Interview with Kevin Murphy

In a wide-ranging interview, Kevin Murphy talks about rational addiction, the value of longevity gains, and gives us a glimpse of some future work he and Gary Becker might eventually deliver: thinking about trends in fertility in advanced countries.

Lowest-low fertility, like the total fertility rate of around 1.3 births per woman in Japan, is something that demographers have tried to understand for quite some time. The demographic transition experienced by developing countries with high fertility is much better understood.

R&D Grants: Balancing risk and return

Today's paper includes an article about grant money in cancer research and other research areas funded by the National Institutes of Health. It focuses on the process of awarding grant money, which is done based on the result of peer review of applications, in a process similar to that found in academic publication.

I'd bet that while every scientist you might talk to would agree that the system has flaws, they would probably also agree that it's difficult to imagine what a better system would look like. Highly innovative research is likely to also be risky, and peer review is bound to have a hard time with such proposals. On top of that, the NIH is charged with coming up with the "best" way of spending federal tax revenues, not exactly an uncontroversial activity. Politically speaking, private foundations can afford to take much bigger risks, even if from a functional point of view one might argue that the risk tolerance of the nation as a whole ought to be at least as great as across any subgroup.

The economics of textbooks

Our union president at CUNY emailed us to inquire about our opinions regarding the latest efforts in the Senate to lower the cost of textbooks for college students, this time by providing grants to faculty who write them. At issue would be the copyright; if you write a textbook paid for the public, should it become a public good? This issue was discussed last fall in an article in the Times.

And now I can't stop thinking about the economics of the textbook market. There's an interesting NBER paper recently on the demand side of the market that finds students are quite rational and forward-looking when it comes to purchasing decisions. They'll make educated guesses about publishers' new editions and buy only those textbooks that are likely to hold much of their value. This certainly fits my own perceptions of the extremely economical students at Queens College. They even dealt in second-hand course readers!

An interesting issue in the textbook market --- on the supply side --- is the incentive for creating a quality product. I think these parameters are debatable, but one could argue that key qualities in a textbook are:

that it has been updated relatively recently to reflect the current state of knowledge

that it is easy for the instructor to adopt; perhaps it is an updated version of a textbook already in use!

that it is paired with an online course homework system

(The last is probably the most discipline-specific. At teaching colleges in economics, online homework grading such as provided for specific textbooks by Aplia is becoming an absolute necessity due to class sizes and the lack of graduate student course assistants.)

The problem is that writing or updating a textbook is very costly to an academic in terms of lost time. But by and large, the academic marketplace does not reward professors for writing textbooks in the form of career advancement or prestige; instead, they're rewarded for publishing scientific articles (or books). This is where textbook publishers come in. They're intermediaries that polish up the product, mark up its price, and compensate professors for writing and updating textbooks.

It is surely no coincidence that two of the professors committed to open-source textbooks in the Times article are already full professors at prestigious universities. Although that's arguably exactly who you want to write textbooks --- established members of the field --- my point is that they don't have to worry as much about the opportunity cost of writing and updating textbooks that bring scant returns in other senses.

Another issue laid clear in that article is the large difference between fast-moving sciences in technology and relatively slow-moving sciences like history and economics, where textbook obsolescence is less of a huge issue. In the case of the former, forces seem to favor open-source publishing, maybe because it can respond so much quicker. But maybe also because there's more money in the industry!

Portfolio choice and aging in a down economy

Today's Times includes an article about investment strategies for folks nearing retirement now that the stock market has been down for several years. My favorite quote is from one of the investment advisors, who says, “One of my rules is don’t do something. Just stand there.” This is the often-heard 'buy and hold' advice based on stocks' good performance in the long run.

Another theme permeating the article is reductions in risk-taking through age, and the advisors phrase it in terms either of increasing aversion to risk or mean reversion in stock returns. But theoretically speaking, if you have Social Security and you're spending down your financial assets, you should actually go riskier as you age, because you can never "cash out" of Social Security, and it's basically risk-free in the short to medium run.

But do investment advisors see an increasingly select type of client through age? In other words, if you're comfortable with your investments, you won't get advice. If you're worried, you will. Can this help explain traditional investment advice about portfolio choice?

Freedom, democracy, and Coke

One of my favorite and most memorable New Yorker reads is a book review of A History of the World in 6 Glasses. It's not just Coke that has caffeine and gets us to socialize, of course, and it's not just caffeine that does it. Ben Franklin famously said that wine is the proof of divine adoration, but I'd put in a vote for the coffee bean and tea leaf too.

Another favorite of mine is the one on Dogfish Brewing, a somewhat less philosophical read but at least as entertaining. It opens with a recounting of how all kinds of mammals seem to love alcohol, as evidenced by rampaging drunk (beer thieving) elephants. The quote at the very end by Patrick McGovern at Penn about alcohol's unique effects on mammalian brains, namely to stimulate at first, is particularly interesting.

Had we all remained hunter/gatherers and were there no Neolithic Revolution, no agriculture, and no brewing of caffeinated or alcoholic beverages, would we ever have come up with as many great ideas? Or as many stupid ones?

Credit (crunch) where credit is due

I just wish the ode to Ben Bernanke appearing in this (bi)week's New York Magazine hadn't been penned by Jim Cramer, he of the Daily Show shame. But otherwise I'd have to agree with the assessment of Bernanke's adroit stewardship. From an economist's perspective, what is really striking is the de facto complete reversal in central banking from opacity to transparency over the past decade or two.

Nobody has a monopoly on anti-immigrant sentiment

According to a Times article today, some native Oregonians express the same disdain for Californian immigrants, and the same concerns about those mostly white immigrants taking jobs and causing traffic congestion that one often hears from groups opposed to international immigration. While anti-immigration sentiments could be driven at least in part by racism, this indicates how people can "improvise" when that isn't an issue!

Child sex preference in the U.S.

Today's Times contains an article on a 2008 study of the sex ratio among U.S.-born Asian American children in the 2000 Census by Doug Almond and Lena Edlund. Birth order was important; they found the sex ratio of the first child looked to be distributed about 50-50. It was the sex of the second child and on that appeared to reflect an abnormal male bias.

Off-center advice for graduates

Yesterday David Brooks and Gail Collins engaged in a very insightful back-and-forth about useful advice for high school graduates. Brooks wonders why Oprah and Dr. Phil seem to have cornered the market on information regarding how to meet "life's vital needs." I'd add another name to the list, Suze Orman, although I'm not sure that stable personal finances are quite the same provider of happiness as marriage and friendships. But they certainly require impulse control, which Brooks and Collins also talk about. And I'm sure that unstable personal finances are a source of unhappiness.

Collins seems to take aim squarely at the drive to get into expensive, prestigious colleges. I absolutely agree that circumspection is required; research shows, that earnings outcomes aren't appreciably better at a more prestigious college given a fixed quality of applicant. If that is true, then it follows that it isn't worth taking on student loan debt just for the privilege of attending a more prestigious university.

Bleak fiscal futures

David Leonhardt writes about massive deficits and debt today, citing some comments and new work by UC Berkeley's Alan Auerbach and William Gale. As those authors are quick to point out, they have been warning about looming fiscal imbalances for some time. What is particularly shocking is recent developments in the credit default swap market: a rise is the implicit/perceived probability of default by the U.S. government from 1 to 6 percent.

Marriage and sleep

File this under the "duh!" category: research suggests relationship issues reduce the quality of sleep, and poor quality of sleep reduces relationship issues. This is an example of the famous "sleep fights" made famous in my circles by a couple that, er, wasn't immune to relationship issues.

The other remark is that married women seem to have better-quality sleep than those who are never married, widowed, etc. You would think the latter comparison would be best made between currently married women and widows several years after the widowing, with the hope that ideally the widowing death would have been basically random and not long-lasting in its inducing of insomnia. Maybe never-married people don't get married because they can't sleep!

Politics intrude: Regional variations in health spending II

An article on June 8 discussed political reactions to the New Yorker piece I blogged about last week. Apparently the article got the attention of White House policymakers.

It is absolutely right that the Dartmouth Health Atlas research to which many folks (not the article so much) refer doesn't yet offer a positive result. All it points out is that there are vast differences between cities, counties, and states in Medicare spending. Gawande offers a suggestion about what he thinks may be driving it: the profitability to individual doctors of running more tests and getting reimbursed.

It seems to me that vast harm could descend from policies that seek to level the spending field while not attacking root-level reasons. Suppose we capped Medicare payments. If it's an annual cap, it's clear that profit-seeking doctors would just accelerate their procedures and claims to be the first to be reimbursed. Same probably for a monthly cap. If it's a per-hospital cap, that sounds more watertight, but it wouldn't prevent doctors from closing up shop and moving elsewhere, presumably under the radar once again.

If it's an evidence-based cap with data on initial underlying health conditions and outcomes, that would seem like a better solution. Sicker populations ought to get more spending and would under such a system. (This leaves aside the sticky question of whether you're maximizing life years, in which case you might not necessarily want to spend more on the sick, or pursuing social justice.) But the data and reporting requirements for such a cap would be large, and there's no guarantee doctors and hospitals would report it accurately.

Macroeconomics and politics in Iran

Today's New York Times includes an article reporting on the macroeconomic conditions in Iran, which are mixed. Back in February, the New Yorker ran an article about economics in Iran.

As forecast by the IMF, Iranian GDP growth in 2009 sounds relatively high at 3.2 percent. But population growth is around 1.5 percent, dragging per capita income growth down to 1.7.

Inflation has been a larger concern for some time. The Iranian Central Bank reports CPI inflation running 15.5% over a year earlier. I think the Times article cites the difference between annual averages in (roughly) 2007 and 2008, which is a figure more like 25.4%, up from 18.4% the previous year.

The last time inflation approached 20% was in the U.S. was in early 1947.

An update on Sen's "missing women"

A recent article cites a new study by Siwan Anderson and Debraj Ray on missing women around the world, following in the footsteps of Amartya Sen, who famously remarked about the trend back in the 1990s.

The "economics" of sports concussions

Yesterday's Times included an article about sports concussions among people under age 18 that highlighted the behavioral economics of the condition. While a majority of neurologists recommended strict rules that prohibit the return of athletes to the playing field following a concussion, a minority of them pointed out that such rules also encapsulate a perverse incentive for the athlete, namely not to report or admit having a concussion so as to avoid benching.

An additional likelihood is that an athlete suffering a concussion would probably be a little less capable of rational thought, but I imagine that would only increase the chance that he or she would decide to conceal the condition when possible.

Macroeconomics in theory vs. practice

Greg Mankiw writes about business school vs. econ department macroeconomists in response to a question from David Brooks, while Steve Levitt criticizes the subdiscipline for choosing to take the mathematical route toward understanding the macroeconomy, when it isn't apparent that's the best way.

It's always seemed a little strange to me how theoretical microeconomics gets its own field in Ph.D studies, sometimes just called "theory," while there are many more applied micro fields. In macro, you have both types of folks crushed together all under one tent. It's arguably much more difficult to do either job well in macro anyway; Levitt points out that there's just less macro data (which is probably why a lot of "macro" folks actually use individual-level data these days), and the whole economy is a lot harder to model theoretically than just a part of it.

Several years ago, Greg Mankiw wrote a very nice piece in the J. Econ Perspectives about the dual roles or two types of macroeconomist, discussing along the way how they came to be quite so distinct.

I'd like to see a renaming of "macroeconomics" in which we are clearer about what we often really mean: "banks, money, and fiscal policy" or something similar. There are macroeconomists in all kind of other subfields whose research is less directly relevant for macroeconomic policy per se. Like health and demography, just to take a totally random example.

Another look at the sources of health care cost increases

I guarantee you'll feel more like a communist --- and I mean that in a good way --- after you read Atul Gawande's latest piece in the New Yorker. He argues that patterns of considerably higher medical costs and higher rates of cost inflation in one Texas border county as compared with a neighboring county suggest that the economic motivation of hospitals and doctors are key.

Some usual suspects, at least that produce higher cost levels but not necessarily growth rates, are sicker populations and differences in medical training. The latter is kind of what Gawande is talking about, because he cites the Mayo clinic and other organizations that put physicians on salaries and then "team-heal" their patients, which is similar to the style of practice one would learn in medical school. This in contrasted with the model in which physicians order procedures and tests for patients and then pocket whatever Medicare or insurance reimburses themselves individually --- what Gawande believes is driving higher costs in one border county.

It's hard to believe the problem would be attributable to just one element of caregiving, but Gawande makes a pretty impressive case for it. What I found interesting was his vignette about how his own (New England) training was for more cautious, perhaps unfoundedly so, medicine than what he and his family received while on vacation in another part of the country. He didn't really address how important that might be, and one certainly suspects that it might be important for high-cost but also probably low-profit areas like New York City.