Saturday, May 30, 2009

Sentence of the day

But then again, if it weren't for the FED, I'd be hunting deer on Park Avenue instead of writing this article. - Charles Davi.

Thursday, May 28, 2009


Wednesday, May 27, 2009

Obama's argument for education vouchers

From his remarks in nominating Sonia Sotomayor for Supreme Court of the United States:
When Sonia was 9, her father passed away, and her mother worked six days a week as a nurse to provide for Sonia and her brother — who's also here today, is a doctor, and a terrific success in his own right — but Sonia's mom bought the only set of encyclopedias in the neighborhood, sent her children to a Catholic school called Cardinal Spellman, out of the belief that with a good education here in America all things are possible.

With the support of family, friends and teachers, Sonia earned scholarships to Princeton, where she graduated at the top of her class, and Yale Law School, where she was an editor of the Yale Law Journal, stepping onto the path that led her here today.
Oh, but one person's life experience is anecdotal. What does evidence tell us?

Citigroup stock price anomaly

Given that Abu Dhabi owns a great deal of Citigroup, this post may be of interest to followers of the UAE economy:
When the markets closed last Friday, the cost of buying 1,000 shares of Citigroup in these three ways were (using price quotes from Yahoo and ignoring transaction costs):
Method Cost

Simple $3,670

Preferred $3,052

Synthetic $3,160
Note: The preferred calculation is based on the Series F; other preferreds give slightly different values. The synthetic is based on options that mature in September 2009 with a strike price of $4.

What’s going on here? Why does it appear that investors in the common stock are overpaying by as much as 20%?

Tuesday, May 26, 2009

Dumb, Dumber, Dumbest

For those Americans who think biofuels is a good idea:
Forcing the market to produce large amounts of renewable fuel will harm consumers in two ways: it will increase prices at the pump, because biofuels are more costly than gasoline, and it will drive up the price of food, because it diverts crops into fuel. The impact of food price inflation will weigh most heavily in developing countries where food purchases comprise larger shares of consumption. Food expenditures account for as much as 70 percent of household consumption among lower income groups in the developing world.
Right now, Congress is considering the Waxman-Markey bill, which would establish an economy-wide cap on greenhouse gases. With a firm cap in place, a law that mandates different fuel mixes will increase the cap’s compliance costs and will not achieve any further reductions. Indeed, to the extent that land use changes are not captured by the cap, the biofuels mandate may actually lead to emission increases. Unfortunately, not only does the Waxman-Markey bill keep the biofuels mandate in place; it goes one step further by creating a renewable electricity standard that mandates different fuel types for electricity generation.
That's Ted Gayer writing at The American.

And then you have the fuel economy standards just agreed to. Heaven forbid we should do something sensible like introduce a carbon tax. Or, at least, cap-and-trade.

Does the New York Times need a Hal Varian?

Wired has a great story on how google uses auctions to sell advertising, a story that focuses on the economist Hal Varian. From the Wired story:
Google had already developed the basics of AdWords, but there was still plenty of tweaking to do, and Varian was uniquely qualified to "take a look." As head of the information school at UC Berkeley and coauthor (with Carl Shapiro) of a popular book called Information Rules: A Strategic Guide to the Network Economy, he was already the go-to economist on ecommerce.

At the time, most online companies were still selling advertising the way it was done in the days of Mad Men. But Varian saw immediately that Google's ad business was less like buying traditional spots and more like computer dating. "The theory was Google as yenta—matchmaker," he says. He also realized there was another old idea underlying the new approach: A 1983 paper by Harvard economist Herman Leonard described using marketplace mechanisms to assign job candidates to slots in a corporation, or students to dorm rooms. It was called a two-sided matching market. "The mathematical structure of the Google auction," Varian says, "is the same as those two-sided matching markets."

Varian tried to understand the process better by applying game theory. "I think I was the first person to do that," he says. After just a few weeks at Google, he went back to Schmidt. "It's amazing!" Varian said. "You've managed to design an auction perfectly."

To Schmidt, who had been at Google barely a year, this was an incredible relief. "Remember, this was when the company had 200 employees and no cash," he says. "All of a sudden we realized we were in the auction business."
Would the New York Times need a Varian? The reason I ask is, NYT ranks search terms, but it doesn't seem to know much about why they are important -- and, by extension, if there's a way to make the most out of what their readers are looking for. Listen to the NPR story here. (My wife realized United Health Care was a search term because Elizabeth Edwards mentioned it on Jon Stewart. But why is "May 4, 2009" highly ranked -- because of swine flu?")

Sunday, May 17, 2009

Should your economics department pay a premium for to attract female faculty?

Suppose the goal of your department or university is to increase the number female majors in economics, math, engineering and science. Consider these results:
This paper begins to shed light on this issue by exploiting a unique dataset of college students who have been randomly assigned to professors over a wide variety of mandatory standardized courses. ... Our results suggest that while professor gender has little impact on male students, it has a powerful effect on female students’ performance in math and science classes, their likelihood of taking future math and science courses, and their likelihood of graduating with a [science, technology, engineering, and math] degree. The estimates are largest for female students with very strong math skills, who are arguably the students who are most suited to careers in science. Indeed, the gender gap in course grades and STEM majors is eradicated when high performing female students’ introductory math and science classes are taught by female professors.

High IQ goes hand in hand with patience, calculated risk-taking and interpersonal judgment

Tim Harford on recent research by Aldo Rustichini, Stephen Burks, Jeffrey Carpenter and Lorenz Goette:
An intriguing pattern emerged. The truckers who scored highest on the IQ test were also more patient and more willing to take calculated risks, rejecting unfair gambles and accepting favourable ones. Their choices revealed a more consistent attitude to risk and a more consistent level of patience, too.

The high-IQ truckers were also better at predicting what other players would do in the trust game, and secured more money overall. When they played second, they were more discriminating, rewarding co-operation and punishing those who would not trust them.

High IQ goes hand in hand with patience, calculated risk-taking and interpersonal judgment, it seems – and this is true after statistically adjusting for age and race.

Nor is any of this limited to the laboratory. Many trainee truckers drop out before completing their first year of work, even though this means they must repay the trucking company their training costs, which run into thousands of dollars. This indicates a lack of patience, an inability to appreciate how much money is at stake or a serious miscalculation in the initial plan to be a truck driver. Whatever the reason, dropping out is correlated with Rustichini’s experimental tests of low IQ, impatience and bad judgment of risk or of other people.

Rustichini puts this in a far more striking way: that the ingredients for prospering in a capitalist society all seem to be present together, or absent together.
Read it all.

Saturday, May 16, 2009

Does it work for economists, too?

During improvisation jazz players turn off a brain area linked to self control:
While the musicians riffed on the piano, giant magnets whirred overhead monitoring minor shifts in their brain activity. The researchers found that jazz improv relied on a carefully choreographed set of mental events, which allowed the musicians to discover their new melodies. Before a single note was played, the pianists exhibited a “deactivation” of the dorsolateral prefrontal cortex (DLPFC), a brain area associated with planned actions and self-control. In other words, they were inhibiting their inhibitions, which allowed the musicians to create without worrying about what they were creating.
I know the most productive economists are those that have a set daily schedule for when they do research. But that doesn't negate the likelihood that they this discipline actually gets them into a zone where they can be highly creative, a zone which allows them "to create without worrying about what they were creating."

Friday, May 15, 2009

The global downturn and labor market opportunities in Middle East countries

The Middle East Youth Initiative is a joint project of the Wolfensohn Center for Development at The Brookings Institution and the Dubai School of Government. It has just released its report, Missed by the Boom, Hurt by the Bust: Making Markets Work for Young People in the Middle East. Its key findings (quoting):
• Recent high growth in the Middle East did not sufficiently resolve the region’s education and employment problems. Countries are entering the global slowdown with large pre-existing hurdles, including high rates of youth unemployment and deteriorating job quality.

• The global economic slowdown is hitting the Middle East at a time when the youth share of the total population is at a historic high, with nearly 32 percent of the population between the ages of 15 and 29. This means that a large number of new job seekers will continue to exert pressure on the region’s labor markets for years to come.

• Policies that increase public sector employment and job protection while delaying progress toward greater global integration are likely to be counterproductive. The path to economic recovery will require cultivating a skilled workforce, expanding the role of the private sector, and reducing the appeal of government employment.

• The report presents ten policy recommendations. Countries in the Middle East committing to fiscal stimulus should prioritize job creation for young people. Governments should engage in an open and transparent dialogue on the economic crisis with citizens, the private sector, and civil society. Additional recommendations include reforming public sector hiring practices and raising the value of informal jobs – which are serving as a refuge for an increasing number of young people – through investing in skills development.
My emphasis.

See also, Stalled Youth Transitions in the Middle East: A Framework for Policy Reform. From the abstract:
The root cause of youth exclusion lies in the institutions that mediate transitions from school to work and family formation. These institutions provide the signals that tell young people what skills to learn, tell firms whom to hire and how much to pay, tell credit agencies to whom to lend, and tell families how to evaluate the potential of a young person as a future spouse or parent. In the region, many of these signals and incentives are skewed, leading to adverse consequences for young people, including a mismatch between those skills obtained in the education system and those demanded for jobs in the growing private sector.


Thursday, May 14, 2009

The Norway Way: Frugality

Consider a small oil-rich oil-exporting country. The UAE. Or Norway.

The New York Times reports on how Norway has weathered the global recession and the downturn in oil prices:
With a quirky contrariness as deeply etched in the national character as the fjords carved into its rugged landscape, Norway has thrived by going its own way. When others splurged, it saved. When others sought to limit the role of government, Norway strengthened its cradle-to-grave welfare state.

And in the midst of the worst global downturn since the Depression, Norway’s economy grew last year by just under 3 percent. The government enjoys a budget surplus of 11 percent and its ledger is entirely free of debt.
Instead of spending its riches lavishly, it passed legislation ensuring that oil revenue went straight into its sovereign wealth fund, state money that is used to make investments around the world. Now its sovereign wealth fund is close to being the largest in the world, despite losing 23 percent last year because of investments that declined.
Unlike Dublin or Riyadh, Saudi Arabia, where work has stopped on half-built skyscrapers and stilled cranes dot the skylines, Oslo retains a feeling of modesty reminiscent of a fishing village rather than a Western capital, with the recently opened $800 million Opera House one of the few signs of opulence.
Notice in that last paragraph -- that was "Dublin", not "Dubai."

Read it all.

Tax-free doesn't mean lower prices

A study by The National finds that consumers pay more out-of-pocket for products in the tax-free UAE than in countries that have sales and value-added taxes:
Prices in the UAE of consumer goods, from cosmetics to electronics, are among the highest in the world, an investigation by The National has found.

A survey of major cities reveals that shoppers in this country frequently pay significantly more than their counterparts in London, New York, Paris and Hong Kong.
Read it all here.

If your motivation to visit or reside in the UAE is that you've been told it's tax free, don't buy the sales pitch that tax-free means you'll save money.

Thanks to a reader for the pointer.

Friday, May 08, 2009

A KAUSTian bargain

King Abdullah of Saudi Arabia has provided the country's new university, King Abdullah University of Science and Technology (KAUST), with an $11 billion campus and a $20 billion dollar endowment -- rivaled only by Harvard and Yale.

But that would be a waste if it was organized like other universities in the country. The plan is it won't be. It will be run like the famously efficient oil ministry -- because it will be overseen by the oil ministry.
To make his vision a reality, the king appointed his minister of oil, Ali Ibrahim Al-Naimi to lead the project. That decision was controversial because the obvious choice would have been the minister of education Faisal bin Abdullah bin Muhammad. The problem with turning the king's vision over to the Ministry of Education, however, was that that ministry is accustomed to enforcing Saudi Arabian law on its existing university campuses, and the enforcement of those laws on the new campus would surely have limited international engagement. In Saudi Arabia, women are not allowed to drive, they are required to wear the traditional abaya, a flowing black cloak that must be worn at all times in public, and they are strictly forbidden to be accompanied by any man who is not their immediate relative.

Such restrictions on women would surely have limited the new university's ability to attract foreign students and faculty. When I was in graduate school at Harvard, I worked alongside Phd students from Israel, Poland, China, the Netherlands, Italy, South Africa, England, Singapore, Turkey, Germany, and so on. In addition, I took classes from professors of similarly varied origins. That pattern is not unique to Harvard; the world's great universities are remarkably diverse places. Therefore, the Saudis reasoned that for their new university to produce great scholarship, innovation, and entrepreneurship, it would need to attract the best and brightest from around the world; but doing that meant that they would have to be flexible with many of their customs.
Read it all at The Bulletin of Atomic Scientists.

From what I understand, it's not just that the campus will be liberal. It's that the professionals will be allowed to run the place with a minimum of intervention. They'll be held accountable for the right things -- whether they create a first class institution of learning.

Tuesday, May 05, 2009

Bahrain allows labor mobility

Bravo Bahrain!

The Nation reports:
Bahrain will implement a new labour law that allows foreign workers to switch jobs without the consent of their employer, Majeed al Alawi, the minister of labour, said yesterday.
He said the law would help to bring an end to the trend in which Bahrainis sponsor several, sometimes hundreds of foreigners, and charge them a “visa fee” to work with another employer. The workers, mostly from the Indian subcontinent, are not allowed to change jobs without the permission of their sponsor.
“The end of the sponsor system is the most important aspect of this law because in my opinion that phenomena does not differ much from the system of slavery and it is not something suitable for a modernised country like Bahrain,” said Mr al Alawi, who is also chairman of the Labour Market Regulatory Authority.
“The new law will also help revitalise the labour market in the country, raise wages and improve the overall work atmosphere for everyone, including citizens,” Mr al Awari said.
As I have long argued at The Emirates Economist, the sponsorship system in the Gulf States has some large downsides. One is that it places the government in the impossible position of policing employer abuse of foreigner workers. It is far better to give workers job mobility; they can leave and find another job if they get taken advantage of by the current employer. To avoid this the employer keeps compensation in line with the competition.

Another big plus is that the sponsorship system works to the disadvantage of citizens seeking employment in the private sector. The reason goes back to mobility. Citizens were "protected" and could change jobs at will. From the perspective of employers that made them less desirable than foreigners. The reform levels the playing field.

I encourage all Gulf countries to monitor the Bahraini labor market, and implement similar reforms or improvements on them should the evidence warrant.

See last month's post on other reforms in the Bahraini labor market. Bahrain is implementing many of the sorts of reforms suggest in a report prepared c. 2005 for the Bahrain government by McKinsey & Company. At one time that report was posted at the Bahrain Economic Development Board.

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1. Would pedestrians be safer if cars were required to have spikes on the bumper?

2. An observer of the UAE sends this link with a suggested title: a collusive oligopsonistic development? The gist of the story is that the seven taxi companies in Abu Dhabi are adopting "to unify their pay structures and hiring processes in an attempt to attract drivers to the capital and curb discontent once they arrive" and we are supposed to believe this is good for the drivers. But see the definition of oligopsony.

3. Risque business in Pakistan.

4. A sample chapter from the new principles book by Cowen and Tabarrok. Recommended.

Monday, May 04, 2009

News of the weird

Gulf News
Dubai: In an unprecedented ruling, a court on Sunday convicted a mother of accidentally killing her foetus in a traffic accident, prompting a prosecutor to stress that the law preserves the right of foetuses to live.

The Dubai Traffic Court of First Instance fined the 27-year-old Lebanese woman Dh2,000 and ordered her to pay Dh20,000 in blood money for accidentally killing her nine-month-old foetus. The blood money is to be paid to the foetus's successors. A person has to pay 10 per cent of blood money for accidentally killing a foetus, according to Sharia. In the UAE, blood money amounts to Dh200,000.

Salah Bu Farousha, Head of the Traffic Public Prosecution, advised women in the third trimester of pregnancy to avoid driving except in cases of urgent need.

Saturday, May 02, 2009

Family relations

Wives in Kenya has started a boycott to deny their husbands sex. Their goal is to force political change in the country. Ida Odinga, wife of Kenyan prime minister Raila Odinga, has joined the boycott.

Like any boycott, alternatives sources have to be closed off. As reported at Foreign Policy blog, "The group has also said it's willing to pay prostitutes in order to make the ban more effective."

Wives in Afghanistan can deny their husbands sex, but new law "that has drawn Western condemnation for restricting women's rights does not allow marital rape as critics claim, but lets men refuse to feed wives who deny them sex, the cleric behind it says," reports the National Post. The CBC offers more details:
"As long as the husband is not travelling, he has the right to have sexual intercourse with his wife every fourth night," Article 132 of the law says.

"Unless the wife is ill or has any kind of illness that intercourse could aggravate, the wife is bound to give a positive response to the sexual desires of her husband."
What if the wife is traveling?

In apparent response to protests, President Karzai has said he will review the law he signed.