Sunday, 24 September 2017

Why study economics? Economics and computer science edition...

MIT is offering a new degree in economics and computer science, which again illustrates that there are lots of jobs available for economics graduates in the tech sector:
The new major aims to prepare students to think at the nexus of economics and computer science, so they can understand and design the kinds of systems that are coming to define modern life. Think Amazon, Uber, eBay, etc.
“This area is super-hot commercially,” says David Autor, the Ford Professor of Economics and associate head of the Department of Economics. “Hiring economists has become really prominent at tech companies because they’re filling market-design positions.”
Because these companies need analysts who can decide which objectives to maximize, what information and choices to offer, what rules to set, and so on, “companies are really looking for this skill set,” he says...
Asu Ozdaglar, the Joseph F. and Nancy P. Keithley Professor of Electrical Engineering and acting head of the Department of Electrical Engineering and Computer Science (EECS), says...
“If you’re thinking about humans making decisions in large-scale systems, you have to think about incentives,” she says. “How, for example, do you design rewards and costs so that people behave the way you desire?”
These issues will be familiar to any Uber user caught in a downpour. Suddenly, the cost of getting anywhere increases dramatically, which is also an incentive for Uber drivers to move toward the storm of demand. Surge pricing may be a scourge to customers, but it's also a way to match supply with demand — in this case, cars with riders.
Read more about the new degree at the link above. Fortunately, you don't need to go all the way to MIT to study economics and computer science. The University of Waikato has one of the top two economics departments in New Zealand, as well as a highly regarded computer science department.

[HT: Marginal Revolution]

Read more:

Friday, 22 September 2017

Elections, temperature and the irony of the 2000 US presidential election

Last month, Jamie Morton wrote in the New Zealand Herald about this article (open access), by Jasper van Assche (Ghent University) and others, published in the journal Frontiers in Psychology back in June. In the article, van Assche et al. look at data from US presidential elections and temperature (specifically, they look at changes between elections in both those variables). They found that:
For each increase of 1°C (1.8°F), voter turnout increased by 0.14%.
Importantly though, there was also an effect on which party voters voted for. Specifically:
...although positive changes in temperature motivate some citizens to cast their votes for the non-system parties, they are an even stronger motivator for some citizens to vote for the incumbent government.
 I found this bit from the final paragraph of the paper laughably ironic:
Another example concerns the 2000 presidential election. Based on our model, an increase of only 1°C (1.8°F) may have made Al Gore the 43rd United States President instead of George W. Bush, as Gore would have won in Florida.
That's right. There wasn't nearly enough climate change to make Al Gore president in 2000.

New Zealand goes to the polls tomorrow (although in reality, many voters have made their choice already). Will the incumbent National government be worrying about the weather forecast?

Thursday, 21 September 2017

Gary Becker on human capital

In ECON110 this week, we've been covering the economics of education. In this topic we theorise that, from the perspective of the individual, education is an investment in human capital. This 'human capital theory' comes from the works of Jacob Mincer and from 1992 Nobel Prize winner Gary Becker, who sadly passed away in 2014 (although it was Arthur Pigou who much earlier coined the term human capital). So it is timely that the Economist has had two excellent articles on Gary Becker and human capital over the last couple of months. It was the second one, from The Economist Explains, that caught my attention this week, but I think the earlier article from August is better so I'll quote from that one:
...human capital refers to the abilities and qualities of people that make them productive. Knowledge is the most important of these, but other factors, from a sense of punctuality to the state of someone’s health, also matter. Investment in human capital thus mainly refers to education but it also includes other things—the inculcation of values by parents, say, or a healthy diet. Just as investing in physical capital—whether building a new factory or upgrading computers—can pay off for a company, so investments in human capital also pay off for people. The earnings of well-educated individuals are generally higher than those of the wider population...
Becker observed that people do acquire general human capital, but they often do so at their own expense, rather than that of employers. This is true of university, when students take on debts to pay for education before entering the workforce. It is also true of workers in almost all industries: interns, trainees and junior employees share in the cost of getting them up to speed by being paid less.
Becker made the assumption that people would be hard-headed in calculating how much to invest in their own human capital. They would compare expected future earnings from different career choices and consider the cost of acquiring the education to pursue these careers, including time spent in the classroom. He knew that reality was far messier, with decisions plagued by uncertainty and complicated motivations, but he described his model as an “economic way of looking at life”. His simplified assumptions about people being purposeful and rational in their decisions laid the groundwork for an elegant theory of human capital, which he expounded in several seminal articles and a book in the early 1960s.
His theory helped explain why younger generations spent more time in schooling than older ones: longer life expectancies raised the profitability of acquiring knowledge. It also helped explain the spread of education: advances in technology made it more profitable to have skills, which in turn raised the demand for education. It showed that under-investment in human capital was a constant risk: young people can be short-sighted given the long payback period for education; and lenders are wary of supporting them because of their lack of collateral (attributes such as knowledge always stay with the borrower, whereas a borrower’s physical assets can be seized).
So many of the things we covered in class this week are found there, including the decision about private investment in education, the credit constraints that low income students face in borrowing towards their education costs (which is part of the rationale for a system of student loans), and one of the rationales for government involvement (that students would under-invest in their own education). Even though, as the article notes, behavioural economics has been used to attack the foundations of Becker's theories, on that last point I think behavioural economics actually makes the case stronger. One of the biases that behavioural economics has identified is present bias - quasi-rational decision-makers heavily discount the future (much more so that a standard time-value-of-money treatment would). Since the benefits of education happen in the future, those benefits are discounted greatly compared with the costs of education that occur in the present. So, quasi-rational people would tend to under-invest in education because they under-weight the value of the future benefits relative to the current costs.

The whole article (or both articles) is a good introduction to Becker's work on human capital. For a broader perspective on Becker's work, from the man himself, I highly recommend his 1992 Nobel lecture.

Tuesday, 19 September 2017

Book Review: Inequality - What Can Be Done?

Earlier this month, I finished reading "Inequality - What Can Be Done?" by the late Tony Atkinson, who sadly died at the start of the year. This book is thoroughly researched (as one might expect given it was written by one of the true leaders of the field) and well written, although the generalist reader might find some of it pretty heavy going. The book is also fairly Britain-centric, which is to be expected given that it has a policy focus, although there is plenty for U.S. readers as well. Unfortunately for those closer to my home, New Zealand rates only a few mentions.

Atkinson uses the book to outline his policy prescription for dealing with inequality (hence the second part of the title: "What can be done?"). This involves fifteen proposals, and five 'ideas to pursue'. I'm not going to go through all of the proposals, but will note that many of them are unsurprising. Others are clearly suitable for Britain, but would take much more work to be implemented in a different institutional context (that isn't to say that they wouldn't work in other contexts, only that they would be even more difficult to implement).

Atkinson also isn't shy about the difficulties with his proposals and the criticisms they might attract, and he addresses most of the key criticisms in the later chapters of the book. However, in spite of those later chapters, I can see some problems with some of the proposals that make me doubt whether they are feasible (individually, or as part of an overall package). For instance, Proposal #3 is "The government should adopt an explicit target for preventing and reducing unemployment and underpin this ambition by offering guaranteed public employment at the minimum wage to those who seek it". These sorts of guaranteed employment schemes sound like a good solution to unemployment on the surface, but they don't come without cost. I'm not just talking about the monetary cost to government of paying people the guaranteed wage. This guaranteed employment offer from the government might crowd out low-paying private sector employment, depending on the jobs that are on offer. Minimum-wage-level jobs are already unattractive for many people to work (consider the shortage of workers willing to work in the aged care sector, even though there are many unemployed people available for such jobs). So in order to encourage the unemployed to take up the guaranteed work offer, these jobs would need to be more attractive than existing minimum-wage-level jobs in other ways. Maybe they will require less physical or mental effort, or maybe they will have hours of work that are more flexible or suitable for parents with young children. These non-monetary characteristics would encourage more of the unemployed to take up the guaranteed employment offer, but they might also induce workers in other minimum-wage-level jobs to become 'unemployed' in order to shift to the more attractive guaranteed work instead. Maybe. The system would need to be very carefully designed, and I don't think Atkinson fully worked through the incentive effects on this one.

Proposal #4 advocates for a living wage, which I've already pointed out only works well when not all employers offer the living wage, but a higher minimum wage would simply lower employment, as the latest evidence appears to show. Proposal #7 is to set up a public 'Investment Authority' (that is, a sovereign wealth fund) to invest in companies and property on behalf of the state, but the link to inequality reduction of this proposal is pretty tenuous. In his justification for this proposal, I felt the focus on net public assets being a problem ignores the value to the government of the ability to levy future taxes, which is very valuable So, it's not clear to me that low (or negative) net public assets are necessarily a problem that needs solving.

Finally, it is Proposal #15 that is most problematic for the book: "Rich countries should raise their target for Official Development Assistance to 1 per cent of Gross National Income". I'm not arguing against the proposal per se (in fact, I agree that rich country governments should be providing more development aid to poorer countries). But if the goal of these proposals is to reduce inequality in Britain, this proposal would have at best no effect. If the goal instead is to reduce global inequality, the policy prescription is quite different, and could be more effectively achieved by avoiding most (if not all) of the other proposals put forward in the book, and simply raising the goal in Proposal #15 from 1 percent to 2 percent of Gross National Income, or 3 percent, or 5 percent. None of the other proposals would be as cost-effective in reducing global inequality as would increasing development aid.

That's about all my gripes about the book (note that they only relate to four of the fifteen proposals). Overall it is worth reading and I'm sure most people will find some things to take away from it. I certainly have a big page of notes, that I'll be using to revise the inequality and social security topic for my ECON110 class that's coming up in a couple of weeks. Especially, there is an excellent discussion that explains changes in inequality over time, and especially the increases in inequality that have happened across many countries since 1980 (this is an interesting place to start, since the time period then covers the period in the 1980s through to the mid-1990s, when inequality really was increasing in New Zealand).

If you're looking for an easy introduction to the economics of inequality, this probably isn't the book for you. But if you're looking for a policy prescription, or ideas on policy, to deal with the problems of inequality, then this may be a good place to start.