Archive for the ‘Economics’ category

Book Review – 7 of ’em

August 6, 2011

Lord of the Rings 1, 2, and 3 by JRRT

The last (and only other) time I read these was in 5th grade, before any of the movies had come out. They felt like one long series of events until they (spoiler alert!) finally destroyed the ring. I remembered Gandalf dying-but-not-really, the ents being badass, and that gollum was a pain yet important in the end. Reading them again having seen the movies a couple times gave me many more plot touchstones to rely on and look forward to, so I had a lot more fun this time around. They also did not feel painfully long. Most importantly – the MAPS. I’m a very spatial thinker, so knowing where in the topography they were trekking actually made the stories feel more grounded and less random. And I’m old enough now to appreciate some of the larger themes and subtleties of the character actions. Plus having taken too many doses of Harry Potter over the years, you notice way too many commonalities (wormtongue? really?) All in all, a great summer read.

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Atul Gawande – The Checklist Manifesto

An absolutely great little book. I had to read just a portion of it for a class and did not put it down that evening until I read the whole thing. The writing is accessible and easy and full of great anecdotes (but if you’re squirmy about gory medical stories like me, be prepared).

Essentially, Gawande is reminding the reader that people inherently forget things. Even routine things. This is a problem when we engage in certain tasks where forgetting key details is detrimental. The solution? A checklist.

A couple salient examples: in building construction, they use huuuuuuge checklists of all the parts and people and the schedule of when which has to arrive and do their job. They even have a checklist of who has to be consulted when something goes wrong in order to properly and thoroughly troubleshoot every problem. Second – airline pilots. They have scads of little checklists that help them out when any kind of problem arises. The lists might even feel facetious sometimes when they start out with “fly the plane” but sometimes in emergencies when you are dealing with all sorts of stresses, you forget even the most obvious of tasks, which can be critically important before going down to “flip this switch, adjust this dial” sorts of tasks.

Gawande is a surgeon, and there are apparently few checklists in medicine. He decides to implement them to some absolutely astounding improvements in medicine that no single pill or procedure could possibly create. Seriously.

Interestingly, people resist checklists. We don’t like to feel incapable. But (and we discussed this in class) the way to think about it is not that we are “stupid” but that checklists can actually be an aide. Without the list, we would have to devote mental space and energy to remembering each little task. Using a physical list both ensures that we never forget AND that we can devote our brains to the more complex tasks.

My summary might be decent, but really you should read the book. There are several other important points in it that I can’t even get to.

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Michael Lewis – The Big Short

The Michael Lewis of Moneyball fame brings his excellent writing to illuminate the characters who predicted the financial crash of 2007/8 and therefore made money off of it. For me, it taught me more thoroughly what actually caused the crash, since I had never really read very deeply into it. And it gave me another glimpse into the world of Wall Street, its language and sensibilities and players. It showed/reminded me that there is still a lot that I don’t know. A good book – I recommend to anyone who wants to learn the details behind the crash. The details are pretty mind-numbing (“credit default swaps”) if you don’t have something entertaining to lead you through them. Lewis provides that needed narrative.

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John Cassidy – How Markets Fail (The Logic of Economic Calamities)

Oh my god. I just finished a Stanford degree in public policy in which I took a lot of classes in economics. Those classes handed me a lot of analytical puzzle pieces. This book gave me my first outline of what the whole puzzle might look like finished. So good.

There are many (MANY) people who are champions of free markets all day every day. As in, free markets will guide our society to the best and most desired ends. In case the title wasn’t obvious, this book takes a shit all over that idea.

First off, the book takes you through some history of the field of economics. To anyone whose taken classes, be prepared for a greatest hits of economic minds. Smith, Hayek, Keynes, Friedman, Walras, Stiglitz, Summers, Pigou, Arrow, Volcker, Coase Greenspan. Hell, he even got Hotelling in there. Cassidy tells a tale of a field of study that spins some simple, grand theories that rest on some incredibly important assumptions that just do not exist in the real world. That nagging feeling that some of what you were learning in economics class didn’t fully apply correctly is because a lot of economists work in theoretical la-la land.

Then he gets into all the ways markets fail. Much of this I had heard before, but here it was all pulled together. Prisoner’s dilemmas can give firms the incentive to do something less beneficial for all (namely, the tragedy of the commons is an n-person PD where everyone would be better off taking less, but the incentive is to cheat and take more). Or when different sides in a trade have imperfect information, or the research by Kahneman and Tversky that links some of economics to psychology and is part of what’s called “behavioral economics” (which, sadly, one of my economics professors called “not real economics”). On and on. I might summarize that whole section of the book in another blog post just because it’s all so important.

Finally, he gets into the financial sector. I’ll give one description to illustrate what Cassidy explains to the reader. In a theoretical market in economics, the supply curve (price vs demand) is a positive relationship. At higher prices, the firm will sell more goods. The demand curve is inverse – at higher prices, people will buy fewer goods. Standard fare econ 101 (in my case Econ 1A). BUT. In a financial market, the demand curves can be all screwy, and  even a positive relationship. A high stock price that is getting higher means people want even more. I laughed when I read him describe this because it was so obvious and went so counter to basic economic theory you learn at the very beginning. It’s part of what creates bubbles – everyone sees everyone making money so they all buy in and drive prices up higher. Then something finally pops those expectations and bam. Clearly, financial markets are not the normal markets of economic theory. Thus, the “let the market be free and unregulated” argument falls apart in this sector. Unless you like bubbles and the pain when they pop. Or the government bailouts.

Anyways, great book. I want to go read some opposing arguments.

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Jared Bernstein – Crunch

To those who pay attention to economists, Bernstein is a liberal. This book ultimately has what are liberal policy prescriptions.

But I found a fair amount of his explanations to be rather persuasive. The most salient point I got from this book is the role of power in the economy. The free market removes a lot of price-fixing and production-level power that is centralized under other systems. However, there are still power dynamics within firms that allow money to flow up the chain or give certain people some control over others’ wages, benefits, and even employment. Sure it’s legal for bosses to cut wages and to fire workers, but those power dynamics have distributive consequences. Namely, they distribute the earnings of the firm to the top. So when people express allergic reactions to “redistributing wealth” by government, just know that it’s not the only place in society where wealth distribution decisions can be made.

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Phew. Lots of reading. And it’s only the surface of some economic issues that I want to explore more. Considering some kind of graduate degree in economics more than a month ago now…

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Concentrated Solar Power

April 14, 2011

Energy! This was on digg recently because Google was funding it. But it was also supported by a $1.6 billion loan guarantee from the US Department of Energy, so it’s funded in part by your friendly neighborhood American Recovery and Reinvestment Act of 2009! In watching the video, you notice that big names are in attendance, such as Ahnold and Interior Secretary Ken Salazar. Suffice to say that most DOE Recovery Act awards don’t get that kind of attendance and attention – this is a big deal.

It’s a puffy video, with cheesy music, and a lot of patting themselves on the back. But CSP has a lot of promise – cheap, simple, clean. Now that some BIG plants are going up, we’ll start seeing more and more of them. Unfortunately, they won’t appear as quickly as they need to, partly because energy politics in DC are so terrible these days such that the government won’t be investing as much. Alas.

Anyways, it’s a fun, optimistic watch. And it has some cool visuals (those are HUUGE mirrors!).

Determining Wages

February 20, 2011

Here’s a vast oversimplification, but an interesting starting point:

The smallest company: one person. She earns whatever she can get based on the market. What she doesn’t use to pay for supplies, she gets to keep.

Now imagine a company of two people. If they do roughly the same work, they probably spit those profits 50-50. Maybe they earn a surprising amount one year, so they decide to pour some of it back into their enterprise and scale up a little. Or they’re a master and an apprentice – the master keeps a majority of the profits, but it seems fair because the apprentice is learning, and will earn his own majority someday.

Extrapolate. Companies of hundreds. Corporations of thousands. Who makes wage decisions?

Is it an agreement involving everyone, where they democratically decide how much of the profits to award as bonuses and how much to invest in improving the enterprise? No – a hierarchical system usually exists. Higher-ups hire and determine wages of the, ah, lower-downs.

And because the workforce is so broad, managers can think in terms of labor supply. Several companies want to hire IT people, and only a finite number of IT people exist; where that demand meets the supply is where the wages are determined (roughly). We’re not talking about someone hoping they can persuade their friend to build the website for their product idea. This is macro labor demand.

So clearly, wage dynamics are complicated by forces outside the company. But looking exclusively inside the institution, how are wages determined? In larger companies, only a minority of the employees set salaries, right?

You, the manager, could decide to allocate the minimum amount for each type of employee (i.e., you pay them what they would earn anywhere else, so you don’t lose them to another company). Then the company (as an institution) has more money. Perhaps you award yourselves, the wage-deciders, higher salaries with that extra money. Or you give yourself the market rate for your position and use the extra profits to invest in R&D, or better HR, or some other improvement.

Suffice to say, because of the hierarchical structure of most companies, there is the possibility that the wage-setters can pay the minimum for labor, giving themselves a bigger cut of the pie. It’s a structural phenomenon that’s not anyone’s real fault (i.e. everything is perfectly legal, though perhaps douchebaggy). And sometimes it is difficult to determine where that supply/demand equilibrium is. But when self-interested people hold the purse, it’s not hard to imagine them take bigger slices.

Or – the decisions are skewed in a different way, like CEO salaries, where every company wants to bump their CEO’s salary up to the average to be competitive, thus perpetuating a cycle of higher CEO salaries.

But this whole issue is the reason why labor unions are important. By organizing, the lower-downs can check against the purse power of the higher-ups.

Sounds very early-20th-century, right? Marx…the rights of labor… etc. But there’s an argument out there these days that goes like this: part of the reason why there has been a growing wealth disparity in the US is because labor unions are no longer as strong as they used to be.

I’ve grown up in an upper-middle class family and am only in college, so I haven’t been exposed to labor unions much and as a consequence, haven’t really thought about or understood their worth before. But thinking systematically, they are a means to make sure people are paid decently. They aren’t necessarily the only means to do so (minimum/living wage, for example.) But the company derives its money from the demand for its products or services. And somehow, some of that money makes its way to everyone working in the building, CEO and janitors alike.

Then! It gets even more difficult when public employees salaries are determined in part by a completely separate voting body. How much political power can they amass to influence those votes? Sometimes a lot, I imagine. Wisconsin is testing that power.

Salary decisions are a bit easier to deal with when institutions are smaller, eh? Mom and Pop businesses they aren’t, these Googles and GM’s and state executive branches.

(sorry if any of this is painfully obvious… just needed to write it all out)

Trash

January 14, 2011

I’ve thought about recycling and composting before. It’s standard fare for someone involved in the sustainability movement. But I’ve rarely started my thought process with trash.

Then the NYTimes reminded me that you could focus on the waste.

If municipalities, states, or even the federal government somehow implemented a more direct – “you toss, you pay” structure, it could be a good financial incentive to move towards recycling. Why have I not heard about that type of policy tool much before? Where are all the advocates? It seems like it would be pretty effective. But maybe if no one talks about it, it’s not effective…

Either way, I’ll keep my eye out for research and case studies on that type of system.

Do You Support Music?

January 13, 2011

Cross written as a column for the Stanford Daily.

Where do you listen to music? Probably not just at concerts—it’s hard to escape a set of speakers in a regular day, pumping out tunes in your dorm room, in a store, on a set of headphones, in your car, etc. We enjoy the work of musicians all the time, so how exactly do we support them?

It’s gratifying to artists when people listen to their work, which could be considered one form of support. Sure, musicians play music because they like to, but rarely do they perform like hermits. Music is a social language; we play for each other. So ignoring financial concerns, it seems like society supports music a lot, with our mp3 players blasting songs all over the place.

Although, what classes or localities of music does society support this way? The pop-music industry farms out a small number of songs to the entire country. And not just Katy Perry, but over and over again, people also “support” the established, famous, great musicians. From Beethoven to the Beatles, every generation gives them a listen. Do we give lesser-known contemporary musicians equal support? It’s trendy, bumper-sticker identity politics to say something like, “support local music,” which isn’t the focus of what I’m suggesting. I take a more comprehensive perspective, that we should pay attention to the makeup of our music portfolios. If you want to support the broader world of music but only listen to Top 40, that’s a pretty limited scope of “support.” And luckily, we now have access to a much wider “local” music scene online. You don’t have to be in Seattle to discover the bands there anymore, for example.

A complementary question might be: how important is music to you? Perhaps you use it merely as part of the background environment in your daily life, or as a significant emotional experience, or something else entirely. Some would argue that if you like and listen to music a lot, you should be predicted to support the musicians more. Do you?

This is where we get into the finances. In the last decade, computers have changed the music recording industry significantly—a topic much discussed before. I don’t want to get into issues concerning what’s the most “fair” or “right” system to distribute recordings to people. From Napster knockoffs to Internet radio to bands making their music fully available, there are many models to discuss.

What I want to ask is the financial side of this column’s title: do you support musicians? How do you participate in the system in such a way that the musicians get paid for what they do? Be it through advertising revenue on Internet radio stations, concert tickets, purchases on iTunes, some donation mechanism or something innovative—if society wants to assist this part of the workforce, it needs to use some type of channel to do so. Clearly a lot of systems are in place and revenue does flow to musicians. I’m simply trying to remind the reader to consider your role and contribution.

Because unfortunately, when recorded music is so readily available, it’s easy for us to be free riders. You could download all sorts of music, making for hours, days and weeks of entertainment, without a cent ever going to a musician. That system assumes musicians must be (unhealthily) in it exclusively “for the art.” Having access to so much music is great, but we need to make sure we give back. And not just for fairness reasons—but because musicians are, by reputation, financially strapped.

I ask because I love music and I love that so many other people also love music and spend their lives creating it. I want them to be able to comfortably keep doing it. And to be honest, I’ve been a free rider too, downloading my share of songs. So I’m happy to pay for concerts, buy young bands’ albums on iTunes, and once I have extra income I hope to donate to the arts, maybe through some cool musician-microfinance scheme. Is it an optimal setup? Probably not. But I’m confident that we will keep figuring this thing out and continue to improve the situation.

Because in the end, arguments about “stealing music” are a turn-off to everyone. Engaging in positive discussions and brainstorming about how to support musicians is much more constructive.

Categories of Efficiency

December 26, 2010

David Owen’s piece in a recent New Yorker discussed efficiency, and an idea called the Jevons Paradox. Basically, when you make a system more efficient, people will take advantage of the added efficiency and use more.

The example given is refrigerators. A few decades ago, the government (I think) made some efficiency standards for fridges, and either due to that standard or product development, fridges used up a lot less energy. Fridge use, on the other hand, is way up. Owen talks via anecdote about how we aren’t one-fridge-per-house anymore, but full of mini-fridges for drinks and a second fridge in the basement for extra storage. It used to be too expensive to have more than one, but now we have a lot. So total energy use didn’t go down.

This is a reasonable worry. In light of much of the work going on at the US Department of Energy on efficiency, it should make a policymaker pause…

However! I think there are a couple different categories of efficiency at play. There are some parts of life people enjoy having in large(r?) quantities, if they can. Having more convenient drinks and a wider selection of refrigerated food is clearly something towards which people gravitate. But some activities, people only need to (and only can) do a limited amount of time/ways/whatever.

For example, a person can only drive one car at a time. Or, how often would you need to work at two computers at once? And, when you’re not in other rooms in your house, do you need the lights on in them? My biggest example is home heating/AC – you’re aiming for one temperature, so if it’s cheaper and faster for your heater to find it, then you’re golden. Making any of these activities more efficient in terms of the energy required won’t be the dominant factor in anyone choosing to do more of them.

(Side note: ok, maybe not with driving when gas is cheap vs expensive, but in Los Angeles, I’d say traffic is the biggest factor. Also, I understand the environmentalist’s desire to making driving on gasoline very expensive so we can finally switch fuels… that’s not entirely my point here.)

To be fair, there is a possibility that the money saved on heating and electricity will wind up going towards other, energy-consuming consumption. Your house can get to 70 degrees way faster, so you have an extra 100$ a month. So you go shopping, or drive to the beach, or buy another appliance. Substitution.

So maybe I just proved that there is no distinction… As noted in the article – it’s very hard to prove causality in the Jevons Paradox. People rarely (though might be starting to more often now) think, “Man, that energy-efficient fridge saved me $22.47 a month. After a couple years, I can buy a new fridge and then only be back to my original load!” I’d conjecture that the decisions are much less connected. People rarely do the analysis to see how much less money they would have had, and then go spend the extra earned cash. You have a bank account balance no matter what, and do financial decisions based on that quantity. Or not – or you have some other way – but that’s sort of how I do it (so far). Either way, it’s clearly not always a direct subsitution.

There’s one last aspect to it I want to bring up: there’s still a limit on how much people can do any one particular activity. I don’t foresee refrigerators in every room in every house. I don’t foresee people driving or flying 24/7 just because they can. Alone, you can only do so much. So imagine if we encourage more energy-efficient activities, and keep working to make the others more efficient. Except, then the problems arise more when the population keeps growing, and all these limited individuals make for a growing total amount of energy. Is there a Jevons Paradox of population – when people lead more efficient lives, we substitute with more people?

Ok – I’ll stop there for now. Energy ramble. Many people spend their lives thinking about this, I’m noobily scratching the surface.

Money Won’t Buy You a Candy Bar

August 19, 2010

Today the bus driver was annoyed when I handed him 17 quarters. But he couldn’t say no.

Bill Gates. All that wealth, in stocks and bank accounts and houses and planes. All useless in the face of a vending machine, when he forgot to get some small bills or change.

As anyone who didn’t have the right bills at a coke machine can tell you, all forms of money do not have the same utility. Credit cards don’t work on buses, cash doesn’t work on the internet. $5 bills don’t even work the same as $1 bills. Luckily, the exchange rates between formats are cheap – just costs a little time.

Are you a person that is willing to pay and be paid in change, or are you like a reverse vending machine, only accepting $10s or higher?