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The Melbourne Business School merger with the Faculty of Economics and Commerce (FEC) at the University of Melbourne was officially called off today. The story was pretty simple: MBS has had a decades-long history of being a self-funded and independent faculty. This is a model that has been pursued by many of the most successful business schools in the world and it had considerable backing from members of the business community who had given their money and their time to the School. In the end, it was those individuals who believed that this core feature of MBS had to remain. The merger — even in its very unique proposed corporate form — did not retain that and with that it is was doomed. Read more

Foxtel have announced a new download service for movies to a computer. It is PC only and kind of strange given that they have a box already tied to a network so it is completely unclear what market they are after. Anyhow, it turns out that the downloads will still count for ISP’s download caps. That means that to make use of this you would need to be paying lots already. Indeed, you might already be paying BigPond Cable. This is the typical serial monopoly problem although the twist here is one firm owns both monopolies which usually means this stuff doesn’t arise. To say that there will be no cost to structural separation is looking a fairly safe statement.

My Wryside Economics talk on ABC Radio National’s Life Matters program tomorrow is on “The Size of Nations”, a terrific book by Alberto Alesina and Enrico Spolaore, which posits that country size is a tradeoff between the economic benefits of being big (economies of scale in public spending, large internal market) and the political costs of size (more heterogeneous interests to manage). If time permits, I’ll discuss why 100 countries have arisen in the past half-century, whether there should be more nations in Africa, the impact that free trade has on separatist movements, and whether Australia should merge with New Zealand.

Update: The audio file is here. Incidentally, the line of questioning didn’t quite permit me to mention how we chose the topic. It came about because of a quip that Richard made the last time, in which he mentioned the size of Greenland. A subsequent conversation with my mother got me thinking about whether economics had anything to say about the size of boundaries, which turned out to be a great excuse to read a book I’d heard a lot about.

QUT’s Professor Paul Frijters has received the 2009 Young Economist Award from the Economic Society of Australia. It’s a biennial award, with the first receipient (in 2007) being Joshua Gans.

Paul’s award is richly deserved. He works on a vast array of topics, running the gamut from labour economics to development economics to econometrics. Paul works with amazing speed (he told me yesterday that he typically aims to write his first paper drafts in a single sitting), and has a CV that’s the envy of just about every economist in the country.

Paul is also the guy you want in seminars, whether as an audience member asking tough questions with typical Dutch directness; or as a presenter combining substance, anecdotes, theory, and methodology.

And as well as doing research on social capital, he believes in it. Practically every day at ANU, he would walk the corridor at noon, knocking on doors and shouting ‘the lunch train is leaving!’. We’ve missed him greatly since he left in 2006 for the humid shores of the Brisbane River.

I had to fly back from the Australian Conference of Economists yesterday just before Paul gave his presentation, but fortunately he’s posted the powerpoint and a background paper on his website. He chose to focus on a major research project that he is involved with, looking at rural-urban migration in China (perhaps the largest mass migration in history).

Congratulations, Paul.

Apparently a big result for Australia over the weekend, with the G20 to replace the G8 as the major international forum for discussing economic coordination. John Denton had a piece in today’s Age where he argued that this was the right body for economic leadership. I can’t remember any significant change in domestic economic policy in any country as a result of these types of forums. Is the US going to change monetary or fiscal policy in any way as a result of these meetings? Definitely not. Are we? Of course not. The main area where there is a need for international economic policy coordination is in the area of trade – and on this front the US prior to the G20 summit whacked a tariff on Chinese tyres, an act that the Economist magazine rightly described as “economic vandalism.” Read more

Glenn Stevens took the opportunity at Monday’s hearing of the Senate inquiry into government fiscal policy to reaffirm the independence of the RBA.  In other comments he put himself on the Government’s side in the debate over whether the Rudd Government’s spending and projected budget deficits are too large, and whether the stimulus should be slowed.  Stevens didn’t demonstrate any partisanship.   In the circumstances of Senate testimony he was obligated to express his opinion.  I don’t agree with his opinion — for me, the level of fiscal stimulus and especially in the form of cash payments was unjustified by Australia’s circumstances in the GFC – but I do not believe that Stevens is at all politically biased.

However, I fear the question of partisan behaviour by the RBA Board will arise in the next election.  If the Government goes full term and economic growth continues to accelerate, then monetary policy will be in a tightening phase come the next election in 14 months time.  During the previous election in November 2007, when interest rates were an important issue, the RBA Board chose to break with tradition and raise the cash rate in the middle of the election campaign.  That was a clear mistake.  That interest rate rise was not urgently needed, coming as it did some 5 months into the GFC.  It was an act of hubris on the part of the Board and it will come back to bight them when they have to choose whether to raise rates during the RBA meeting in the next election, in a campaign where interest rates may be the pivotal issue.

The text of my opinion piece  in today’s AFR on the MAp buyout of Macquarie’s management rights in MAp is below.   Read more

Two interesting new economics papers from the latest NBER batch.

Party Affiliation, Partisanship, and Political Beliefs: A Field Experiment (ungated unstable link)
Alan S. Gerber, Gregory A. Huber & Ebonya Washington
Political partisanship is strongly correlated with attitudes and behavior, but it is unclear from this pattern whether partisan identity has a causal effect on political behavior and attitudes. We report the results of a field experiment designed to investigate the causal effect of party identification. Prior to the February 2008 Connecticut presidential primary, researchers sent a mailing to a random sample of unaffiliated registered voters informing them of the need to register in order to participate in the upcoming primary. Comparing post-treatment survey responses to subjects’ baseline survey responses, we find that those informed of the need to register with a party were more likely to affiliate with a party and subsequently showed stronger partisanship. Further, we find that the treatment group also demonstrated greater concordance than the control group between their pre-treatment latent partisanship and their post-treatment reported voting behavior and intentions and evaluations of partisan figures. Thus our treatment, which caused a strengthening of partisan identity, also caused a shift in subjects’ candidate preferences and evaluations of salient political figures. This finding is consistent with the claim that partisanship is an active force changing how citizens behave in and perceive the political world.

A Cure for Crime? Psycho-Pharmaceuticals and Crime Trends (ungated link to earlier version)
Dave E. Marcotte & Sara Markowitz
In this paper we consider possible links between the advent and diffusion of a number of new psychiatric pharmaceutical therapies and crime rates. We describe recent trends in crime and review the evidence showing mental illness as a clear risk factor both for criminal behavior and victimization. We then briefly summarize the development of a number of new pharmaceutical therapies for the treatment of mental illness which diffused during the "great American crime decline." We examine limited international data, as well as more detailed American data to assess the relationship between crime rates and rates of prescriptions of the main categories of psychotropic drugs, while controlling for other factors which may explain trends in crime rates. We find that increases in prescriptions for psychiatric drugs in general are associated with decreases in violent crime, with the largest impacts associated with new generation antidepressants and stimulants used to treat ADHD. Our estimates imply that about 12 percent of the recent crime drop was due to expanded mental health treatment.

As we move into climate change debate season again, a timely post from Greg Mankiw about an issue that appears to be dividing the Government and, at least, the climate change activist part of the Coalition.

In discussing climate change legislation over at his blog, Paul Krugman says something that I believe to be correct, but he does not fully draw out the logical implications of what he says. Here what Paul writes:

And the burden on households from cap and trade depends on what’s done with the rents. In the original Obama plan, the rents would be used to pay for middle-class tax cuts; in Waxman-Markey, many of the permits are initially granted to utilities — but since these utilities’ profits are regulated, many of the rents would end up being passed on to consumers through lower prices.

In my view, that is a bug, not a feature, of the Waxman-Markey bill. From the standpoint of economic efficiency, the price of carbon emissions should be passed on to consumers in the form of higher energy prices, so that consumers can make optimal decisions regarding energy consumption. Consumers should be compensated for paying these higher prices via cuts in income or payroll taxes. Those tax cuts would be financed by the revenues received from the auctioning of carbon rights (or, better yet, a carbon tax).

To promote an efficient allocation of scarce resources, relative prices should reflect true social costs. Shielding consumers via the regulatory process, rather than through tax cuts, fails to achieve that goal and, as a result, makes environmental protection more costly than it needs to be.

You will recall that the Coalition falls on the ‘feature’ side of this issue. I think it would be a bug.

I sent the following letter to Gerard Henderson today.

Read more

A splendid new paper sums up some of the interesting developments in the field known as behavioral public finance (I wrote about this in my AFR column recently). The abstract is below, and some choice snippets are over the fold.

 

Behavioral Economics and Tax Policy (gated stable link, ungated unstable link)
William Congdon, Jeffrey R. Kling, Sendhil Mullainathan
Abstract: Behavioral economics is changing our understanding of how economic policy operates, including tax policy. In this paper, we consider some implications of behavioral economics for tax policy, such as how it changes our understanding of the welfare consequences of taxation, the relative desirability of using the tax system as a platform for policy implementation, and the role of taxes as an element of policy design. We do so by reviewing the logic of specific features of tax policy in light of recent findings in areas such as tax salience, program take-up, and fiscal stimulus.

Read more

My friend Michael Fullilove argues in The Australian that the PM is doing the right thing in seeking a UN Security Council seat. He point out that the cost of a campaign is likely to be around $35 million. This figure caught my eye, since it suggests that campaign costs are now approximately in line with the benefits that a developing country can expect to gain from a Security Council seat.

Benefits, you ask? From a 2006 JPE paper:

How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations
Ilyana Kuziemko and Eric Werker
Ten of the 15 seats on the U.N. Security Council are held by rotating members serving two-year terms. We find that a country’s U.S. aid increases by 59 percent and its U.N. aid by 8 percent when it rotates onto the council. This effect increases during years in which key diplomatic events take place (when members’ votes should be especially valuable), and the timing of the effect closely tracks a country’s election to, and exit from, the council. Finally, the U.N. results appear to be driven by UNICEF, an organization over which the United States has historically exerted great control.

The punchline:

On average, the typical developing country serving on the council can anticipate an additional $16 million from the United States and $1 million from the United Nations. During important years, these numbers rise to $45 million from the United States and $8 million from the United Nations.

Unfortunately (or fortunately, depending on your perspective), the study did not find any direct pecuniary benefits for developed countries of serving on the Security Council.

Club Troppo reports on a paper published by Mixon and Upadhyaya, who measured the citation impact of various Economics blogs. Core Economics does fairly well, with Joshua ranked 15, Steven 23rd, Andrew 33rd, etc. Read the article at http://clubtroppo.com.au/2009/09/20/ranking-economics-bloggers/. I’m happy that our work is making a measurable impact. I want to take this opportunity to thank our readers for your interest, and  I hope that you will continue to engage with our ideas in your professional lives, as well as by posting thoughtful comments on the website.

My op-ed today is on the touchy topic of stimulus spending. Full text over the fold (with the usual hyperlinks for anyone interested in reading the original research).

Read more

Macquarie Airports (MAp) is an entity listed on the ASX which owns 74% of Sydney airport and minority stakes in several European airports.  MAp has a board to represent the interests of its shareholders, but the management of MAp is done by a firm called MAML which is a subsidiary of Macquarie Bank.   For those management services MAp shareholders pay MAML about 1% of MAp’s market capitalisation per year plus 20% of increases in MAp’s market value above a global infrastructure industry benchmark.  The MAp board wants shareholder approval to buy all the shares of MAML from Macquarie Bank for $345 million in cash.  In a previous post I explained why the MAp board is wrong to value  MAML by simple discounted cashflow methods.   

MAp is not obligated to pay Macquarie anything in order to end the management contract with MAML. The MAp board could simply appoint other managers, either internal or external.  However, the board argues that ending the MAML contract would represent a change of control of MAp assets and thereby trigger clauses in its $4.0 billion of bank debt which would allow the banks to reprice the debt by up to 3% per annum.  That would cost MAp up to $120 million a year in extra interest.  Ok, so why doesn’t the MAp board either wait until the debt rolls over, or interest rates go down, and then end the management contract.  What is the hurry? Read more

It has been a couple of weeks since Paul Krugman set the blogosphere and academic lunch tables a buzzing with what was essentially a summary essay of what he has been saying for some time. The issue actually started last year when the Queen asked that same question at the London School of Economics. There is nothing like interest from her Majesty to get everyone’s attention. Of course, she was just asking what every non-economists were asking: wasn’t it your job to anticipate this?

Read more

I attended a fascinating roundtable last week on ‘open-source intelligence’ at the Office of National Assessments (ONA), a body whose mandate to ‘provide all-source assessments on international political, strategic and economic developments to the Prime Minister’.  As a recent US report describes the topic:

Open source information (OSINT) is derived from newspapers, journals, radio and television, and the Internet. Intelligence analysts have long used such information to supplement classified data, but systematically collecting open source information has not been a priority of the U.S. Intelligence Community. In recent years, given changes in the international environment, there have been calls, from Congress and the 9/11 Commission among others, for a more intense and focused investment in open source collection and analysis. However, some still emphasize that the primary business of intelligence continues to be obtaining and analyzing secrets.

As a tech-savvy bunch of readers, let me ask the question: if you were in the business of using publicly available data to fulfill ONA’s mandate, are there any novel or unusual sources that you would draw upon? This includes sources that would provide new information, as well as those that might help sift the wheat from the chaff.

(xposted @ andrewleigh.com)

I’m giving evidence at 10.45am tomorrow to the Senate inquiry into the government’s economic stimulus initiatives.* If you’ve read my paper on the topic, you’ll know everything I intend to say.

* Oddly, mine is presently the only submission on the inquiry website.

(xposted @ andrewleigh.com)

Greg Mankiw’s forays into debates are always a great read because they are a great write. Today’s NYT piece on health care reform is no exception. He illustrates the issue of who pays for medical innovation:

Imagine that someone invented a pill even better than the one I take. Let’s call it the Dorian Gray pill, after the Oscar Wilde character. Every day that you take the Dorian Gray, you will not die, get sick, or even age. Absolutely guaranteed. The catch? A year’s supply costs $150,000.

Anyone who is able to afford this new treatment can live forever. Certainly, Bill Gates can afford it. Most likely, thousands of upper-income Americans would gladly shell out $150,000 a year for immortality.

Most Americans, however, would not be so lucky. Because the price of these new pills well exceeds average income, it would be impossible to provide them for everyone, even if all the economy’s resources were devoted to producing Dorian Gray tablets.

He then proceeds to ask the real death panel question: who will get the pills and who won’t and, importantly, who decides?

But the question highlights an assumption: where did the $150,000 a year come from? Suppose first (to make things simple) that it is a once off rather than annual treatment. Suppose that it is x/300m where x is the total R&D costs for the magic pill (risk adjusted). So if it was for everyone in the US, x would have been $45 trillion. Not only is that unaffordable, that isn’t the cost of any innovation ever! So, it should be pretty clear that if it had to be recovered from the top 10% of wealth holders, they can’t afford it either.

So the $150,000 is more likely what the inventor would charge as a monopolist. Let’s suppose instead that the cost of this was a more modest $50 billion. You could recover that from the top 1% of the population at a cost of $150,000 but I suspect that the inventor of this magic pill could get more sales than that. For instance, they might make $300 billion as a monopolist (6 times their risk-adjusted costs). In this case, it would only cost $1,000 per person to cover the whole US. Would people vote for that? Absolutely. Indeed, the issue would then be the remainder of the world and their access to the pills: a far trickier issue.

And is it impossible to conceive of decision-making rights that would generate this outcome. Yes, again. We have it here in Australia in the form of the pharmaceutical benefits scheme (see here). Problem solved.

I came across a strange blog post by Gerard Henderson who appears to be associated with something called the Sydney Institute. In his regular post “Media Watch Dog,” he comments on the Media Watch that mentioned my work with Andrew Leigh on media slant and he also spends time plowing through posts of mine on this blog. There are over 4000 posts but he focused this one where I link to the xkcd comic on optimal urinals. Anyhow, you can read his post yourself but as you can see, Mr Henderson fails to understand what a hyperlink is.

For his benefit, a hyperlink is a web link where a writer has assigned the address of another piece of web content and creates a means by which the reader can look at it. Here is an example. Mr Henderson mis-attributes this hyperlink to xkcd as not only a link to something I have written but also to a link of a serious bit of research. It is neither. Mr Henderson mis-attributes various amusing quotes written by Randal Monroe to me. He then invites Media Watch to take a closer look at “my research.” I’d invite them to take a closer look at Mr Henderson’s posts. How can someone purporting to watch the media not understand the point of hyperlinks? That said, his post doesn’t seem to contain any itself so this web-stuff might not be his thing.

I published this in the Age last September, after a visit to Bangalore. I am back in Bangalore this week, and nothing in the piece below has changed.  India has some serious impediments to growth and poverty reduction, and recent growth in the services sector in India has to some extent distracted politicians from the fundamental problems with a lack of education, poor infrastructure, and rules, red tape and bureaucracy in India. The only alteration I’d make to the piece as published is that it is “good leadership” that is required, rather than just the “leadership” that I have in the last sentence. Follows is the piece…

When China began economic reforms in 1979 per capita purchasing power was around two-thirds the level of India. At that time both economies were dominated by a labour intensive agricultural sector, and despite the two countries having around two-fifths of the world’s population at that time, together they accounted for less than two percent of global trade. Today per capita purchasing power in China is more than double the level in India. Despite India’s very strong recent economic growth the slightly faster GDP growth in China and slower population growth there mean that the income gap is widening rather than narrowing. Read More

Posterous is an easy to use service that allows all manner of posting (twitter, facebook and blogs) via email. I figured I’d test it out here to see how it all looks.

That requires a quote:

> Like this.
And a video link. If it works, enjoy.

Posted via email from Joshua Gans’ Posterous

Sometime back I came up with a controversial notion that information is free. To be clear, it wasn’t that it ought to be free but that it actually was free. What people pay for is the medium.

Today, Paul Graham has a new essay out that says the same thing:

Publishers of all types, from news to music, are unhappy that consumers won’t pay for content anymore. At least, that’s how they see it.

In fact consumers never really were paying for content, and publishers weren’t really selling it either. If the content was what they were selling, why has the price of books or music or movies always depended mostly on the format? Why didn’t better content cost more? [1]

A copy of Time costs $5 for 58 pages, or 8.6 cents a page. The Economist costs $7 for 86 pages, or 8.1 cents a page. Better journalism is actually slightly cheaper.

It’s a good, free read.

I remember these ads from 1993 (I was in the US then).

It is amazing how many of these came true – GPS navigation, book search online, faxing from a phone, etc. None of them came from AT&T. Also, we are still missing the whole medical record thing.

My colleague Alison Booth has an article in VoxEU on gender, risk and competition (I blogged on part of this research agenda recently). Some snippets.

Read more

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