Friday, January 30, 2009

The Year of Water

The School of Advanced International Studies (SAIS) has declared that the 2008-09 academic year is The Year of Water. The latest issue of their alumni journal, SAISPHERE, published at the very end of 2008, is dedicated to water policy. The articles are short, accessible, and free online.

Here's Professor Charles F. Doran, from his article, Canada: To Sell or Not to Sell?:
Water is no longer a free good, anywhere. With a dollar sign attached, water will be used more carefully. More particularly, water ought to be properly priced across users and uses within each country so that low-grade uses do not absorb the larger share of water supplies, while higher-grade uses are denied availability.
It's never been a free good, of course, but it is good to see increasing recognition that it should be priced and priced accurately. Growing up in Northern California I grew tired of hearing Mark Twain's (misattributed?) famous saying that whiskey is for drinking and water is for fighting over, but it still stands as one of the most astute comments about our policies and the feelings they provoke.

The New Economist

Two blog posts on consecutive days! It looks like The New Economist is back to blogging. Good news, the site is excellent and highly recommended.

Entrepreneurship and Aid

Iqbal Quadir is the founder of Grameenphone, founder and director of MIT's Legatum Center for Development and Entrepreneurship, and co-founder, along with Phil, of Innovations Journal. Here's the op-ed he wrote for today's WSJ:
Foreign Aid and Bad Government
Barack Obama has talked a lot about changing the way America relates to the world, and few areas are as ripe for reform as our policies on foreign aid. They have contributed to economic stagnation in poor countries and deprived America of large export markets. Entrepreneurship, not aid, is essential to rejuvenate markets in the developing world and, in turn, help America prosper.

During the Cold War, the U.S. instituted a policy of sending money to governments in poor countries to buy their political loyalty. While studies show that sending aid to foreign governments creates allegiance, it does not lead to economic progress. Instead, it makes governments in poor countries dependent on the U.S. rather than their citizens' taxes.

Pakistan has been one of the key recipients of U.S. aid over the last six decades, but there has been no real progress as a result. Pakistan is riddled with problems that are rooted in the disproportionate power of the state. Aid has only boosted that power.

In contrast, Malaysia saw its economy grow at twice the rate of Pakistan's over the same period of time. Fueled by trade rather than aid, Malaysian economic prosperity is decentralized, and its reliability as an ally much greater.

Tragically, the Cold War aid approach actually preserves suffering in poor countries. Aid empowers bureaucracies, promotes statism, and weakens government incentives to boost tax revenues through growth. Economic assets are often kept in the hands of the state, leading to monopolies, stagnation and extortion. All of this hurts entrepreneurs, who have the potential to create wealth and promote governmental accountability.

The history of Western economic and political advancement illustrates that it is the economic strength of citizens -- not governments -- that gives rise to checks and balances.

A case in point is England, where a lack of outside money created real accountability. In the 13th century, after the advent of property rights, the British monarch was forced to convene a group of citizens as a tax-legitimizing device. This group, known as the parliament, capitalized on the monarch's chronic need for money and made sure the monarch did not gain financial independence. Every time the monarch wanted to pass a new tax bill, the parliament obliged only after exacting more liberty from the crown. Over time, it was parliament that emerged as the more powerful branch of government. The monarch's shortage of money and a lack of outside aid were key to England's democratic success.

President Obama now has the opportunity to adopt a new aid approach that will actually help citizens. Such an approach would demonstrate our faith in democracy and serve long-term American interests.

What should this plan look like?

First, America must remove trade barriers on exports from the poorest countries, regardless of trade policies in those countries. With global market access, poor countries would automatically attract private investment, despite their institutional weaknesses. These institutions would become stronger over time as businesses flourish. Private investments capitalizing on access to global markets would necessarily employ low-cost labor, thus creating jobs.

Next, small entrepreneurs can be bolstered with seed money in the range of $25,000. Small entrepreneurs create jobs, products and services that form the bedrock of flourishing democracies. With some tangible changes in its operation, the International Finance Corporation (IFC) within the World Bank Group could promote development through entrepreneurs. The World Bank should stop lending to governments and be absorbed into the reformed IFC.

Third, America could give $1 million to match any grass-roots group capable of raising $1 million to establish a health clinic. These clinics -- one thousand could be built with $1 billion -- could provide crucial services to poor citizens and generate goodwill towards America.

In short, America should stop pouring billions into bureaucracies to buy short-term alliances and focus its efforts on bottom-up entrepreneurship. This would increase America's popularity, alleviate poverty, and promote real democratic change in these developing countries.

We should encourage governments to be sustained by citizens' taxes -- that is, democracies. Democracies will be enduring allies of America.

Copyright WSJ. On a related theme, here's an earlier piece by Iqbal on whether money can solve Africa's development problems.


A friend of mine is currently taking her third of five (or six?) tests to become an architect. She's already been working as an architect and has found good success working for others, but if she wants her own practice at some point she must pass these tests. Apparently these tests, and not her education and work experience will ensure she's qualified. Architecture is far from unique in this regard. Licensing is one of the reasons why doctors in the United States make so much more, on average, than doctors in France. Members of professions generally like licensing because it creates a barrier that some individuals may not want to bother with. Hence, we will get fewer people wanting to work in those industries. This bids up the wages for people in those sectors.

So I was not surprised to see that the National Council of Examiners for Engineering and Surveying (NCEES) wants to increase the mandatory educational requirements for professional licensure in engineering. I was surprised, however, to see that this proposal has met with considerable pushback by other engineering associations. The American Society of Mechanical Engineers (ASME), opposes such a change and issued a statement to that effect. From their press release:

The NCEES plan, known as “Master’s or Equivalent,” proposes 30 additional credits or a master’s degree, on top of the bachelor’s, for licensure. ASME states that the higher educational requirements are unnecessary.

“There is no evidence to suggest that adding 30 credit hours, representing a full academic year of upper-level undergraduate coursework or graduate-level coursework, will have a positive impact on the public’s health and safety,” according to the position statement.

This will be interesting to follow, not just for science and tech folks.

Wednesday, January 28, 2009

A Bit More on Virtual Worlds

Alex Tabarrok had a great post the other day about the importance of virtual worlds to economics. It's one of the best posts I've read all year.

Also worth checking out is David Friedman's post about World of Warcraft and antitrust.

New AEA Journals

This year the American Economic Association is switching from publishing three journals to publishing four. A couple of days ago I received my first copy of one of the new journals, the American Economic Journal: Applied Economics (TOC). It is generally being met with positive reviews and several articles look promising (there are some heavywieght authors, like Michael Kremer, so it should be good). Here is the TOC for the new macroeconomics journal. Here is one favorable mention about a new public choice paper looking at capture in india:
This paper integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture in a novel way. Studying banks in India, I find that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in nonelection years or in private bank lending. I show capture is costly: elections affect loan repayment, and election-year credit booms do not measurably affect agricultural output.

Should We Tax Virtual Worlds?

Catherine Rampell (economix) discusses a new law review article (Yale) by Leandra Lederman, a tax law professor at the Indiana University Maurer School of Law, Bloomington. Catherine excerpts several paragraphs, including this:
[P]rofits received in the form of Lindens (Second Life’s currency) should be taxed in much the same way profits received via PayPal, a widely used electronic-payment system, are. Although Second Life profits could instead be taxed once the taxpayer sells for real money (“cashes out”), that would create a special exception for Second Life that does not exist for platforms such as eBay. It would facilitate abuse and distort economic activity.
This seems to be overstepping some sensible grounds. I think it is inevitable that one day all money that is converted from Linden dollars to USD will be taxable, but I do not think we want to start taxing in-game transactions. The IRS would have to issue a rule about what actually constitutes a game and what doesn't, and given the ambiguity inherent in these worlds, this would be problematic and could stifle innovation. The author suggests SL is equivalent to Ebay, but this hardly seems to be the case. Anyway, it's an interesting discussion.

Speaking of the IRS, the National Taxpayer Advocate released its Annual Report to Congress earlier this month. It included a 13 page section on taxing virtual worlds. You should read Dan Miller's analysis of that report at his blog, Economics of Virtual Worlds.

Tuesday, January 27, 2009

More on Wokai

Thanks to Leslie for answering (very quickly) my question about Wokai and Wikipedia. Wokai looks like a great organization. It was started by two thoughtful and inspiring young entrepreneurs who met while at Tsinghua University in 2006. The two founders, Casey Wilson and Courtney McColgan, recognized the growing potential of linking individual donors in developed countries with microfinance institutions and aspiring entrepreneurs in developing countries. Since they shared a concern for the poor in rural China, Wokai is what has emerged from their efforts.

Casey explains the concept much more eloquently than I can. You can watch her presentation to Google employees in the video below:

For more information see their about page, and be sure to check out their blog. Apparently some feel that China is a poor target, since it is now the third richest country in the world. Of course, that is an aggregate number that reflects China's large population. In per capita terms China remains very poor. We should be wary of income statistics for a fast growing and industrializing country like China because so many people (our entire pop.) are not involved in those gains at all. The rural area, which Wokai is targeting, is very poor. James Fallows had a good piece in The Atlantic last September that did a great job of telling rural China's tale:
But in the villages, people effectively live in a different century. Their families may exist on the cash equivalent of $10 or $15 per month. Their entire life experience may be encompassed within a radius of 10 or 20 miles. When my wife and I visited a high school in an ethnic Tibetan village in Gansu province, we were the first foreigners the students—or any of their teachers, or the principal—had ever seen outside of textbooks. At that school and others in the west, we talked with children who went to school in some years and didn’t in others, depending on whether their families had sold enough crops to pay the public-school fees. This is not the China that most foreigners read about or experience on visits, but its isolation and poverty are important parts of any understanding of China.
Fallows goes on to discuss how two entrepreneurs went to pains to ease some of the hurdles rural villagers face, and the whole article makes for a fascinating read.


I am curious if anyone knows anything about Wokai ("I Start" in Chinese)? It is a microfinance institution that lends to entrepreneurs in China, but what's caught my attention is that its Wikipedia page is continually being deleted. The organization is setup in a similar fashion as Kiva, but US donors can qualify for a tax deduction, unlike at Kiva. The catch is that after three loans the money goes to the local microfinance institution, hence it is not strictly a loan as it is with Kiva. There are plenty of news reports, so I do know the basic details, but I am really more interested in why it is being blocked from Wikipedia.

Microfinance and The Global Economic Slowdown

According to Premal Shah [President of Kiva], “Shocks to an economy, like a global recession, affect the informal sector less than the formal sector. For the MFIs [microfinance institutions], because their clients are in the informal sector, typically the portfolio quality does not decline.”

Micro-entrepreneurs mainly employ domestically produced goods and services, which make them less exposed to currency devaluations or exchange controls. This insulates MFIs from currency volatility and as a result micro-entrepreneurs are more likely to realize an increase in demand for their less expensive locally produced goods and services as the local market during a recession shifts from more expensive to cheaper imports from countries facing raising inflation levels due to the financial crisis.
From "Global Recession and Microfinance in Developing Countries: Threats and Opportunities," by Roberto Moro Visconti and Geoffrey Baluku Muzigiti (SSRN). The main threat to MFIs right now is whether their funding is constrained due to problems in US financial and credit markets. So far Kiva seems to still be getting plenty of loan volume, but I don't know whether large philanthropists are still donating as much to MFIs. It's no question that people stuck in the informal sector would be much worse off in the absence of these organizations.

Monday, January 26, 2009

P2P Lending

Peer to peer lending is a frequent topic of this blog. The PSD blog has a very good post on the subject as well:
It looks like person-to-person (P2P) lending is no longer just for the developing world. Kiva, the originator of the P2P model, now has at least one imitator in an OECD country. Smava, a German-based company, now offers P2P lending in Germany and starting this year in Poland as well. Perhaps finally the financial crisis will stimulate a bit more of the 'creative' side of creative destruction.

Aid Watch

That's the title of development economist, and foreign aid skeptic, William Easterly's new blog (via Greg Mankiw). "The objective is to be brutally honest when aid is not helping the poor, but also praising it when it is." It doesn't sound like he'll be pulling any punches.

A few other development blogs worth reading regularly:
Chris Blattman's blog
Dani Rodrik
The Center for Global Development's blog
The World Bank's PSD blog. There are a million others but these are among the best and most well known. Easterly is instantly among the most important and significant writers out there though, in pretty much any field.

Thursday, January 22, 2009

Global Dreams

Kwende Kefentse, over at the Creative Class Exchange, captures the global hunger for change (CC):
Young people are definitely empowered by President Obama as a living example of change. It’s interesting, however, to see how hungry young Canadians are to play a role in and identify with this change. As neighbors to ground zero of the global Obama-wave, and a nation that is deeply interlinked with the U.S., it is natural and fair that we pose the question “where is our Canadian change?”, and not unreasonable that we would yearn somewhat for an Obama figure of our own - to give young people a sense that their voices participate as equals in their democracy. In this new vision of the North American dream, what will Canada’s role be and where will its youth place?

While Canada’s version of the dream is younger, less dense, a bit smaller, and more cautious, it is sturdy, perhaps a bit more agile, and has the advantage of being able to consider the trials and missteps of its older, bolder neighbor in order to innovate on that experience and those ideas - probably in a faster and more dexterous way as a result of being over 60 percent slimmer in terms of population and density. While we might not do the scaling up, we are in a great position to build the models. The climate will most certainly be ripe for the ideas.
Elsewhere at the Exchange, Richard Florida clearly wants to be nice about the stimulus proposals, but seems a little disappointed (see here and here.) Ryan Avent, Paul Krugman, and Mathew Yglesias are similarly disappointed about the infrastructure provisions.

After having a very small house filled past the capacity of a very large house, I am just now getting caught up with everything. So I won''t pile on. Keep in mind that we don't even have Senate language yet so who knows what will be in the final legislation.

Sunday, January 18, 2009

PE Obama's Speech at the Inaugural Concert

I was lucky enough to make it to the concert today. From PE Obama's speech (full text):
What gives me that hope is what I see when I look out across this mall. For in these monuments are chiseled those unlikely stories that affirm our unyielding faith -- a faith that anything is possible in America. Rising before us stands a memorial to a man who led a small band of farmers and shopkeepers in revolution against the army of an Empire, all for the sake of an idea. On the ground below is a tribute to a generation that withstood war and depression -- men and women like my grandparents who toiled on bomber assembly lines and marched across Europe to free the world from tyranny's grasp. Directly in front of us is a pool that still reflects the dream of a King, and the glory of a people who marched and bled so that their children might be judged by their character's content. And behind me, watching over the union he saved, sits the man who in so many ways made this day possible.

And yet, as I stand here today, what gives me the greatest hope of all is not the stone and marble that surrounds us today, but what fills the spaces in between. It is you -- Americans of every race and region and station who came here because you believe in what this country can be and because you want to help us get there.

[...] But never forget that the true character of our nation is revealed not during times of comfort and ease, but by the right we do when the moment is hard. I ask you to help reveal that character once more, and together, we can carry forward as one nation, and one people, the legacy of our forefathers that we celebrate today.

Friday, January 16, 2009

Cool Conference on Patents

On Thursday 26 and Friday 27 March 2009, TILEC – Tilburg Law and Economics
Center – hosts an international conference on Patent Reforms in Hotel Krasna-
polsky, Amsterdam. The conference features internationally renowned speakers
and intends to foster discussion on patents, innovation and competition policy
between lawyers, economists and practitioners.

The conference addresses current topics:

Patents and Innovation
Trivial Patents, Laxity of Patent Offices
IP Licensing in the context of SSO’s
IP Enforcement
Abuse of Patents
The Problem of Uncertainty in Patent Law
More info and schedule here.

Now on Alltop!

We are thrilled to be a part of alltop's new section on innovation ( Guy Kawasaki and his team have done a great job putting together a remarkable site and it's great to be a part of that. The web's been full of praise for Guy lately, so I won't needlessly pile on.

Anyway, if you're new to our site and you found us through alltop, welcome. To quickly get up to speed about this blog just read our first post, aptly named Schumpeter's Century. Most of the later posts are built around the themes developed there.

Once again, to all new visitors I offer a sincere welcome and hope you become an active participant as this blog grows and our discussions of innovation and entrepreneurship progress.

Thursday, January 15, 2009

Overestimating Low Probability Events

Cass Sunstein, soon to be the next head of OIRA, and Richard Zeckhauser have a new paper entitled, "Overreaction to Fearsome Risks." It is timely. The abstract (SSRN):
Fearsome risks are those that stimulate strong emotional responses. Such risks, which usually involve high consequences, tend to have low probabilities, since life today is no longer nasty, brutish and short. In the face of a low-probability fearsome risk, people often exaggerate the benefits of preventive, risk-reducing, or ameliorative measures. In both personal life and politics, the result is damaging overreactions to risks. We offer evidence for the phenomenon of probability neglect, failing to distinguish between high and low-probability risks. Action bias is a likely result.

Meet Me in Macao

China has now surpassed Germany as the world's third largest economy, and naturally there have been growing pains along the way (FT). As a particularly egregious example, have a look at this story about a number of Chinese Communist Party officials who have been gambling away China's gains (NYT):

A 2008 study of 99 high rollers from mainland China showed that 59 had some sort of state affiliation: 33 were government officials, 19 were senior managers at state-owned enterprises and 7 were cashiers at state businesses. They were typically men, between 30 and 49 years old, and lived in mainland areas close to Macao.

The government officials reported losing an average of $2.7 million each, according to the study, which was conducted by Zeng Zhonglu, a professor at Macao Polytechnic Institute. State managers lost $1.9 million each, on average, and cashiers dropped an average of $500,000. Most said their gambling careers lasted less than four years before they were found out.

[...] Many of the biggest losers have been sent to prison and at least 15 have been executed. Some have committed suicide. The scandals have become a source of deep embarrassment for the Chinese government, which has now begun cracking down on travel visas for Macao. [emphasis added]

A Lesson on Investment

The real question posed by the auto bailout is then clear. Will the benefits, in terms of higher current and future incomes in the auto industry, fully offset the incomes lost as a result of the lost consumption and investment that the bailouts displace?

We are all moved by the visible prospect of lost jobs in the auto industry. We tend to forget the unnamed people who lose jobs or don't get jobs, the businesses that close or the new businesses that don't start, because the bailout displaces productive activities elsewhere.

That's finance economist Eugene Fama at his relatively new blog. The post is insightful. I didn't mention the first part of Fama's post, but it has set off quite a storm (see this post by Felix Salmon for a roundup). So far Fama hasn't responded, but he will have to if he wants the blog to maintain any credibility. I have no doubt he had something like this in mind, but he never fully made his argument clear.

Wednesday, January 14, 2009

Education and Entrepreneurship

A new meta-analysis of the link between education and entrepreneurship. It's gated, but if you have access here is the link. The abstract:
This paper provides a review of empirical studies into the impact of formal schooling on entrepreneurship selection and performance in industrial countries. We describe the main effects found in the literature, we explain the variance in results across almost a hundred studies, and we put the empirical results in the context of related economic theory and the much further developed literature in labor economics (studying the rate of return to education among wage employees). Five main conclusions result from this meta-analysis. First, the impact of education on selection into entrepreneurship is insignificant. Second, the effect of education on performance is positive and significant. Third, the return to a marginal year of schooling is 6.1% for an entrepreneur. Fourth, the effect of education on earnings is smaller for entrepreneurs than for employees in Europe, but larger in the USA. Fifth, the returns to schooling in entrepreneurship are higher in the USA than in Europe, higher for females than for males, and lower for non-whites or immigrants.

Tuesday, January 13, 2009

Comparing Entrepreneurship Data

This paper compares two datasets designed to measure entrepreneurship. The Global Entrepreneurship Monitor dataset captures early-stage entrepreneurial activity; the World Bank Group Entrepreneurship Survey dataset captures formal business registration. There are a number of important differences when the data are compared. First, GEM data tend to report significantly greater levels of early-stage entrepreneurship in developing economies than do the World Bank data. The World Bank data tend to be greater than GEM data for developed countries. Second, the magnitude of the difference between the datasets across countries is related to the local institutional and environmental conditions for entrepreneurs, after controlling for levels of economic development. A possible explanation for this is that the World Bank data measure rates of entry in the formal economy, whereas GEM data are reflective of entrepreneurial intent and capture informality of entrepreneurship. This is particularly true for developing countries. Therefore, this discrepancy can be interpreted as the spread between individuals who could potentially operate businesses in the formal sector - and those that actually do so: In other words, GEM data may represent the potential supply of entrepreneurs, whereas the World Bank data may represent the actual rate of entrepreneurship. The findings suggest that entrepreneurs in developed countries have greater ease and incentives to incorporate, both for the benefits of greater access to formal financing and labor contracts, as well as for tax and other purposes not directly related to business activities.
From the excellent, "What Does 'Entrepreneurship' Data Really Show? A Comparison of the Global Entrepreneurship Monitor and World Bank Group Datasets," (SSRN)

Experimental Learning Methods

The NYT has a profile of a new, and yes, expensive, method of teaching introductory classes (NYT):

In an article in the education journal Change last year, Dr. Wieman noted that the human brain “can hold a maximum of about seven different items in its short-term working memory and can process no more than about four ideas at once.”

“But the number of new items that students are expected to remember and process in the typical hourlong science lecture is vastly greater,” he continued. “So we should not be surprised to find that students are able to take away only a small fraction of what is presented to them in that format.”

[...] The new approach at M.I.T. is known by its acronym, TEAL, for Technology Enhanced Active Learning.

A $10 million donation from the late Alex d’Arbeloff, an M.I.T. alumnus, co-founder of the high-tech company Teradyne, and former M.I.T. corporation chairman, made the switch to TEAL possible. The two state-of-the-art TEAL classrooms alone cost $2.5 million, Professor Belcher said.

Unlike in the lectures, attendance counts toward the final grade, and attendance is up to about 80 percent.

Universities are incubators for entrepreneurship and innovation but professors are often the most resistant to changes in teaching methods, and often to change in general. So it is good to see some professors and administrators taking chances.

An Innovative Use of Prizes

The Christian Science Monitor ran an amazing story on Monday about the Mexican government's efforts to identify the most egregious regulatory burdens (CSM):

Montserrat Contreras Castañeda had her eyes set on a job opening in Mexico's state attorney general's office, but first needed proof of residence for a competition that ended the next day.

A simple undertaking, she thought. But after an hour and a half in line, she found out that her identification alone would not suffice. She either needed three years worth of bank statements or could head to her local representative's office to seek another document to expedite the process. After more lines, wrong directions, and bureaucrats on lunch break, she made it back to the original line with the right paperwork under her arms. But it still was not enough: the process would not be over until someone visited her home within four days to verify that the mass of documentation was indeed valid. Needless to say, she didn't get the job. She couldn't even apply.

Welcome to the red tape that seems to wrap the whole of Mexico, turning the most mundane tasks – changing a sign outside a small business, obtaining a birth certificate, or reporting a stolen license plate – into megamissions.

Now Mexican President Felipe Calderón is trying to change all that. Ms. Contreras was recently awarded $7,500 for her troubles, as a winner in a government-sponsored contest to identify "the most useless procedure." It's an effort to turn Mexico's famously inefficient officialdom into a well-oiled machine – both for the sake of a saner citizenry and for a state hindered by processes that make it more prone to corruption and far less productive.

Mexico's per capita GNI is just over 8,000 USD, so a prize of $7,500 is a huge incentive. Mexico fairs okay on the World Bank's Doing Business Survey (56) but has slipped from its 2008 level (42). On some indicators, like the registration requirements for starting a business, it does very poorly (115), so it is amazing to see such self-awareness on the government's part. If there were a prize for the most innovative government program this would probably take top honors.

Perhaps when Cass Sunstein takes over OIRA he can implement a similar policy, albeit with larger prizes. This would serve two purposes. First, it would identify the worst regulatory burdens by tapping into the distributed intelligence of our society rather than having a few members of the administration scouring lines of code. And second, the prizes would serve as a useful, if small, stimulus.

Saturday, January 10, 2009

A Model of the Subprime Mortgage Market

Here's the abstract from an NBER paper, An Empirical Model of Subprime Mortgage Default from 2000 to 2007 (NBER; I haven't found an ungated version yet):
The turmoil that started with increased defaults in the subprime mortgage market has generated instability in the financial system around the world. To better understand the root causes of this financial instability, we quantify the relative importance of various drivers behind subprime borrowers' decision to default. In our econometric model, we allow borrowers to default either because doing so increases their lifetime wealth or because of short-term budget constraints, treating the decision as the outcome of a bivariate probit model with partial observability. We estimate our model using detailed loan-level data from LoanPerformance and the Case-Shiller home price index. According to our results, one main driver of default is the nationwide decrease in home prices. The decline in home prices caused many borrowers' outstanding mortgage liability to exceed their home value, and for these borrowers default can increase their wealth. Another important driver is deteriorating loan quality: The increase of borrowers with poor credit and high payment to income ratios elevates default rates in the subprime market. We discuss policy implications of our results. Our findings point to flaws in the securitization process that led to the current wave of defaults. Also, we use our model to evaluate alternative policies aimed at reducing the rate of default.

"Citizen Philanthropists"

A story from Women's International Perspective (WIP) contributor Janelle Weiner about an organization that links donors to cash strapped teachers (WIP):
Former teacher Charles Best started eight years ago as a way to connect “citizen philanthropists” directly with teachers like Dubin who have ideas for enhancing their students’ learning experiences, but lack the funds to implement projects. Best saw firsthand how a lack of classroom supplies prevents teachers from providing “thorough, engaging instruction” to their students.

“My principal is super supportive,” says Sacramento, Calif., resource teacher Lisa Claussen, “but our money goes to basic classroom supplies.” And yet since April of last year, Claussen has managed to add about $3,000 worth of classroom materials for her students with special needs by listing her projects on the DonorsChoose website.

Concerned that public schools should be sufficiently funded by the government?

Vice President of Operations Cesar Bocanegra says he is familiar with critics of DonorsChoose who say the organization is doing the government’s job.

“We agree that we should not exist,” he says, “however, we’re not an organization that works for systemic policy change.” Instead, explains Bocanegra, the organization grew organically from Best’s desire to help his own school.

Friday, January 9, 2009

The Entrepreneur

From William Baumol's seminal paper, "Entrepreneurship in Economic Theory," in the American Economic Review (1968):
If we seek to explain the success of those economies which have managed to grow significantly with those that have remained relatively stagnant, we find it difficult to do so without taking into consideration differences in the availability of entrepreneurial talent and in the motivational mechanism which drives them on. A substantial proportion of the energies of those who design plans to stimulate development has been devoted to the provision of means whereby entrepreneurs can be trained and encouraged.
Historically fiscal policy has never worked as a stimulus measure because it is always enacted too late and ends up doing more harm than good. If we are being gracious we can perhaps say that the literature on this question is mixed. The central question we should be asking is how we can help entrepreneurs get back to creating the product and process innovations that drive our economy.

Surely There's Another Way?

The Economist has an obituary for Margaret Thatcher's favorite economist:

ON USHERING visitors into his home Sir Keith Joseph, a punctilious host, would proffer a handshake by way of welcome. On this occasion, however, the senior Tory politician was shocked when his younger guest pointedly refused to take his hand. Instead, he got a volley of abuse about his role in “debauching the currency”. Such was the pedagogic style of Sir Alan Walters, who died on January 3rd, aged 82.

At the time of their meeting, in 1974, Joseph was beginning a total re-evaluation of economic policy provoked by Edward Heath’s disastrous government, in which he had served. That had ended with a Keynesian public-spending binge, the orthodoxy of the day, to stimulate the economy. But instead of helping, it had caused runaway inflation and a rash of strikes. Surely there was another way?

Thursday, January 8, 2009

Escaping the Past

Excellent post by Ken Jarboe about fighting the last war, compete with Keynes' great quote: "The difficulty lies not so much in developing new ideas as in escaping from old ones." What we all need is a healthy dose of Schumpeter.

Free is Priced Just Right

Apparently someone at Giant Food Stores read Chris Anderson's article. From the Washington Post:
Giant Food stores will give free generic antibiotics to customers with a prescription for the next three months in what retail experts called an aggressive move in supermarkets' heated battle for shoppers.

The company said the program, which will begin Friday and last through March 21, covers several popular antibiotics such as amoxicillin, penicillin and ciprofloxacin. This is the first time that Giant has offered free prescription drugs and it did not estimate the cost or potential popularity of the program.

"Times are tough," said Robin Michel, executive vice president for Giant Food, which is based in Landover. "If this is the way that we can help most people, why not?"

Very nice of them. Or perhaps this is just a positive effect of Wal-Mart.
The pharmacy business has become increasingly competitive since Wal-Mart began offering nearly 300 generic prescription drugs for just $4 in 2006. Its rivals were forced to follow suit, with Giant lowering 90-day supplies of popular drugs to $9.99 this summer. According to consulting firm Willard Bishop, pharmacy sales typically make up about 10 percent of revenue at grocery stores.
Via Mark Perry.


The Edge Annual Question this year is pretty general: What will change everything? "What game-changing scientific ideas and developments do you expect to live to see?"

General is not necessarily bad since it gives the authors lots of room to play. There are lots of answers up already so spend some time reading through them, they are interesting.

Wednesday, January 7, 2009

Statistics Programs

On the heels of news that mathematicians have the best jobs, there is a good front page article in the business section of the NYT about R. R is an open source statistics package that is most famous for its graphics capabilities. You can do the same things with other programs, but not nearly as easily. The Harvard Government dept has its students learn R and Latex and you can read more about their recommendations at the Social Science Statistics Blog (SSSB). The easier option is to learn Stata and Word. That's what I use and its what we are taught at GMU, both in the School of Public Policy and in the Econ dept. It's become the standard choice for microeconometrics.

One small complaint is that the Times article downplays the importance of SAS. Even in departments where R is popular, like public health, the epi folks still load all their data with SAS and do basic data manipulation before imputing it into R. I frequently do the same if the data cannot be easily transferred using StatTransfer. All told though, it's interesting how fast adoption of the program has been.

Tuesday, January 6, 2009

Budget Outlook

Stan Collender will be busy tomorrow (CBO):

The Congressional Budget Office will hold a pen and pad press briefing on the 2009 Budget and Economic Outlook on Wednesday, January 7th, at 11:00 a.m.

Acting CBO Director Robert Sunshine will conduct the briefing. The outlook report will be available to the press and public on our Web site at 10:00 a.m. the same day.

NOTE: Acting Director Sunshine also will testify on the Budget and Economic Outlook at a hearing of the Senate Budget Committee on Thursday, January 8th, at 10 a.m. in Room SD-608 of the Dirksen Senate Office Building.

Lifestreaming with Apple

Many people had grand hopes for today's MacWorld and the general consensus is that the event was kind of a downer. But it was actually a pretty good day for mac users. The new iWeb in particular has a number of notable new features. For example, if you link your iWeb site, which can be hosted by Apple or any other hosting company, to your Facebook account, anytime you update your site Facebook will let your friends know. There is now compatibility with Flickr and there are plenty of other widgets to customize your site.

With built-in compatibility with the other Apple applications, like iPhoto, iWeb is quickly allowing your website to become an aggregator for all your web content. However, it is not yet a full lifestreaming application and Apple could really capitalize on the increasing demand for these products by moving more aggressively into this space. Apple currently charges $99 for its MobileMe service, and I think that marketing it as a true lifestreaming service would convert a lot of Windows users who are looking for a simple and elegant program to organize their digital lives. Friendfeed beware.

For more background on lifestreaming, ReadWriteWeb recently wrote about 35 Ways to Stream Your Life and earlier published a primer on lifestreaming.

Navel Gazing

I've been making a good faith effort to post daily after getting off to a slow start last spring, so I was happy to see that this blog is now ranked #140 on one list of the best entrepreneurship blogs. You can find the entire list here (HT). Below are the top ten, but do check out the rest:


A Knowledge Spillover Theory of Entrepreneurship

The January 2009 issue of Small Business Economics has a very good article by Zoltan Acs (GMU), et al. It's technical, but it is also an important work. At one point Krugman didn't think knowledge spillovers were something you could model. The empirical and theoretical approach to entrepreneurship has come a long way since then and Acs and his coathors have played an important role in the field's development. Anyway, let's lift the curtain and get on with the show:
This paper develops a knowledge spillover theory of entrepreneurship to improve the microeconomic foundations of endogenous growth models, in which the creation of knowledge expands technological opportunity. The theory shifts the unit of analysis from exogenously assumed firms to individual agents with new knowledge endowments. Agents with new economic knowledge endogenously pursue the exploitation of such knowledge, implying that the existing stock of knowledge yields spillovers. This further suggests a strong relationship between such knowledge spillovers and entrepreneurial activity. The theory provides an explanation for the role of the individual and the firm in an economy. According to Romer (1996, 204), such an approach “…removes the dead end in neoclassical theory and links microeconomic observations on routines, machine designs, and the like with macroeconomic discussions of technology.”

The model is one where new product innovations can come both from either incumbent firms or start-ups (Acs and Audretsch 1988). We can think of incumbent firms as reliant on incremental innovation from the flow of knowledge, such as product improvements. Start-ups with access to entrepreneurial talent and intra-temporal spillovers from the stock of knowledge are more likely to engage in radical innovation leading to new industries or replacing existing products. According to Baumol (2004, 9): “…the revolutionary breakthroughs continue to come predominantly from small entrepreneurial enterprises, with large industry providing streams of incremental improvements that also add up to major contributions.” Entry by start-ups has played a major role in radical innovations, such as software, semiconductors, biotechnology (Zucker et al. 1998) and the information and communications technologies (Jorgenson 2001). Start-ups are especially important at early stages of the life cycle, when technology is still fluid. Therefore, this paper makes the strong assumption that radical innovation comes from new firm start-ups.

The main predictions of the model are:
  1. An increase in the stock of knowledge has a positive effect on the level of entrepreneurship
  2. The more efficiently incumbents exploit knowledge flows, the smaller the effect of new knowledge on entrepreneurship.
  3. Entrepreneurial activities decrease under greater regulation, administrative burden and market intervention by government.
The paper is available through a creative commons license (HTML, PDF)

Monday, January 5, 2009

Some Credit Channels Are Still Working

From the WSJ:
Rick LaChappelle, owner of four pawnshops in Maine, calculates he has lent about 33% more money this year than last. "The banking industry is not giving out any money right now," he said. "So people are relying on second-tier lending institutions."

Small Businesses Having Trouble Hiring

From the Dallas News:
In a report last month, the National Federation of Independent Business found that in November, nearly half of small-business operators had hired or had tried to hire.

Nearly three-quarters of those firms that wanted to add workers "reported few or no qualified applicants for the job openings they were trying to fill," and 8 percent said finding the right hires was a top business problem.

Similarly, a recent TriNet HR Trends survey of more than 500 U.S. small and medium-size businesses found that more than 80 percent said they tried to hire this year and more than two-thirds of smaller businesses still plan to hire in 2009.
This surprised me. In previous posts, I said now would be a good time to begin think of starting a business because there is a deep well of talented workers aching to get back to work (see here and here). One argument against this is that there is a mismatch between the people who are getting laid off and those firms that are looking for employees.

Many tech workers have been laid off, but many more construction workers and manufacturing jobs have been lost. For a while some of the people that had been working in residential construction could work in nonresidential construction, but now those jobs are gone as well. So depending on what sectors of the economy are hiring, it is possible that a mismatch could occur and could continue for a long time.

Destructive Entrepreneurship

In "Entrepreneurship: Productive, Unproductive, and Destructive," William Baumol laid out different ways of thinking about entrepreneurship and encouraged scholars to recognize that the number of entrepreneurs in a society may not change, but what those entrepreneurs do does change. Thus, perfectly capable self-starters may find it more rewarding to pursue a job working for the government rather than starting a business. In extreme cases, individuals will find reward through destruction.

On the front page of today's NYTs was a story about the prevalence of kidnappings in Mexico and how the rewards are increasingly being paid by family members in the US (NYT).

In Good Capitalism, Bad Capitalism, Baumol et al capture the costs of this clearly: "A society in which theft is not punished will soon no longer be a "society" but instead a disconnected set of individuals, each fearful of the other, a true "Hobbesian" state of nature." (p. 114)

Trust is an important and well documented ingredient of a fully functioning state and economy so let's hope the Mexican authorities are able to get this problem under control. No society can successfully function for very long if there are greater rewards and incentives to doing evil.

Mobile Banking

From, M-PESA: Mobile Money for the “Unbanked” Turning Cellphones into 24-Hour Tellers in Kenya, by Nick Hughes and Susie Lonie in Innovations Journal (PDF):
In March 2007, Kenya’s largest mobile network operator, Safaricom (part of the Vodafone Group) launched M-PESA, an innovative payment service for the unbanked. “Pesa” is the Swahili word for cash; the “M” is for mobile. Within the first month Safaricom had registered over 20,000 M-PESA customers, well ahead of the targeted business plan. This rapid take-up is a clear sign that M-PESA fills a gap in the market. The product concept is very simple: an M-PESA customer can use his or her mobile phone to move money quickly, securely, and across great distances, directly to another mobile phone user. The customer does not need to have a bank account, but registers with Safaricom for an M-PESA account. Customers turn cash into e-money at Safaricom dealers, and then follow simple instructions on their phones to make payments through their M-PESA accounts; the system provides money transfers as banks do in the developed world. The account is very secure, PIN-protected, and supported with a 24/7 service provided by Safaricom and Vodafone Group.
Uptake has been dramatic and the program has widely been judged a success. Olga Morawczynski, a doctoral candidate at the University of Edinburgh has been interviewing businesses that offer M-PESA services and has been tracking consumer adoption. According to one business owner: “Since we have become M-PESA agents we have no time to rest. This thing has even over-run our other business.” From a fascinating article at CGAP.

By contrast, mobile banking in the US has been slower to catch on due to security fears. From Mobile Content Today:
A new report by Javelin Strategy and Research indicates that, while popular overseas, less than 10% of US consumers use a mobile banking product, most over fears of a lack of security. The report entitle "2008 Mobile Banking Security Standards" found that 47% of those who did not sign up for a mobile banking product stated it was because of concerns of security, while 73% feared that hackers could access their mobile phones.
If you want to learn more about M-PESA, also see, "From Microfinance to m-Finance Innovations Case Discussion: M-PESA," by Mudit Kapoor, Jonathan Morduch, and Shamika Ravi (PDF)

Saturday, January 3, 2009

A Few Interesting Notes on Economists

I don't like lists much, that said, here goes.
  • The Economist has a profile of eight up-and-coming economists. Most should be household names at this point, but it's worth flipping through, especially for sentences like this: "Economics is now defined neither by its subject matter nor by its method." (HT).

  • The RTE team at the WSJ has a good post about Raguram Rajan and a paper he presented at the 2005 Jackson Hole Conference, an important meeting for macroeconomists and central bankers. Rajan warned about the problems that now plague our economy, but was mostly ignored at the time. Paul Krugman weighs in as well.

  • Felix Salmon chronicles the ongoing dispute between Nassim Nicholas Taleb and Nobel laureate Robert Merton over the value of portfolio theory in modern finance.

Friday, January 2, 2009

Innovative Media

From back in May, 2008 (NewsPaperDeathWatch):

The San Francisco Chronicle reports on how startup 8020 Publishing is producing two beautiful magazines consisting almost entirely of reader-contributed content. Everywhere is a travel magazine and JPG is for photo enthusiasts. People vote on the work that others submit and the best stuff goes into print. Photographers get a check for $100 and a year’s subscription. Big money apparently isn’t needed: the contents of the April/May issue of JPG was culled from photos uploaded by 16,278 submitters.

And fast forward back to today (WSJ):
An expected shakeout of the magazine industry this year began Friday when 8020 Media, the publisher of a pair of titles filled with contributions from readers, said it was closing for lack of funds.
This model is not dead, but it will be a while before anyone launches another print publication.

Thursday, January 1, 2009

Micro Resolutions

With the rapid growth of twitter, 2008 was the year the world went micro. We should learn from that development. Rather than picking an unreasonable New Year's Resolution that you will fail at anyway, why not make 2009 the year you pursue micro improvements?

As an example, one of my good friends likes to test himself with small challenges. For the first week of each month he eschews meat and fish for a vegetarian diet. He's young and healthy, but he likes to know that he can do something like this. One month he went without any alcohol.

So rather than digging out your old exercise equipment and vowing that this will finally be the year you get back in shape, why not pursue something easier that you are more likely to stay with?

Vow that for the first week on each month you will give up red meat, or go for long walks. If you've always wanted to read War and Peace, break it up into workable slices. Only read 15 pages a day. You might find that when you put the book down, just as things are getting interesting, you will be that much more likely to want to pick it up and read it again.

Trying to radically change your life won't work. Instead do something small that will lead to other changes. The reality is that you are probably pretty happy with the way you live your life and randomly deciding one day that you are suddenly going to lose 25 lbs just isn't going to work.

So pick something small, say one week without soda each month or one week of packed lunches, and don't worry so much about perfecting yourself. Best wishes for the new year.