Repost from Econometrics by Simulation:
* If A is correlated with B and B with C, does A need to therefore be correlated with C?
* No.
clear
set obs 10000
gen A = rnormal()
gen C = rnormal()
gen B = A+C
corr A B C
Monday, August 13, 2012
On correlated variables
Infographic: Dominance in the Olympics
Also, Prof. Sicat's latest column, "Sports and national development", exploring the link between economic prosperity and success in the Olympics.
Wednesday, August 8, 2012
The changing nature of the US government
I'm sure the exact assumptions behind these numbers are debateable, but the broad theme seems well-established. Back in the 1960s, about one-third of all federal spending was devoted to building up these various types of capital. Now only half that share of federal spending goes to these purposes, and the Third Way report projects that public investment spending may be headed for just 5% of all federal spending in a few decades. Conversely, entitlement spending was only about 15% of all federal spending back in the 1960s. Now it's more than half of all federal spending, and the share is rising. The main functions of what the U.S. government actually does are shifting before our eyes.
Tragedy of the commons, illustrated
Case in point: antibiotics resistance:
The problem arises, paradoxically, because antibiotics are such a miraculous medical invention that they are heavily and broadly prescribed, even for relatively minor conditions like bronchitis or ear infections, and even for virus-caused conditions like flu where antibiotics don't even work. When antibiotics are so widely used, bacteria mutate in response and build up resistance.
"In the United States, for example, resistance to the bacterium methicillin-resistant Staphylococcus aureus (MRSA), has reached 60 percent. This means six out of 10 patients with this virulent staph infection can no longer be treated with oxacillin, a relatively low cost drug. But what still amounts to a cost problem in rich countries is becoming a serious threat to public health in the developing world: lower-income countries face a growing toll of death and morbidity from curable infections because the generally available antibiotics no longer work."
The problems only start with infections that are resistant. Without antibiotics, almost every form of surgery lead to additional and potentially severe infections.
One obvious answer is to invent new antibiotics, but it has gotten more difficult and costly to do so...
Many natural resources--like fisheries or forests or clean air--share the trait that if they are used in moderation, they have an ability to renew themselves and to continue. However, if they are overused, the resource can be depleted in a way that it has great difficulty in recovering. Moreover, as the "tragedy of the commons" scenario points out, every individual has an incentive to overuse a common resource, because the gains of using that resource all flow to the individual, while the social costs of overusing the resource are shared across society. This is the economic basis for arguing that natural resources need to be managed in some way: perhaps through private property rights like ownership or marketable quotas, or perhaps through more direct regulation of use, to prevent their overuse and depletion.
The effectiveness of antibiotics fits this scenario. Each doctor and patient has an individual incentive to use a wide spectrum of antibiotics to treat any given condition. The benefits to the patient are immediate, while the potential costs of creating greater resistance to antibiotics are shared across society. The effectiveness of antibiotics is an extraordinarily important social resource, but it is being eroded by overuse. Exactly how to prevent overuse of this resource is debatable, but the need to take steps to do so is clear.
Featured paper of the day: Spam economics
"The economics of spam" (Rao, Reiley)
We estimate that American firms and consumers experience costs of almost $20 billion annually due to spam. Our figure is more conservative than the $50 billion figure often cited by other authors, and we also note that the figure would be much higher if it were not for private investment in anti-spam technology by firms, which we detail further on. Based on the work of crafty computer scientists who have infiltrated and monitored spammers' activity, we estimate that spammers and spam-advertised merchants collect gross worldwide revenues on the order of $200 million per year. Thus, the "externality ratio" of external costs to internal benefits for spam is around 100:1. In this paper, we start by describing the history of the market for spam, highlighting the strategic cat-and-mouse game between spammers and email providers. We discuss how th e market structure for spamming has evolved from a diffuse network of independent spammers running their own online stores to a highly specialized industry featuring a well-organized network of merchants, spam distributors (botnets), and spammers (or "advertisers"). We then put the spam market's externality ratio of 100 into context by comparing it to other activities with negative externalities. Lastly, we evaluate various policy proposals designed to solve the spam problem, cautioning that these proposals may err in assuming away the spammers' ability to adapt.
Coasean bargaining, illustrated
An author called Patrick Wensink ripped off the trademarked Jack Daniel’s label for the cover of a novel called Broken Piano for President, whose principal (perhaps only) interesting characteristic is that it was published by a press called Lazy Fascist. Clearly this is a conflict over the use of a property right, and the author is enjoying uncompensated benefits. One would think that, as Jack Daniel’s clearly owns the property right, the company could force the author to change the cover. Apparently, however, the transaction costs of doing that are high, so the attorney for Jack Daniel’s wrote the author a charming cease-and-desist letter that actually offered to bribe the author to change the cover right away. This is a general point, I suppose, now that I think about it: as the transaction costs rise of using official legal institutions to resolve externality conflicts, the de facto owner of the right can effectively switch, even in a world in which the transaction costs we usually talk about – those of finding and negotiating with the conflicting users of the property – remain small enough to allow Coasean bargaining.
Wednesday, August 1, 2012
Painting the slow US recovery with graphs
Repost from John Cochrane's blog:
1) Real GDP levels seem to have assumed a lower trajectory since 2007...
2) ...and, while it is necessary to be skeptical of trend lines in general, the above trend line is pretty solid throughout the years.
3) Here's what a recovery is supposed to look like (still, using trend lines); this shows recovery from the recession in the early 1980s...
According to John Cochrane:
You see that after the severe 1980 recession at the even more severe 1982 recession, the economy recovered to trend, by posting a few years of 6% growth. The tragedy is poorly expressed in growth rates. By 1987, the economy was back on the prior trend line. We are now 14.5% below the trendline, and each year that goes by like this we lose another half a percent. The average person in the economy is producing 14.5% less, and earning 14.5% less, than if we had followed the path following the 1982 recession.
4) According to the Congressional Budget Office, what we're seeing now is the "new normal".
5) The employment picture is just as dismal:
Employment declined by about 7 million people, from 63% of the population to about 58%. And it has stayed there ever since. The "job gains" you hear about in the news are just barely keeping up with population. As we are about 14% below trend and slowly losing ground, we are 7 million jobs short and sitting there too.
6) Of course, linking output and employment is productivity. The graph below seems to show that output per worker has grown a lot since the 1960s and 1970s...
In the short run, capital doesn't change much, so as a rough guide you make more output when you hire more workers (or increase hours) and vice versa. So, GDP = Productivity x workers. To get more workers, we need to make a lot more GDP. The lackluster GDP growth is the other side of the terrible employment coin.
There's more in the graph. In the long run, rising productivity is behind everything good in the economy. It's what gives more income per capita. Rising productivity is the only hope for paying for entitlements and getting out of our deficit trap. It's the main hope for long-run GDP growth, after the empolyment-population ratio reverts to where it should be. Rising productivity comes from new ideas, new companies, new ways of doing business. It isn't all pleasant. Lots of incumbents lose out. Rising productivity is the core of a "growth" agenda as economists understand the word.
7) Worst, zooming into the 2000s productivity data, the trajectory since 2003 is noticeably lower.
In sum, total real output and output per worker seem to be doomed to lower trajectories in the future, owing to the real impacts of the 2007-2008 financial crisis, and employment is hardly keeping up with the US population. The US is in for rough decades ahead (sadly, so does the rest of the world).
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