more detailed, obscure, and technical variations on existing themes.
2. Like Isaac Newton, we can see ever further by standing on the shoulders of the giants who preceded us. This requires more demanding techniques. New theories supply the foundation for more advanced ones.

I hesitate to state which situation applies to which fields outside my own, but for economics the latter is definitely true. Today the best economists come up with interesting ideas, and express them both with mathematical equations and data, and in plain English. During the 20th century it became common practice for economists to express their ideas on growth, decision making, unemployment, and monetary policy using mathematical models. These models shaped economic policy debates, brought greater stability, while paving the way for new ideas to be developed using these sophisticated techniques.

Keynes once described what it took to be a great economist:

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher...No part of man's nature or his institutions must lie entirely outside his regard

Many important ideas in economics can be stated simply. But often those simple ideas first revealed themselves in the elegant inevitability of a mathematical equation. Only after the math had illustrated that it must be so, did the economists work out the simple words to explain the phenomenon. And many seemingly elegant theories have been found less compelling when sophisticated statistical techniques run on real world data failed to back them up.

Of course, some economists do get too caught up in their beautiful equations, leading them to focus on solving hard, but uninteresting, esoteric problems. But these economists tend not to be the most successful. The best are like those Keynes described: not only good mathematicians, but also creative and insightful thinkers who influence not merely policy decisions, but the direction of human thought.

I had this to say:

When I was considering graduate school in Economics, all of my professors warned me that higher-level education was nothing like my undergraduate experience. They spoke of advanced economics as another world, entirely divorced from the qualitative-minded introductory-/intermediate-level taught to undergrads.
I have just finished the first year of my PhD. Though I certainly wish I had a stronger background in writing proofs, I think my professors (and much of the economics community) were overly dramatic. Even if the language is a bit different, we're still talking about economic concepts and all the advanced mathematics only sharpens our understanding of qualitative conclusions and helps to clear up questions where less-precise methods are ambiguous. For those of us who were frustrated for 4 years of undergrad when a professor waved his/her hands, it's as if the wheel's been invented. More important for this discussion, those who were untroubled by a fast-and-lose treatment of the technical details never have to deal with the "math-ification."

Get your parents to pick up the dinner check

The USA Today (yes that's right) leads with a story about how the old don't only become wiser, they're also becoming richer. The generational wealth and income gap has been widening in the last 10 years

Inequality within age groups hasn't changed much. People in their 30s or 60s have roughly the same wealth distribution among themselves as in 1989. What's changed is inequality between age groups.

Older people are thriving in wealth and income. Younger people are not. How wealth and income have changed for two age groups, after adjusting for inflation:

•Ages 55-59: Median net worth — the middle point for all households — rose 97% over 15 years to $249,700 in 2004, the most recent year for which data is available. Median income rose 52%.

•Ages 35-39: Median household net worth fell 28% to $48,940. Median income fell 10%.

What's notable is that this is not just a reflection of asset bubbles. If this were only a housing price/NASDAQ story, then it'd be only wealth that's accumulating with gray hair. Instead income growth is concentrated amongst older earners. The story briefly hints, but does not fully explain that age may be only a single part of the greater demographic shift. New immigrants and minorities, tend to be younger, and thus depress the wages of the whole group. This is one plausible explanation for the inequality.
The USA Today writers are more keen to explain that the Baby Boomers "enjoyed" relative income/job stability from the waning days of the industrial economy, whereas today's college-educated youth are more transient and have delayed moving into the high-earning, upper-echelon jobs.
Quite strikingly:

So far, though, the return on education has paid off for older people, but not for younger generations.

The net worth of households headed by a college-educated person ages 55-59 rose to $526,300 in 2004, up from $271,515 in 1989, adjusted for inflation.

This group has enjoyed enormous income gains, too, and had a median annual income of $100,634 in 2004.

By comparison, wealth and income have declined for college-educated people in their late 30s and risen only slightly for college grads in their early 40s. In short, age has mattered more than education in widening the wealth gap in recent years.

This debunks the demographic co-movement story. It's not just that young tend to be demographically unfavored. It seems, comparably educated people of different age cohorts have different outcomes.
In light of all of this, I have another theory, which builds on (PIMCO head) Bill Gross' recent "Da Bomb" piece and everything Tom Friedman has been able to write in the last five years:
This is a result of globalization and, more specifically, the changing balance of factor payments from labor to capital. I'll unpack that: in recent years more of the proceeds of production have gone to owners of capital rather than labor. Commentators have explained that by a global glut of new labor following liberalization/internationalization of populous countries and changing production technology led by computer and communication revolutions.
Income from capital is strongly correlated with age, as it takes a while to build enough of a personal capital holding to generate significant income from its rent. In our economic models, income from either wages, a function of time and efficiency, or rents, which depend upon how much capital one has to sell and its relative efficiency. As rent becomes a more larger portion of total income, those with more capital to provide get more of the income pie. This doesn't mean that wage growth will cease, because there is no fixed size for national income. However, inequality might become greater, as even if wages grow at their historical pace (which they haven't) capital rents are growing faster than ever.
My thoughts: kids might be asking their parents for money long after college-age pleas for beer cash... "Mooooom, I don't have the capital stock to cover my mortgage...."

For the World Bank Pres, it's not what you know...

...it's who you know. The World Bank does some tremendous research, hires some of the best minds and still champions its founding ideology in human potential. It seems reasonable, therefore, that Dani Rodrik would call for a new World Bank President to be hired solely on merit. However, the World Bank is best served by a Presidency with political connections and rich county support.
In Rodrik's recent post, he argues against the tradition of national and political considerations:

The World Bank's executive board has just announced that its new president will be selected using a competitive, merit-based process, paying no attention to the nationality of candidates. Breaking precedent, a White House spokesman said that the position as World Bank president is too important for parochial and political considerations to dominate.

Not!

Is it too much to ask that the new president at least know something about development?

It's reasonable that the new president "know something about development." But, the position of World Bank president is too important not to be subject to "parochial and political considerations."
The World Bank has a multi-faceted role in the world: they do applied economic research, coordinate development goals and make loans to the neediest cases. To maintain quality research, the Bank clearly needs merit-based, apolitical hiring. The best research is done by the smartest, most dedicated people, regardless of nationality or personal connection.
However, coordinating the deep-pocketed Samaritans is best done by someone with the trust of these parties. Perhaps few bankrollers would quarrel with a respected expert when he sets a development goal, but that long CV won't necessarily change budgets or convince politicians to abandon their pet projects in favor a multilateral end. Instead, a successful operator is familiar with how platforms are set and, preferably, has a voice (or an agent) in the back rooms.
The role as lender most requires connections. A bank doesn't lend unless is has financial resources to tap. In the World Bank's case, it's IDA window could not finance risky loans to the poorest cases based upon market considerations alone. Someone at the bank need to coax the world's rich to give readily and generously.
As the World Bank's chief cheerleader, the President is most involved in the second two roles: setting and financing development goals. It takes a whole team of dedicated researchers, and a researcher president might even interfere with this agenda: researchers need to be interested in their topic and develop expertise beyond the horizon of a presidents term. If an elite professor came in and tried to direct the program, he might be more disruptive than constructive. However, coordination and begging require a point man inside the ears of the national leaders. To research, the World Bank could act in a vacuum, but when it's success depends upon its member governments, an IGO needs someone to steer key governments. A President with the support of the most active pocket books and inside the political cabal serves this role best.

Crowds could be wiser

With finals over, I've resumed normal human behaviors, such as getting hair cuts. As a byproduct, I'm now also interacting with normal humans, like barbers (or "stylists," if that's a better term).

The trajectory of my recount should be clear at this point: I got a hair cut, talked to the barber, and was surprised:

I certainly wasn't expecting a lecture on astrophysics from "Ashely!"(the exclamation point poorly conveys the excitement with which she introduced herself) I even egged her on when she started regaling me about her Sister's breakup- "I mean, I also would have been like... yeah ... get out here if you're making a copy of my house key. Weird!" In fact, I contributed helpfully, "maybe first she should ask for the key back."
It was successful all the way until she was joyfully spinning a mirror around my head to show me that the back of my ears were still where I last put them. Then the bomb dropped:
"Oh yeah, I'm telling everyone this. Have you heard not to buy gas on the 15th? My mom emailed it to me and I'm like spreading it to everyone I can" I was a bit flummoxed at this. My first thought was that maybe she had some insider information that prices spike because of some technical nuance with the delivery system. Curious, I asked her why. "Well, because if we do, then they'll lose like $3 billion, or something and have to drop the prices, instead of pocketing it all..." She trailed off, perhaps sensing strange currents flowing from my head to her scissors.
I didn't ask her to identify "they" nor raise as single challenge to such flawed thinking. I couldn't - it was just too ridiculous. The only thing that could come out of my mouth was a kind of mumbled "eh, I mentioned that I'm an economist...eh...ok" It seemed a bit like going into the doctor and saying, "so I heard this Skinny-o-trim XS will let me eat burgers and lose weight too." Daniel Gross, one of my favorite pop economics writers explains her fallacy pretty well here.
But what I find interesting is not why she's wrong (fun family activity: list all the reasons), but rather, that it's so obviously wrong. I'll now build a straw man: There's been a great deal of recent pop economics along the lines of public economic intuition. But even before Blink, or The Wisdom of Crowds, basic microeconomic theory is build upon the basic rationality of individuals who are not economists. Supposedly, this is not even a result of a life's education in a market society. The Economist sums the conventional wisdom that even outside of relatively well educated, rich countries "the poor act rationally, however straitened their circumstances. If their undertakings are too small, or their efforts too thinly spread, to be efficient, it is not because they have miscalculated, but because the markets for land, credit or insurance have failed them."
If a insignificant portion of Americans could have such meager economic literacy as to believe in the righteous fight against the economic conspiracy of "they," (who set gas prices) its no surprise that those of more meager means are so illiterate as to embrace any number of evil "they"'s (e.g. The Elders of Zion, the IMF). I'd like to put in a call to action here. That we should somehow proselytize for the cause. Start when they're young: while they're experimenting with building blocks try to let them design mock auctions with various pricing/allocation mechanisms. However, if my own education has taught me anything, it's better to try and understand fully before launching a campaign. Information studies often focus on how rational actors deal with information constraints, but what about how rationality itself is affected? The area is not totally virgin, but I was reminded of its importance.
Thankfully, Ashley gives a cheaper haircut than I'd get from the cold, calculating homo-economicus.

Force-fed chocolate and other toothless threats

I once tried to explain my course in game theory to my 88 year old grandfather. I tried to make it accessible, but I also wanted him to think it was difficult (I really like the way that he nods his head and changes the topic to baseball whenever I start mentioning my courses, so I need to keep up the impression that my work is too complicated). I said something like: "It's trying to mathematically understand what is my best move, if I think that I know that you know that I know something about what you think I know about you." As anticipated, he nodded his head and the complained about the Cubbies.
But Game Theory has entered the popular discussion of such critical issues as climate change. And one of our basic strategies (meant in standard English usage, not theoretic definition) is to relate diverse situations to our seminal games.
Greg Mankiw discusses the repeated prisoner dilemma and climate change here.

Policy toward global climate change is a lot like repeated prisoners' dilemma. We need to convince China to adopt the cooperative equilibrium in which everyone taxes carbon. Starting with a small tax that increases over time, together with the threat that we will revert to the non-cooperative equilibrium without a tax if China does not participate too, may be an effective strategy for inducing cooperation.

I don't think he's properly using the repeated prisoner dilemma analogy here. My major difficulty is with the threat of reversion to the non-cooperative outcome. In a classic, repeated game prisoner dilemma, we have a trade off between defector's reward and the consistent gains of cooperation. The threat to keep players cooperating should be some minimax - or at least the non-cooperative outcome. But key is that the instant payoff for this threat should be lower than the cooperative outcome. We induce the would-be defector to play nice because the threat is a long stream of sub-optimal outcomes.
However, here we have the problem that the cooperative outcome has less instant gratification than the non-cooperative, one-shot outcome. It's like saying to a glutton, you'd better keep eating vegetables, otherwise I'm going to punish you by force-feeding you chocolate. If China doesn't give enough value to future consequences of their outcome, we can't induce them to cooperate by threatening to just let them keep on polluting. They've already revealed that they prefer to pollute than cooperate.
In short: you're proposing a toothless threat because the Chinese are already showing that the threatened, non-cooperative outcome is preferred by someone with the preferences to defect from a long-term cooperative agreement. It's not that they've been trapped into this suboptimal by the structure of the game, and they'd prefer cooperation. Instead, the cooperation brings more pain than competition, especially for one with a myopic view of one's interests.

Getting under an economist's skin

There's the guy with the cackle. He means well, he's trying to be friendly, happy and fun. But that laugh. You definitely can't go out with him, because everyone in a room stares when he starts. He can hardly be tolerated in a confined space.
There's the guy who always has to talk about his exploits with his other friends. "Man, we got so plastered, and there were these chicks...and my bro knows the bar tender, so we weren't paying for anything... and the bling was flying..."
But economists are generally a tolerant lot, perhaps because many are so socially inept, the standards are not so high. Still, there is one class of social parasite that will always draw scoffs:
the guy who hocks a spurious regression.
This scorn is nothing new - ever since the computer era bestowed the power to painlessly add regressors, the profession has ruptured over how to utilize the methods.
The calibration crew, spurns the econometric power - fitting the data is meaningless unless we have a theory to give it meaning.
Then there's this other camp, an unscrupulous exploiter: akin to the TV attorney "I will get you the money that you deserve, and generously skim for myself..." Even the public distrusts these economists with "fancy" numerical tools. The backlash is so strong, that people become defensive, expecting that any studies are lying - correlations are always just massaged and a model fits because of the underlying assumptions. The phenomenon even hits me close to home: I sent my own Dad a simulation I made that showed an optimal income tax rate calibrated to the US. It came out around 45%, and because it seemed too coincidental that the tax rate was near 1/2, he accused me of massaging the data. Why would I massage the data? Who was I impressing?
Maybe it's just this public distrust that gets economists so upset about their own who abuse statistical-crunching power. Especially economists trying to sell their expertise (commonly called consultants) are threatened. If it seems that economists just throw some numbers together and make haphazard projections, then their "true" analysis is not marketable. My old colleagues as Free Market, a macroeconomic consultancy in Chicago, bristle at the CB's "Index of Leading Economic Indicators." But just bad theory does not draw such ire as bad methods. I might believe in New Keynesian price frictions, and you might have firm faith in market clearing and the two of us will still sit down for a beer. However, if I'm a credible, theory driven-researcher, I turn my nose at someone I consider a "data whore"
I think there are two possible explanations:
1) We worry about public discredit for the whole discipline. The more economists play into the stereotype for hubris and misinformation, the worse the reception for all of us.
2) Disgust at intellectual dis-ingenuity. We are a curious bunch, and those who look for the easy answer somehow sully the whole quest.
Of course, all this said... if a guy from the Conference Board wants to buy me a beer, I'll go: just don't tell me about "the gang," and don't laugh too loud.

China surges and pigs fly

There's nothing new about a surging Chinese economy. But a combination of indicators tells such a strange story that, just in time for the New Year's astrological symbol, we might as well have pigs flying. The NYT, in their magazine, coins "Reverse Foreign Aid" to explore how global funds flows baffle traditional international finance theory by flowing "against the stream": that is, from poor countries like China to rich countries, e.g. America. So we have pigs with wings and flippers?
But enough of the slick anthropomorphisms, or whatever the term for my masterful rhetoric... some dry economics:
I'm really being spurred by an email discussion with a College friend who now works in FX research at UBS. He's always been much smarter than me, so when he's confused, it's a bit presumptuous that I should pipe in with my explanation, but presumptions can be occasionally indulged...
The past two months of data have been especially startling in China: surging exports, yawning liquidity and monetary policy that's more neutered than that steer I ate for dinner last night.
Exports:
The trade surplus had gained on slower imports showing slackening demand for basic goods from abroad, largely because of over built inventories in prior import booms and domestic supply coming online. Now, we have exports rising, but without a accompanying rise in imports from its largest partners, US and Japan, and without the rest of developing East Asia sharing the experience. So are January and February trade figures statistical noise?
My friend suggests and writes off two explanations: Chinese competitiveness or new trade regime that drops barriers. He says that productivity doesn't spike over a two month period: true. He also says that there hasn't been a significant l trade liberalization: also true. But just because our initial explanations fail doesn't mean that the phenomenon that we observed was wholly random! Given the numbers, I'm not sure it's not a difficult exercise to perform a Chow test and find the likelihood that there was no structural change between the last two months and prior year or so. Even if they are only one standard deviation above, two months gives you a probability ~10% Here's a possible explanation: accounting error. He mentions that data is sketchy, but it's very difficult to count goods that weren't actually there (especially since most of Chinese exports are merchandise exports). However, it's conceivable that in previous months, some of it went under the radar. So this "blip" is really the tip of a slow ramp-up, that is finally being reported. Then we could find some real shock to be the cause: whether it's productivity/competitiveness gain or perhaps related to institutional changes related to the Party Congress?
Next strange phenomenon: liquidity has surged
Credit and leverage have become easier to obtain despite vociferous calls from inside and out to tighten monetary policy. Here, there's an interesting explanation, which deals iwth the peculiar institutional framework in the developing country. The economy surged, but instead of stashing the corresponding tax windfall in commercial bank, the government puts it into the PBoC, essentially slicing out some of the money base. But then, when it wants to tap these stores, it both expands money and government spending - robbing some of the PBoC monetary authority by expanding the money supply in the course of expansionary fiscal policy.
But this is essentially a pro-cyclical policy, which could be repeated anytime there's an upswing in GDP (which seems to be more often than not). Tax revenues surge because of increased economic activity, that's placed in the PBoC, and slows money growth. But then at the end of the year, wherever that is in the cycle, we spend it all, and not only is there a fiscal policy stimulus from greater spending, but it's an implicit monetary loosening by unleashing all this cash and expanding the base... We always knew the PBoC political dependence could cause problems, but this is not just a one time problem - this is an institutional short coming which, in less-heady times, ought to undermine the credibility of the authority. The recent experience is no abnormality: it's the likely consequence of a poorly designed system.
The third baffler was the recent rate hike:
It almost tragicomic that they'd chose 27bp, as if it were that much of a science. The mention of other policy tools, though, gives them too much credit (no pun intended). Sure increasing the reserve requirement likely has an effect, and sterilization has been remarkably effective... but other forms of coercion and strong persuasion are no means for a developed policy. I'd expect that Chinese monetary policy stays neuter - like a bunch of eunuchs trying to hold back a bull - balls always win.

Three Wisemen are better than one

Advisory institutions around the world are designed around the notion that a council of experts are more reliable than even the wisest amongst their ranks. Exemplars include the collegial Monetary Policy Committee, the modern think-tank, and countless round-table style sports shows. But the press takes its cues from the comic book industry, which found that a single superhero story sells better than the Justice League, the all-star band of the best crime-fighters in tights.
With its story titled "Top forecaster sees year without rate increases," USA Today proves again why it should stick to making big color pictures instead of economic journalism. Richard DeKaser of National City had a good year, by the sophisticated metrics developed by USA Today, the people that pioneered writing for a 6th-grade education level. Then, they headline, that this luminary believes we won't have rate hikes. But are his projections for 2007 that much more reliable than the second-best from 2006? What if they disagree? What if he disagrees with both number two and number three? The line of reasoning seems obvious: a survey of the best forecasters, and there are many such by more cautious journalists, would give a more credible headline and reliable forecast.
On closer inspection, it is a ridiculous premise that any expert could perfectly guess that actions of another, which is exactly what seems to be the aim here. To "see a year without rate increases" is akin to seeing inside Bernanke's mind. Beyond, reading him perfectly today, this wise man should be able to read perfectly what he will think in 9 months. No economist who could perfectly guestimate Fed policy for an entire year, especially in the post-Greenspan, "measured pace" 03-05 stretch. But even when the FOMC wrote and released its complete script, there was debate an uncertainty. I say no economist could foresee perfectly, but perhaps someone could get an advantage by calling a psychic phone line - does DeKaser sound Jamaican?
In fact, the USA Today story cites a "top 10" that have the Target Rate anywhere from 4.25% to 5.25%. DeKaser is actually at the high end of the spectrum. But why does the headline seem to trumpet: "there won't be a rate hike." They encourage certainty by invoking the wisdom of "the top forecaster." Even while admitting later in the article that there is distention amongst others, who are equally qualified. USA Today's success is built on snappy headlines, well organized front page leaders and eye-catching graphics. I guess DeKaser just doesn't make such great eye candy, so they had to find another way to sensationalize. But USA Today does him a disservice, because even if he's correct, it'll only be by luck and whatever his modeling merit will be upstaged by his dice-rolling prowess.

Sophist in 2007: techniques of a pundit

Politicians don't have luxury of addressing a complex problem and saying "we need to discuss the issue more." Following the legacy of Greek democracy, the politicians gather in the Agora and must take a position, and sway the demos to their side.
Political commentators, on the other hand, have the ultimate critics advantage: they don't have to prose new solutions, they don't even have to say that the current politicians are wrong on the issue. It's somehow become insightful to criticize the establishment for not "discussing" an issue enough - as if the only time these public figures can discuss is when they're in public, as if the sophistic paradigm of point-counterpoint debate in the Agora were the ultimate goal.
Nick Kristof had seemingly given up the traditional op-editorialist metier and taken up a new hobby: saving the world. But in "Talking About Israel," he assumes all the bad habits of a seasoned pundit. He's taken a true premise, that the Palestine-Israel conflict is too complicated to blindly defend Israeli policy. But then, he's taken a position in shallow end of the pool and started cheap shots at those struggling to tread in the deep, shark-infested waters.
His basic premise: Israelis in the press and politics are far more ready to criticize their own government than American politicians:

American politicians have learned to muzzle themselves. In the run-up to the 2004 Democratic primaries, Howard Dean said he favored an “even-handed role” for the U.S. — and was blasted for being hostile to Israel. Likewise, Barack Obama has been scolded for daring to say: “Nobody is suffering more than the Palestinian people.” In contrast, Hillary Rodham Clinton has safely refused to show an inch of daylight between herself and Prime Minister Ehud Olmert.

Horribly unfair technique 1: use indefinite subjects to stand in for malevolent forces. Specifically, who is scolding Obama? Its poor English to use a passive voice and not identify the active subject of the sentence. But also it masks any sense of scope about those overwhelming enemies of discussion who happily scold. With more perspective, their ranks must be thin, considering the tear that Obama has been on. Further, could any politician in a vibrant democracy, including those free-thinking Israelis, say something without being scolded by someone? If Kristof wants a discussion, he has to allow for multiple rounds: both sides weigh toss their punches and counter-punches in a continual cycle. It would stifle the debate if Obama could say something without rebuke.
Technique 2: carefully select your summary quotes. "Howard Dean said he favored an 'even-handed role' for the U.S." Who are these zealots who "blast" the centrist that wants an "even-handed" approach? Why are they in charge? How could we be so blind as to follow them and reject the Dean candidacy, when all he wanted was to be "even-handed"? I wish they didn't "blast" him. Again, Kristof is quite nebulous claiming that Dean "was blasted," by not defining his enemy. But his hero is even more a distortion of reality. At one moment in his vast public record he said he wants to be "even-handed," which is a reasonable, if reason-less position. Kristof conveniently ignores any explanation or context for one line which really says very little. If I were a reporter who asked Dean how to deal with one of the great questions of the day, and he said "we should be 'even-handed'" and then stopped at that, I think I'd blast him too. To the extent that I could - as he's got a good 100 lbs on me.
Technique 3: show a light at the end of the tunnel, a shining pot of gold, a beautiful possibility in the distance, if only we'll follow you. Kristof promises that "We even know what that peace deal will look like: the Geneva accord, reached in 2003 by private Israeli and Palestinian negotiators." If only we could get our act together, we could move into this pre-fab tomorrow. Pay no attention to the inherent paradox here: we need more debate on the topic, but we've already got the solution? Kristof poses at one-upping the politicians, by showing his keen awareness of the best developments on the topic.
Really, Kristof has shown that he's not the gadfly, who irritates politicians into better policy and closer inspection. He's being a sophist, demonstrating his rhetorical prowess, but leaving the great issues of the day. It was nice when Kristof stayed away from the sophist's Agora, but in his absence he's lost the ability to veil his tactics. Maybe next time you're being manipulative, be a bit less transparent?

The Economist, better family bonding than Monopoly

Some families sit at the dinner table and talk politics, others talk American Idol. I'm not exactly sure what's said at the Wiczer household, but these are the emails we send each other:
I started by sending a link to this economist article:

>For my favorite scientists, "pure" or otherwise.
>I find it particularly interesting the way that the article frames the entire post-WWII American R&D complex as a result of some 'enlightened' memo from a Presidential adviser. Certainly, journalists are given to dramatize the contributions of an interesting individual. If the article won't open, go:
>https://netfiles.uiuc.edu/dwiczer/www/Economist - 3-1-07.pdf
http://www.economist.com/science/displaystory.cfm?story_id=8769863

My brother responded with:
So, I read most of the article, and it bothers me a bit. For one:
"Academics, he says, cannot do this, since they continually struggle for funds. This forces them into projects of just one or two years—even shorter than industry horizons."

Does that make any sense to you whatsoever? I think journalists are envious of academia. They try to put it down and say it's not as much of an "ivory tower" institution anymore, and it's even more cut-throat than industry... Although those statements may be true in part, there's no way academics have to be more near-sighted than industry.

I also got quite sick of statements like, "Old-fashioned R&D is losing its ampersand."

Dad brought up this point a few days ago: In lots of techical and scientific things (DOE labs, industry, academia), bureacrats and organizers like to think that the science they oversee runs smoothly and according to the protocal and organization they set forth. But the truth that everyone knows is that the science is much more flexible. It's just not possible to have true strict deadlines, etc on creativity or science. So, I think a lot of this article is about how orgainzers think industrial science is changing and how project managers are changing what they assign. But I bet the actual shift in the way the science is being done is minimal.

The economic shifts, however, are undeniable. Whether the work going on is the same or not, it is clearly on a much smaller scale. And that's where this article may be interesting, although it seems the explanation is the classic economist's cop-out: competition.

Thanks for the article, David. I like to hear about science in journalism much like you like to hear about economics in journalism. Because they're tricky. To what extent do we try to tell the truth and when do we compromise precision for understanding. Also, how deep do we go? Can we really talk about the science, or should we just talk about the computers you all know and love and are interested in reading about. This guy put in a real effort to give a worthwhile account accessible to the economist about an aspect of the scientific community and why it's important, and that's probably the best way to do it. But it bothers me that there may have been a sacrifice in accuracy. Attached is a reasonably interesting article on how to approach the subject.

Regards,

Michael

And I retorted:

I sympathize with a lot of what you're saying. Journalists seem to have little understanding of academe, and the standard operating procedure at the Economist tends to address such an issue by making stronger assertions. I think for a business person, used to understanding the world through deadlines and understanding deadlines by the limit of available funds, a cycle of two year grants does seem out of sync with the traditional needs of research. They observe short funding contracts and long development times and conclude there's an asymmetry, but what they don't understand is that these funds are not the same "hard budget constraint" to which they're accustomed.
Your other article starts about the precision of language, that certain terms are used differently in the context of science and in everyday usage. I think this is a prime example: money means one thing to the business world and another to the scientific community (otherwise the scientists would all be investment bankers).
I just had an experience akin to that which she describes: a student wouldn't stop talking about "the long run," but horribly misusing the word, in it's special economic meaning. He'd talk about the multiplier "in the long run" which is a contradiction. After me getting visibly uncomfortable (this was Survey Building, we were surrounded by economists) I basically had to tell him never to use those words again.
I also like the anecdote about Newton's laws remaining valid as approximations given certain conditions. As an economist, I'm given to valuing approximations and conditions, but furthermore, it speaks to the general misunderstanding: all models are lies. They all hide something, but generally we find them to be pretty good at illuminating the important bits.
It's this kind of nuance that the Economist article misses: a researcher may be working within certain bounds today, but that doesn't mean the he must always. Certainly Palo Alto had good people who went on to Google who went on to the DOE. And maybe it's more of a measurement error. In the 90's we saw unprecedented productivity growth due to scientific innovation. Certain science became monetized. So now, there's some science with huge value added, and when we look at the dollar-figure impact of science, this work takes the fore. That doesn't mean there aren't other important contributions being made, perhaps as much as any other time. But now, the market value of some work, in industrial science, is greater than ever. It seems to be "winning the race" only because it's sped up so much more... that is contributed many more dollars and become more intertwined into the broad economy.
Love the discussion
D

David Wiczer
University of Illinois, PhD Program - Dept of Economics
email: dwiczer@uiuc.edu
office: 103 Survey Building

" I too shall lie in the dust when I am dead, but now let me win noble renown."
-- Homer

And things really get crazy when Dad decides to give an opinion:

Michael,

I could not agree with you more regarding the quality of this Economist article "Out of the Dusty Labs" March 2007 on industrial and university R&D.

This article has some accurate statements and then some inaccurate summary and generalization statements.

The real key to understanding R&D is that there is rarely pure R or pure D. There is a continuous "project specific" gradation between R and D; you can think of this as a continuous gray-scale - without the black and white at the ends of the scale.

This whole thing is related the issue we discussed earlier about managers and "bean counters" want to put all activity in nice, neat categories - the real world does not work that way. Lots of almost pure D work has generated some very impressive R results and lots of almost pure R work has generated some very impressive D opportunities. There is almost always elements of both R & D in most projects - which is why most people do not separate the R from the D and just lump it together. It's too hard to actually understand what is R and what is D -- and then what. Even if you could categorize every project's R & D components what are you going to do about it?

For example, it has been determined that project A has 37% R, and 63% D. You can't change this ratio. If a "bean counter" accountant says "No R in this facility, its not in the budget, do not do anything that looks like R, the D part must go to 100% by edict but the results from this work will simultaneously go to 0.

Michael, another example that you can relate to better -- Let's say that there is a Chemistry R&D project that has 81% R and 19% D components of R&D. If someone says, no D in this facility, this is a research lab! The results from this 100%-R Research Lab will rapidly go to 0.

The real world laws of Physics won't let you mandate how this mix should go. The goals of a project may result in a shift to one side or the other of the R&D spectrum. The author of this Economist piece has some correct statements but the generalizations are just wrong.

Now, let me also say, I see no problems with the pendulum of R&D shifting from one side to the other. I believe that I have seen some very shoddy R and some very shoddy D. A lot depends on the individuals involved in a project and the project goals. There have been abuses in the past in which non-performing R&D staff would hide their lack of output under the label of "Research" and similarly, poor performing Researchers would hide their inability to do original thinking as "we need to do Development".

There are real subtle shifts in emphasis based on budgets and the perception of what is needed but talking about R-only and D-only is wrong- headed and reflects on the overall ignorance of the authors about how "real" R&D happens.

More later.

Dad.

Bloggers say: "Rinse and repeat as necessary"

Of all the brilliant lines in marketing, the best of all is not a television slogan. It was not "Where's the beef," or "Just Do It," or even the old Budweiser line "Wassssaaaahhhppp." The best line was on the back of the bottle: when shampoo makers advised consumers to "rinse and repeat," their ambition was to double consumption of their product. A hot tech product that aggressively markets and expects 100% growth might not be so rare, but the "rinse and repeat phenomenon" (R&R P) was a mature industry with the ambition, with the audacity, to endogenously increase the size of their market.
It is a special thing when producers are able to create their own demand. There are a few good examples, when a mature industry revives itself: inthe last 50 years, business lawyers have driven their own employment, as business hire larger legal teams to fight off other, more powerful legal teams. Coca-Cola has launched Enviga, a new weight loss drink, to help shed the pounds that you gain drinking its other, sugary drinks.
Have political bloggers come so far that they need to endogenize their own growth? John Edwards' experience seems to prove this point. The blogosphere has proven its "maturity" by making itself integral to campaigns of anyone who targets "young" (meaning under 50) activists. However, bloggers are not just the sophisticated and savvy cutting edge of media, they are also the reprieve of base, personal-attack journalism. Blogs have discovered what the supermarket tabloid perfect years ago: readers in quantity (if not quality) are drawn to mud and the slingers can profit. The more prominent blogs and bloggers become, the more they can squawk.
Thus, in a cruel irony, by hiring bloggers, John Edwards opened himself up to the attack of other bloggers. But this is no triumph for "new media" or "web 2.0" or "young politics," or citizen participaition, or whatever tag line one affixes to the blog trend. Rather, its desperation: the last gasp of an industry that has reached the limit of its natural growth. There is only so much hair to wash, so shampoo companies see their future in getting twice the profit per strand. If bloggers hottest topic is to discuss their own ilk, this suggests they have no more insight into the real politics that make policy and decisions. If blogging is about the personalities of bloggers, then the internet Campus (maybe Think Tank 2.0), which was intellectual blogging, has now become the school yard. Working papers give way to scrawls on the bathroom stalls. Political blogging had promise, but maybe its too far extended if its resorted to marketing tactics of "mature" industry. Maybe next, Hanes could get us each to wear two pairs of socks?