Monthly Archives: September 2008

So says Erik Hurst:

Popular belief holds that if the government had better regulated the mortgage industry, the current crisis could have been avoided. At some level, this must be right: if the government outlawed mortgages altogether, there would be no one to default on a mortgage. But we must not risk throwing out the baby with the bathwater.

The whole essay is worth a read. Here are the important links:

Relaxing these regulations led to massive gains in the efficiency of the U.S. banking system. These aren’t just abstract changes in efficiency; they have touched all of our lives. Here’s a quick reading list of research showing that this deregulation yielded greater income growth; less volatile business cycles; better access to housing credit; offset racial discrimination in the labor market; and reduced crime.

Shortly after the Soviet Union collapsed, a Russian bureaucrat travelled to the west to seek advice on how the market system functioned. He asked the economist Paul Seabright to explain who was in charge of the supply of bread to London. He was astonished by the answer: “Nobody.”

Fifteen years later, I had thought that almost everyone had abandoned the notion that a committee could plan its way through the unimaginable complexities of an advanced economy. I was wrong.

Earlier this month, the Migration Advisory Committee presented a list of professions that would qualify migrants for entry, broadly on the grounds of UK skills shortages. They include geologists of all stripes, veterinary surgeons (but not other veterinarians), chefs (but only those paid £8.10 an hour), sheep shearers with a British Wool Marketing Board bronze medal (or equivalent) and ballet dancers (but not choreographers, nor other dancers).

The remainder of this column can be read here. Please post comments below.

In the women’s individual gymnastic competition at the Olympics, there were a couple of controversies over scoring that experts believe cost the US gymnast a gold. The problem is that officials from the top countries cannot be judges if a citizen from their country is in the competition, so the remaining judges are from countries with no gymnastic tradition. Is there an efficient way to solve this problem?
Doney Joseph, Los Angeles, CA

Dear Doney,

In a sport whose entire aim is to win the approval of the judges, error is unavoidable. Yet (as the sports economist Stefan Szymanski reminds me) there is a trade-off here between two sorts of error: bias and variance. The decision to use disinterested but inexperienced judges should reduce bias but increase the variance of the outcome. That is a painful trade-off.

National pride is not the only source of bias. Judges have friends; they may know athletes, or their coaches. It was for this reason that the great US orchestras began to introduce “blind auditions”, where musicians performed behind a screen. The idea was to eliminate favouritism towards the students of particular teachers. The unexpected result – shown by the economists Claudia Goldin and Cecilia Rouse – was to disarm sexism as well as favouritism: many more women succeeded in the blind tests.

Alas, gymnasts can hardly perform behind a screen, although I suppose they could compete in balaclavas. All I can recommend is an alternative reward system for judges. Each should assign scores in isolation, and then be paid only if the other judges agreed. The judges will need to co-ordinate on a “focal point” if they wish to be paid, and the obvious focal point is their honest opinion of a gymnast’s performance.

This is surely worth a try. If the judges cannot agree, of course, they will be paid exactly what they deserve: nothing.

Questions to

The excellent David Leonhardt, and colleagues of his at the New York Times, have started a new economics blog. It looks promising.

Ray Fisman reports at Slate:

Firing bad teachers may seem like a rather obvious solution, but it requires some gumption to take on a teachers union. And cleaning house isn’t necessarily the only answer. There are three basic ways to improve a school’s faculty: take greater care in selecting good teachers upfront, throw out the bad ones who are already teaching, and provide training to make current teachers better. In theory, the first two should have more or less the same effect, and it might seem preferable to focus on never hiring unpromising instructors—once entrenched, it’s nearly impossible in most places to remove teachers from their union-protected jobs. But that’s assuming we’re good at predicting who will teach well in the first place.

It turns out we aren’t. For instance, in 1997, Los Angeles tripled its hiring of elementary-school teachers following a state-mandated reduction in class size. If L.A. schools had been doing a good job of picking the best teachers among their applicants, then the average quality of new recruits should have gone down when they expanded their ranks—they were hiring from the same pool of applicants, but accepting candidates who would have been rejected in prior years. But as researchers Thomas Kane and Douglas Staiger found, the crop of new teachers didn’t perform any worse than the teachers the school had hired in more selective years.

Some interesting comments on the Slate site too. Not everyone agrees that it is hard to fire teachers.

Disciplining children seems simple enough. Reward them when they do well and punish them when they misbehave. They should respond to incentives, right? Am I missing something?
Tom Cookson, Berkshire

Dear Tom,

You are right up to a point. Children do respond to incentives, but there are limits to this strategy, the most obvious being that children are impatient. If you cannot help them to become pleasant people without rewards and punishments, you will find that both carrot and stick must be brandished with alarming frequency.

A second problem is credibility. Will you really carry out your threat to subject four-year-old Billy to waterboarding? It seems unlikely, and since Billy will not always respond to your threats, he will soon discover if they are hollow.

The challenge, then, is to make sure that you have punishments available to you that you are willing to carry out. You may be able to rise to that challenge by building up what Joshua Gans calls “punishment capital” – not to be confused with capital punishment. Professor Gans, author of a new book called Parentonomics, points out that if you are the source of a steady stream of money or sweets, that gives you a negotiating position. Threatening to remove the carrot (or rather, the flow of chocolate coins) is more credible than threatening to wield the stick. What one parent sees as junk food, Professor Gans sees as an “incentive opportunity”.

I have written before about the research of economist Bruce Weinberg, who finds that children in richer families are much less likely to be spanked, yet more likely to have allowances withdrawn. That makes sense: poor families lack all kinds of capital, and that includes punishment capital too.

Questions to

Very few of us remember globalisation in retreat: the last great wave of globalisation swelled in the late 19th century and broke spectacularly with the onset of the first world war. After a rash of protectionism, the great depression and the second world war, the process of expanding trade (and cross-border investment and the flow of ideas and of people) resumed and has continued ever since.

Some economists now wonder if the current wave might also be about to break. The problem is not so much the rolling farce of the Doha round of trade talks, or protectionism in the US – although neither is helpful – but what the price of oil is doing to the cost of shipping goods around the globe. While oil prices have fallen in the past couple of months, they could hardly be described as low. Shipping costs may rise yet further if, as expected, the International Maritime Organisation bans the use of cheaper, dirtier fuel oils by container ships.

There is some anecdotal evidence that this is having an impact on trade: for example, some container ships are reported to be slowing down to save fuel. But there is no sign anything is amiss in the latest World Trade Organization statistics – which, admittedly, date back to 2006. The volume of merchandise trade defied high and rising oil prices to grow at more than 6 per cent a year in 2004, 2005 and 2006.

The remainder of this column can be read here. Please post comments below.

So says this NBER paper:

During the contest for Kansas attorney general in 2006, an organization sent out 6 pieces of mail criticizing the incumbent’s conduct in office. We exploit a discontinuity in the rule used to select which households received the mailings to identify the causal effect of mail on vote choice and voter turnout. We find these mailings had both a statistically and politically significant effect on the challenger’s vote share. Our estimates suggest that a ten percentage point increase in the amount of mail sent to a precinct increased the challenger’s vote share by approximately three percentage points. Furthermore, our results suggest that the mechanism for this increase was persuasion rather than mobilization.

The authors are  Alan Gerber, Daniel Kessler, and Marc Meredith.

My attention is drawn to this paper, on the asking price (not sale price, not) for used cars that have been driven by smokers or non-smokers. The difference is about 10 per cent – $700 – for a typical car:

For this car to loose $700 in KBB value, the car would have to miss all of the following standard features: air conditioning, power steering, power windows, power door locks, cruise control, and the dual front airbags.

The authors emphasise the dangers of second-hand smoke but of course there are other explanations. (If safety concerns are the main motivation for the lower selling price for smoky cars, my guess is that they are overblown.) I wonder if this result tells us more about smokers than their cars – smokers are the ones offering cheaper deals, after all.

Why did people murder suspected witches in renaissance Europe? And why do they still do so today in sub-Saharan Africa? As someone whose main source of information about witch trials is Monty Python and the Holy Grail, I was fascinated to learn that witch-burning has its own grim economics.

Clearly, some of the fervour for murdering women – typically elderly widows – had cultural and religious origins. In the early medieval period, the Catholic Church dismissed the idea that witches had supernatural powers, and some Church documents argued that it was heresy to believe in witchcraft. Without Church support, it’s easy to see why witch trials were not popular.

Yet when the trial and execution of suspected witches surged in the mid-16th century and throughout the 17th, it was a cross-cultural phenomenon. Trials took place in many countries and were conducted by both Protestants and Catholics, and in both secular and religious courts. Perhaps a million women were killed across Europe after being accused of witchcraft, and most of them died during this period. Why?

The remainder of this column can be read here. Please post comments below.

The Undercover Economist: a guide

Publishing schedule: Excerpts from "The Undercover Economist" and "Dear Economist", Tim's weekly columns for the FT Magazine, are published on this blog on Saturday mornings.
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