Wednesday, 8 December 2010

The Ozzard of Wiz: or Market Definition

Daughter 1, aged 8, reports that the 4 year olds wanted to do the Wizard of Oz for school.  They phone the performing rights people, she says, who refuse on the basis that it would be too close to the centre of London.  Quote "Honestly Dad, some people are idiots.  Who really thinks that people in London would not go to a play in order to come and see some infants at a School doing it instead".  So now the kids are doing The Ozzard of Wiz.

Good thing her Dad was on the Competition Commission for eight years.  The gal understands market definition.

Wednesday, 1 December 2010

The Irish Bail Out Disaster

Assorted links.

1. Barry Eichengreen on the disaster that is the Irish bail-out, via Brad de Long.

2. Martin Wolf on the future of the Euro.  The lesson: like the minimum wage, there is always another margin of adjustment.

Monday, 1 November 2010

Do incentives matter? Evidence from the Rolling Stones.

For those who doubt the central economic assumption that agents react to incentives you need look no futher than this extract from an article about the Rolling Stones (as reported in Greg Mankiw's excellent blog)

The Stones are famously tax-averse. I broach the subject with Keith [Richards] in Camp X-Ray, as he calls his backstage lair. There is incense in the air and Ronnie Wood drifts in and out--it is, in other words, a perfect venue for such a discussion. "The whole business thing is predicated a lot on the tax laws," says Keith, Marlboro in one hand, vodka and juice in the other. "It's why we rehearse in Canada and not in the U.S. A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left, and they lost out. No taxes at all. I don't want to screw anybody out of anything, least of all the governments that I work with. We put 30% in holding until we sort it out." No wonder Keith chooses to live not in London, or even New York City, but in Weston, Conn.

More great insights into the economics of the Rolling Stones and the music industry are here.

Monday, 25 October 2010

Why Economic Growth is Still the Big Question and How to See It

The spending cuts dialogue seems to have moved today away from the numerator (the deficit) to the denominator (GDP).  Hooray.  Let’s not forget that growth can really help us get out of the mess we are in.

But its often hard to put over the sheer power of economic growth in a way that persuades people, who have iPhones, cars, flatscreens etc, just how remarkable modern economic growth is.  One very good method is set out in John Nye’s short piece.

Here are some facts on the table.  He starts by observing
    1. the average American’s annual income in 2000 was five times higher than thatin 1890 and
    2. 12 times higher than in the 1850s.

How best to bring this to life?  Consider the following table.  To see how much more an American worker can buy today, compare the number of hours she would have had to work to obtain various items in 1895 versus 2000.  Have a look at the bicycle row.  Today the worker needs to work 7.2 hours to earn it.  Back then, they needed to work 260 hours.  No wonder bikes sit rusting in the back garden or sell for nothing on eBay.  And, going back further in time, I’ve always been struck how in the dramatisations of Jane Austin there are so few possessions in people’s houses.   The final column compares the prices charged in the Montgomery Ward catalog with prices today, both expressed as a multiple of the average hourly wage, to give an index of productivity of making the goods consumed back in 1895 has multiplied.

Multiplication of Productivity 1895–2000: Time Needed for an Average Worker to Earn the Purchase Price of Various Commodities

For even more fascinating stuff on this, see the great Brad de Long here.

Hooray for competition : what fights discrimination?

In class we have stressed again and again the benefits of competition.  In addition, we looked today at arbitrage as what consumers might do and its consequences for the ability of firms to price discriminate.  Here's a lovely example of firms doing it and its consequences for the ability of other firms to price discriminate, from The Economist.
 Gender arbitrage in South Korea: If South Korean firms won’t make use of female talent, foreigners will
Oct 21st 2010 | Seoul

"Working women in South Korea earn 63% of what men do. Not all of this is the result of discrimination, but some must be. South Korean women face social pressure to quit when they have children, making it hard to stay on the career fast track. Many large companies have no women at all in senior jobs.

This creates an obvious opportunity. If female talent is undervalued, it should be plentiful and relatively cheap. Firms that hire more women should reap a competitive advantage. And indeed, there is evidence that one type of employer is doing just that.

Jordan Siegel of Harvard Business School reports that foreign multinationals are recruiting large numbers of educated Korean women.

South Korea is the ideal environment for gender arbitrage. The workplace may be sexist, but the education system is extremely meritocratic. Lots of brainy female graduates enter the job market each year. In time their careers are eclipsed by those of men of no greater ability. This makes them poachable. Goldman Sachs, an American investment bank, has more women than men in its office in Seoul.

 Firms will have to use all the talent they can find. If they don’t, their rivals will."

This finding is exactly that found by Sandra Black, page 41ff. She found that the opening of US state banks to competition raised the relative wages of women as new entrants hired hitherto low paid women and bid up their relative wages.

Wednesday, 20 October 2010

Assorted links

  1. The great Russ Roberts is in love.
  2. Where were you about two hours ago, at 20:10: 20:10; 2010?  Warney wants to know.

More on Spending on the Science Base

A lot of leaks before the announcements.  The Times (gated) reports the science budget is to be frozen in real terms, that is a much lower cut than the 40% being talked about.  They kindly quote my work with Gavin Wallis, which is here and explained on You Tube is hereAs they also note, David Willetts has been very energetic in defending the science base: here is one of his speeches here  and evidence in front of the House of Commons Science and Technology Committee (which also kindly quotes our work).  The spending review document confirms these rumors: page 6: "maintaining the science budget in cash terms over the
Spending Review period with resource spending of £4.6 billion". Hats off to David Willetts and those campaigning for Science.  Note that the science budget, unless something has changed that I don't know about, includes all research council monies, so includes research spending on arts and social sciences.

Update.  Here's the FT after the spending review day

UK science spending flat at £4.6bn a year
Science escaped the big cuts that some researchers had feared from the government’s spending review unveiled on Wednesday. The government’s core “science budget” will remain flat at £4.6bn a year over the next four years, amounting to a likely reduction of around 10 per cent in real terms.

"Asked what had changed since the 1980s, when the Thatcher government slashed research spending, David Willetts, science minister, replied: “The scientific community has been able to produce empirical evidence about the economic returns from research. The Treasury buys the argument that scientific research contributes to long-term growth.”

Tuesday, 19 October 2010

OECD innovation strategy and intangible investment

In August the OECD launched their innovation strategy.  Our COINVEST research team was very chuffed to be featured in Figure 1.  And comparative data on intangible investment, produced by our team is here.  A link to our UK survey work is here.

Corporate tax rates, 2010 data

Following from last week's lecture, what do you think would happen to corporate tax rates as the world becomes more globalised?  To check your answer have a look at page 29 of today's KPMG report.

Monday, 18 October 2010

Readings for Students from last week's lecture

Some recent posts to complement last week's supply-and-demand sessions

  1. The incredible Brad de Long on markets, consumer and producer surplus.
  2. From Freakonomics a long and thoughtful piece on whether people really do respond to incentives
  3. Supply and demand in the university market
  4. Monetary estimates of externalities from the Department of Transport, para 46.  Thanks to Geoff Riley for the tip.  

Why we need an IKEA Champion now

The BBC's excellent technology correspondant Rory Cellan-Jones reported on the Today programme this morning that this week is Get Online Week. I have to say that I was unaware of this effort until this morning.  Nor was I aware that we had a Digital Champion, Martha Lane Fox, who promotes it (with a mix of private and public money).  She has launched her Manifesto for a Networked Nation which aims to "get everyone of working age and those preparing for retirement online within the lifetime of this parliament".

Cellan-Jones reports the information provided by the Champion: "More than nine million Britons have never used the internet, and they tend to be more elderly and less well-off. Events promoting web use will take place across the UK. The campaign will hammer home a simple message, that the internet can save you money. Research by UK Online Centres, which was set up by the government to provide public access to computers, found that a third of new internet users reckoned they had already saved more than £100 by being online."

The number of eBay, Facebook and Google users (let alone of online pornography) makes me think it's unlikely that people are having much trouble logging on.  So let's have a champion to help with something that's really difficult.  I mean of course putting up IKEA furniture.  To test this proposition, I tried cutting and pasting IKEA for "online" and "internet" into the paragraph above.  It reads:

"More than nine million Britons have never used IKEA, and they tend to be more elderly and less well-off. Events promoting IKEA use will take place across the UK. The campaign will hammer home a simple message, that IKEA can save you money. Research by UK Online Centres, which was set up by the government to provide public access to computers, found that a third of IKEA users reckoned they had already saved more than £100 by using IKEA."

This IKEA test suggests to me that Online week is a waste of money. Why don't we use this public money instead to help with the Science Budget the evidence for which suggests very high returns?

For students of economics, I offer the following thoughts.  Economists genererally justify public subsidies if the activity produces public goods (R&D) and taxes if public bads (carbon).  What public good does this campaign produce?  Internet usage confers a private benefit to the user, which is why we generally trust users to get on without public money.  But there is some public benefit over and above that since new use of the internet improves things for others (a "positive externality")by expanding the network with whom one can communicate. How much is that positive externality?  In the Competition Commission's 2002 inquiry into Mobile Phones, this argument was used by the Phone companies.  They argued it that monopolistic termination charges (charges levied by operators to users on other networks) were socially optimal since they helped subsidise handsets so expanding the network.  Mr. Justice Moses, the High Court judge who eventally had to adjudicate on this, awarded a fraction of a penny per call for this social externality.  So I don't think this is a wise spend of public money.

Sunday, 17 October 2010

Why the Science Budget Should be Ringfenced

My friend Gavin Wallis and I have done a lot of work trying to measure the impact of the Goverment's spending on the Science Budget.  This is spending on public sector R&D, which is grants to Research Councils (which then go to universities), plus direct spending on Civil and Defence R&D by governments. Our data indicates very substantial payoffs to Research Council spending, which of course is determined by competitive bidding by academics in competition with each other (another reason why competition is good). The paper is here and my debut on You Tube is here (you gotta wait 38 seconds but you also get to see the excellent Romesh Vaitilingham and Ammon Salter).


We went to see Birdsong last night, an evening made more pleasurable by bumping into both one of my students (hello Daneesh) and our cousins (hello Emma and Sarah).  Verdict: a bit like your favourite guitar player doing an acoustic version of Bat Out of Hell: it's just missing something.

Markets everywhere reports that Fifa is investigating allegations that two of its officials offered to sell their votes in the contest to host the 2018 World Cup.  The key assumption in Economics is of course that people respond to incentives.  Do other social sciences have this at their core? I'm not sure.  One might say of course that most of the officials at FIFA are not selling their votes: but if enough do, that would be enough to determine the outcome of the competition.  Second key economic insight: everything is determined at the margin.