The Economic Man

Macroeconomists are constantly looking for micro-foundations in their models. However, there is always a debate on how far the Economic Man should go. Here are two quite different views:

Paul Krugman said, "The question, however, is how far to push it. Keynes didn't make an all-out assault on Economic Man, but he often resorted to plausible psychological theorizing rather than careful analysis of what a rational decision-maker would do. Business decisions were driven by "animal spirits," consumer decisions by a psychological tendency to spend some but not all of any increase in income, wage settlements by a sense of fairness, and so on."

Yet, Thomas Sargent countered, "One of the first reviews of Keynes' book was written by an economist named Wassily Leontief. He deplored the fact that Keynes was departing from the older tradition of attributing rationality and optimality to people. Ever since then there's been a persistent call to put microeconomic foundations underneath macroeconomics. And if you try to build micro foundations, you're going to get back to the elements of classical economics.

These elements give us a set of methods for trying to study how people behave basically using Optimization Theory. Optimization Theory was something that was created by mathematicians, and that constitutes our main tool. The simplest example of a micro model is the supply and demand model for determining the price and quantity of a commodity produced, where demand is a reflection of preferences of people for various goods in their income level and supply is a reflection of the costs of production and the technology".

I believe the New Keynesian school has somehow reconciled the difference between the two sides. In fact, I suspect they should be the flip side of each other. Suppose there was a planet populated with some aliens that do not maximize their own utility. The aggregate economic behavior on that planet would be very different from Keynes' macroeconomics, though they might have gone into extinction a long time ago (or have become our god already?).

(Picture: Economic Sophisms)

My house is burning down

I had to proctor the final exam with other TAs because the professor was away. Well into the exam, a student came in and asked for the professor's whereabout. He didn't look very disappointed when he learned that the professor was not in. When he said he wanted to do TA evaluation, I had to stop him and ask him whether he had taken or is planning to take the makeup exam since he was not sitting there writing. He said to me, "My house is burning down." I said, "Oh, did you tell the department and make an arrangement for the makeup?" After learning the arrangement, I tried to close the conversation by saying, "If you want to do the eval, you will have to talk to the department."

"My house is burning down," he said it again with tears welling up in his eyes. Right at the moment, I realized what a cold-hearted bitch I had just become. I rushed to ask him, "Are you alright?" He seemed to be physically OK, but not emotionally.

What'd happened to me? The only reason I can come up with is that I am fed up with excuses. Students have all sorts of excuses when the homework is due or when he/she argues for exam points. My house is burning down? Dude, you just broke the excuse record! That must have come to my mind at the conversation. Why can 't they just be adults and suck it up if they just don't have time for homeworks or exams? These spoiled kids. They want to have fun in college and also good grades. Haven't they learned trade-offs in life?

Just when I thought I understand the psychology of college kids and begin to lose any sympathy for them, this guy with a burned down house reminds me again that "innocent before proven guilty" applies to college kids, too.

(Picture: treehugger.com)

Math intense

Just when I decided to do more math-intense research, I bumped into this profile of a highly talented woman. The story of Franziska Michor is actually quite inspiring. Don't miss it.

(Picture: Esquire.com)

A secret society?

I have a habit of browsing job market candidates from other economics program. I do that because I want to know how I compare with those people in the top programs. One thing I don't understand about their c.v. is that people love to put the membership of AEA on it. Don't you become a member just by paying fees? How is that an achievement? For me, that membership means less on c.v. than saying you have subscribed to The Wall Street Journal. Of course, you don't tell people about your newspaper subscription on the resume.

Or there is something I don't know about AEA membership? AEA is a secret society maybe?

We're always on the losing side

The Wall Street Journal today has the interview with director Ang Lee. His words probably explain why many Taiwanese have the defeatist mentality. Here are some excerpts:

Mr. Lee tells me that growing up in Taiwan influenced his career in other ways as well. He says that in his films, he always takes "the losing side." ("Somebody dies, somebody loses, well, gay cowboys -- they're not going to win," he explains.)

You might be wondering what all this has to do with Taiwan. "I grew up in Taiwan, we always lose," Mr. Lee says. He laughs good-naturedly. "Nobody wins anything, that's just how I grew up. We're always on the losing side. My parents get beat by the communists, they escape to Taiwan. Taiwan's a small island, hardly anybody pays attention. Up until the late '80s I still get this: I come here, 'Where are you from?' I say, 'Taiwan.' People say, 'Oh, I love Thai food!'"

Taiwan, of course, also has more serious dilemmas. "You live in fear that communists will take over . . . China's so big and Taiwan is a small island . . . . We look at America as the big brother, the protector, the good guys. So after the Vietnam War it's very frightening, [America's] . . . in trouble and you feel very insecure. So I think Taiwan needs Americans to be the good guys."

It is no surprise that we Taiwanese are more likely to succeed in gray areas where nationality matters the least. In science and business (arts to a lesser degree), Taiwanese have more share in the world stage than the size of population indicates. It also reminds me of why many of my classmates want to be Chinese or Indian economists while all I can be is a good economist.

(Picture: wsj.com)

Strunk and White

You don't know the importance of writing until you seriously write something. That was my first thought when I began to write up the prospectus for my Ph.D. dissertation. Although I am far from being a good writer, I collect good tips of how to write well. Therefore, I can share some writing advice with you.

1. Read a lot. If you don't know how other good writers write, it is very likely that you are not going to be one. Newspapers and magazines are the best sources. You should not only rely on reading blogs and academic papers. Sometimes they can be very poorly written, though being extremely informative.

2. Use adverbs. The veteran Fortune journalist, Carol Loomis, is the mastermind behind Warren Buffett's fantastic writing. If you love reading annual reports, Buffett's Berkeshire Hathaway is an incredible source. One piece of advice from Loomis to Buffett is to use adverbs. It will enrich the whole article. Of course, you need to know lots of adverbs.

3. Read Strunk and White's The Elements of Style. So many people talk about it that I have to have one by this holiday season. Greg Mankiw mentioned it in his blog. Bob Flood talked about it when he was in town. I will probably talk about it more when I have it.

4. Write often. Starting a blog yourself?

After writing all these, I checked again the advice from Mankiw. Nothing can top his. Check it out: How to write well by Greg Mankiw.

Never stop believing

Dallas Fed recently released a videotaping of the interview with Milton Friedman. Although I am pretty familiar with what the great economist had said in all sorts of interviews, he never stopped surprising me. In this particular interview, he called the social security system a Ponzi scheme. The sustainability of the system relies on recruiting new members to pay off retirees. There is no asset accumulation in the system used by the U.S. If you think it carefully, it is indeed the case. How can Paul Krugman look at this fact and still think we don't have a crisis? Once again Prof. Friedman proved to me: we should not stop believing in him.

(Picture: Dallas Fed)

Fire Mike Nolan

There is a reason why 49ers have more flags than any other team in NFL this season. Players are lack of discipline. When that happens, it is always the coach to blame. That sums up this disappointing season. Fire Mike Nolan and make him take Alex Smith with him.

(Picture: sf49ers.com)

Robert Flood is in town

Robert Flood was in the department to give a couple of talks this week. One was about advice for graduate students. I am just so happy to learn that I am doing most of the things he suggested. Can I say, "great minds think alike?" Maybe it is too early to tell if I will be as big as he is, but I am really inspired.

Having seen the unusual high attendance to Dr. Flood's talk, I want to say something about seminar attendance in general. I have decided to commit myself to one of the department seminars since I cleared field exams. Commitment means attending every week without questioning what the topic is. Most of my peer selectively go. Make no mistake, I did struggle sometimes because the talk was so boring or too difficult. But my take on this is that going to seminars is like taking vitamins. You won't see the immediate benefits, but in the long run, it sure helps. Besides, you know what happens if you take vitamin only once in a while: eventually you will stop taking it for good.

(Picture: worldbank.org)

How to tell something is over heating

A while back when we were still in L.A., we lived in a large apartment complex very close to Disneyland. Because I stayed home quite often during that time, I knew most of the maintenance crew. The head of handymen once talked to me about buying a house through a broker that could hook him up with low down payment and low interest payment mortgage. When I pressed him for more details, he shrugged, "I don't know. I can give you a card and you can call him. He is really nice."

Some day before we moved to Santa Cruz, he told me again that he bought a second house because he made a fortune on the first one. "Jesus," I told him, "you need to be more careful." He didn't seem to care even after I told him I was an investment adviser. He still held on to the first one. I don't know if he had cashed out before the subprime crisis hit. (Good luck, Gus!) But here we have two lessons to learn.

First, as Prof. Ravenna pointed out, bubbles can be rational. As long as there are buyers with higher offer than your purchase price, your buying high is rational. I doubt Gus knew about the theory, but he made a fortune on the first house.

Second, when a handyman is going all in and not hesitating to brag about it, the market is probably over heating. It is only a matter of time to see the bubble burst.

(Picture: www.bconnex.net)

Difference in difference

In the macro workshop last week, two professors argued the efficacy of running regression on inflation targeting countries. (to be continued.)



(Picture: answers.com)

Baby models don't sell

I was sitting in a talk by a Stanford graduate and suddenly realized how true my adviser's comment on writing a simple model to explain puzzles was. That paper presented was extremely difficult to assimilate, not that his heavy accent helped. But no one in that room would think the guy was dumb.

Then the comment struck me. He said in a previous meeting, "Baby models don't sell." It is harder and harder to use a simple model to explain economics. Most of the baby models are already in principle and intermediate textbooks. It won't be easy to come up with one more popular baby model. Besides, you put yourself in a dangerous situation that real economists might think you are not up to difficult reasoning when you can only talk about simple stuff.

So my lesson is when you are talking to professionals, it is always better to be boring and incomprehensible than to be a see-through. You can talk about baby models any way you want when you are judged by no one.

(Picture: Elite Photography)

My head is spinning

The Nobel Prize in economics goes to Leonid Hurwicz,Eric S. Maskin, and Roger B. Myerson. My head was spinning when I first heard of the news, just like when I was in Prof. Singh's advanced micro class. In the very last part of the lecture, Prof. Singh devoted a great deal of time to mechanism design theory. "What is this (beep) ?" was constantly in my mind at that time. I am just so glad that I am done with micro theories.

For those advanced readers, you should check out Alex Tabarrok's explanation of mechanism design theory.

(Picture: Prof. Hurwicz by University of Minnesota)

Double parentheses?

The other day Lauren, a fellow Ph.D. student, asked about how to cite an article when the citation was not part of the sentence. I didn't know how to do that, of course. I just kept persuading her to write another sentence for the citation because I know double parentheses were ugly.

Well, like Lauren said, I didn't read enough and my answer was ugly, too. So I came back and surfed the Internet. To my surprise, there is a clear guideline out there. Check out this citation guide provided by Prof. Parker at Reed College. You can know how to avoid double parentheses by reading page 3 of the guide.

(Picture: www.brill.nl)

Dude, where is my dataset?

I asked a stupid question when meeting with a professor. I said, "Is it possible to publish something without empirics." In empirics, I meant testing the theory with real world data. It is of course possible, but not when you are just a graduate student.

My stupid question came from my frustration of locating data when doing my econometrics project. We social scientists are not like natural scientists: we rarely can run experiments on our subjects. All we can do is have nature do the experiment for us. The downside of it is we usually don't know where nature stores its experiment results.

No matter how elegant your theory is, it is nothing without empirics backing it up. Seeing the difficulty, many economists do it backward. Instead of constructing a model first and testing it later, some get a hold of a good dataset first and then figure out a way to use it.

I don't know which way suits me better, but let me tell you one thing: if I can have access to a really good exchange rate dataset, I will for sure beat it to death.

(Picture: The University of Edinburgh)

My tribute to Freakonomics

The stuff discussed in Freakonomics have raised plenty of eyebrows among economists. Some criticize the book undermines economics research by attracting too many brilliant young minds to work on less important issues. No matter what they say, it is hard not to become one of those freakonomist-wannabes after reading the book.

I was already in the Ph.D. program when I read the book. Still I like the stuff so much that I decided to have my first paper on the same line of thinking. After a year of grueling work, I am now presenting my first paper/draft as an economist: Does how much doctors are paid matter?

Rough might it be, but I can say it is very original. Alas, I have to move on to exchange rate models. After all, they are my ticket to teach in business school.

(Picture: amazon.com)

The sunk cost

I don't like the war in Iraq. A friend of mine sent me a link about how the presidential candidate Ron Paul sees about the war. I agree with his idea of not going to war unless being attacked. But no matter how wrong the U.S. got into the war in the first place, it does not justify a pullout right now.

I think most of the war critics forget what they had learned in Economics 101. Whatever happened in the past is sunk cost. It should not play any role in your plan for the future. You can whip George W. Bush anyway you want, but withdrawing troops from Iraq now is not the right decision for the U.S. It will simply tells the world that the extremists have defeated the U.S. Does anyone out there want an ending like that?

The worst school in America

David Horowitz, the author of the book "The Professors", went on to Fox News to discuss the worst school in America. Guess what? It was UC Santa Cruz!

I don't recall our school has made it to the national media in any sort. I don't watch news channels very often, but got to hear what this guy had to say. It turned out that he was bashing the liberal leaning academia in general and UC Santa Cruz happened to be his pick of the day. I don't deny the fact that our school is very liberal, or sometimes communist like, but the political propaganda Mr. Horowitz hates so much is never seen in economics classes.

Well, any publicity is good publicity. I just hope our undergrads can tell which professor is imposing his/her own view of the world and which one is helping you to become the RIGHT intellectual.

The Dutch treatment

The Wall Street Journal featured the health care reform in the Netherlands on Thursday. I always support the MSA idea better because medical service providers can compete for customers/patients while the patients bear the true medical costs. The key is in competition among hospitals and doctors. Little did I know that competition among insurers works, too. At first glance, the idea should be as good as competition among hospitals and doctors as long as the adverse selection problem is taken care of. In the Dutch system, adverse selection problem is overcome by government subsidy together with mandatory acceptance of enrollment.

But how the doctors are compensated must be carefully studied. Economists will tell you competition among suppliers will not only bring cost savings to customers but also brings about innovation in the industry. If doctors and hospitals fight for customers/patients directly, they will enjoy all the profits their innovations can bring home. With insurance companies in the middle, I don't know if doctors and hospitals will have enough incentives to innovate. Well, innovations can occur in the insurer level, too. But I don't know if that can translate into medical advances.

Speaking of doctors' compensation, I am writing a paper about that under Prof. Dobkin's supervision. I should write another post to discuss it. Stay tuned!

(Picture: wsj.com)

The devil is in the details

OK, this is a bragging post. Cover your eyes if you don't want to see any commercials.

I was invited to hold a training session in the new graduate TA orientation in this coming September. I guess it was because of my "fine" work recognized by the department in the letter above. I am going to reveal all my secrets of how to constantly get 4.5+ student evals in the orientation.

I am going to open the discussion with the following story.

When we first got pregnant with Andrew, one of my friends told me, "man, it is so difficult with all those medical terms during the pregnancy. I didn't know what the doctor said at all. You'd better find a Chinese doctor." This came from an ABC(American born Chinese) with perfect command of English. That really scared me. So my wife and I bought some books and studied them pretty hard. Guess what? I understood everything the doctor had said to us. One of the nurses in the hospital even credited us with the best team ever.

So what is the trick for a non-native speaker to be an excellent TA? Preparation, preparation and preparation. Not too bad to open a training session, huh?

Vernon Smith on the invisible hand

Prof. Vernon Smith had an interview at EconTalk a while ago. He talked about his Nobel-winning work on experimental economics. His experience of sending his revolutionary work to JPE is very interesting to me. Back in the 60's, JPE was already famous for its stance on free market because it was, and still is, housed in the University of Chicago. Prof. Smith thought that his experimental economics could lend support to the invisible hand as empiric evidence. So he sent the paper to JPE. To his dismay, it got rejected!

It turned out that, "If you believe in markets you don't necessarily need evidence." Of course, it eventually got published by JPE when Harry Johnson took over as the editor. It is always good to know where people stand ideologically, but don't try to reason with them when you know they are firm believers of something.

(Picture: George Mason University)

The hollow teachers

Since I am gonna become a professor and teach some day, I have started to notice different types of teaching. Recently, I observed one particular type of instructors and was amazed by such teachers. Let's call them the hollow teachers. Here are some bullet points from my observation.

(1)The hollow teachers love to talk about their own experiences
---because they are not familiar with the material they are supposed to teach.

(2)The hollow teachers enjoy telling how old they are
---they think seniority buys them some credibility.

(3)The hollow teachers chat a lot with students
---they can cut the teaching time to a minimal level that way.

(4)The hollow teachers tend to spice things up in their wordings
---without knowledge of the material, they think cursing will excite students a bit.

(5)The hollow teachers are not demanding at all
---they worry a rigorous syllabus might backfire.

(6)The hollow teachers give students long breaks in between lectures
---again, they can have less teaching to do.

(7)The hollow teachers are popular among some students
---those hollow and lazy ones.

(8)The hollow teachers make mistakes in teaching frequently
---what do you expect from them?

(9)The hollow teachers often make assertive statements
---most likely because they don't know how to argue reasonably.

(10)The hollow teachers don't like transparency in grading policy
---they need lots of room to maneuver once things turn sour.

(11)The hollow teachers watch the clock regularly
---they wish they could go home right away!

(Picture: cartoonstock.com)

Got rich before being corrupted

The other day I saw a Mercedes with a couple of bumper stickers while I was running some errands in Santa Cruz. Political bumper stickers are nothing spectacular in this super liberal town. Some are really fun to read when you are stuck in the beach-going traffic. Others are simply too political. Or too liberal. People at Starbucks ought to be mad had they seen this: Friends don't let friends drink Starbucks. That sort of stickers are everywhere in Santa Cruz.

But it was a first to see a Mercedes to have bumper stickers. The slogans were nothing fancy (No War for Oil! etc.) but with metal frame. I guess it belonged to one of these got-rich-before-being-corrupted people. There are three types of these people: Hollywood celebrities, Wall Street bankers, and Silicon Valley Googlers. They were all young when wealth rained down on them for good reasons (or not?). Since their consciences haven't been "tampered" with, they tend to be idealists, and they surely have the luxury to be. Sadly, idealists often equate liberals in this country.

I admire people with idealism, but you know what the Jews said about their czars in old-time Russia, "May they live a long life, but stay away from me."

(Picture: politicalbumpersticker.blogspot.com)

Joy to the world

I cleared both my field exams at first attempt and, most importantly, my son was born healthy on June 30, 2007!

(Picture: answers.com)

You can't get more international than this

I talked to Sandra, our graduate program coordinator, a couple days ago. I learned that the coming class of the Ph.D. program will have nine international students only. ZERO Americans! I guess spending such a long time to get a degree that is less marketable than an MBA is not so appealing to Americans any more. The good thing is that the department can always find someone that is up to the task, Americans or not, and that America always welcomes such brilliant minds from abroad. Here is the nationality breakdown of the coming class (one student from each country):

Europe:
Bulgaria
Greece
Spain

Latin America:
Brazil
Colombia
Peru

Asia:
China
Pakistan

North America:
Canada

A credible threat?

OK, I admit. I still watch NBA playoffs. Since the Suns are gone, the only fun watching basketball is in LeBron. Last night's game in Detroit was just unbelievable. But it struck me odd that LeBron scored 29 out of the team's last 30 points. He didn't pass at all. He just kept attacking the baskets. If the Pistons knew James was the only scorer, why hadn't they used all the players to corner him? I know if the Pistons had double-teamed or triple-teamed James, there would have been plenty of holes in their defense. But at least you should try and see if the rest of the Cavs is really a credible threat. Apparently, the Pistons thought so. They would not take the chances with LeBron's teammates.

Or maybe it had nothing to do with the credible threat? LeBron was just too good?

(Picture: espn.com)

To save trees, just use more paper

Not long ago, I criticized one of my classmates of printing papers on one side only. After reading an article from Harvard economics professor Ed Glaeser, I have second thoughts on that. Here is the excerpt:

Our paper recycling programs cost time and money and do little to protect first-growth woodlands and rain forests. The trees used by paper mills are a renewable resource. When people use more paper, suppliers plant more trees. If we want bigger commercial forests, then we should use more paper not less. Our policies should directly protect important wildlife habitats, not try to reduce our demand for paper.

I totally get his idea. Limiting the demand is not going to help plant more trees. Stimulating the supply will just do that. But I'll still print the papers double-sided, only for the reason that I can carry less in my backpack.

(Picute: reuters)

Disgusting but effective

While I finally had a little time to watch my favorite Phoenix Suns in the NBA playoff, the game suddenly came to an end. The Suns lost to the Spurs in six games.

Looking back at Horry's nasty hit on Nash, I realized that that cheap shot was actually the defining moment of the series. Horry and the Spurs lost the game, but he single-handedly got Stoudemire out of one critical game and made Nash run for a full 48-mininute game for nothing. I believed the Suns lost today's game only because Nash was worn out.

Look closely at Horry's facial expression. He was just like a cool-headed serial killer. His move was a calculated one, disgusting but effective.












(Pictures: nytimes.com)

What's happening

My heavy class and TA workload is taking a toll on my blogging. I wish I had more time sharing my thoughts with you all....

What blogging can get you

Greg Mankiw advises against starting a blog for junior researchers. He thinks it is a big distraction for a fledgling research career. It is rather discouraging to a novice blogger and economist like me. But the reason why I started a blog is still valid and my Cruzangels blog is getting me something I've never thought of. So I will ignore the Harvard economist's good advice for once.

I began to write on the belief that economists live and die on giving advice. On top of good oral communications, writing well is a big part of delivering economists' thoughts. Prof. Walsh encouraged us to write frequently in his advanced macro class. I took the advice by heart and started to write on economics in both Chinese and English. By the latest count, I have 25 pieces published in the leading Taiwanese newspaper Apple Daily. Quite surprsing even to myself.

In addition to the financial rewards I am getting from writing (by the way, if you click the ads on the top of this blog, I get a few cents from the advertisers.), I get something unexpected recently.

(to be continued.)

Equilibrium, what equilibrium?

Economists build models to analyze stylized facts. In the end, we all want to discuss the state of equilibrium. In the case of basic supply and demand analysis, we say the market clears at equilibrium. If the market is in dis-equilibrium, there will be either excess supply or excess demand. Then the system is said to be in transition to a new equilibrium with a new clearing price.

The problem is, how do we know the prices we observe are in equilibrium or in transition? A Saudi Arabic prince once famously denounced the crude oil shortage, "what shortage? Buyers still can buy any oil they want. "(not exact words) That is very true in a way.

In a bazaar, we know supply and demand are in dis-equilibrium if there is a line waiting to get something tasty. Demand exceeds supply. In a more abstract scenario, we also can discern dis-equilibrium. Suppose a bigger kid bullies a smaller kid all the time. The stronger extorts money from the weak. If the extorter continuously increases the level of the bullying, it can't be in equilibrium. No one kid can sustain bullying for a long period of time, especially when he apparently does not have an unlimited credit line. Something terrible is bound to happen if no one intervenes.

Unfortunately, those are exceptions rather than the rule. It is very difficult for us to distinguish equilibrium from transition in economics. Prof. Dooley said it frankly, "we don't know if the system is in equilibrium unless we have the models in mind." It was a hard concept to absorb at first. In fact, I believe all of us were very shocked to learn this in his advanced international finance class. What he said was counter to not only what we have learned but also what we have been teaching! We talk about the equlibrium like it is something we feel and touch easily and frequently. And yet it isn't something you can point it out every time you see it. Think about these: is the Dow Jones approaching 13,000 an equlibrium? is the water level at Lexington Reservoir now an equlibrium? We don't know! By the end of the class, I was totally sold at this idea. I guess I am at a new equilibrium now.

(Picture: University of Texas)

No-hassle cancellation

I recently moved and found a way to tell whether a company is a monopoly or not. The discovery was due to my attempts to change my address with the utilities companies. I called my garbage collector, Waste Management, and cancelled the service without any hassle. The lady over the phone was friendly and didn't even asked why. The conversation with my cable company, Comcast, was totally different. Not that the guy was rude, but that the guy tried extremely hard to keep me as their customer. In the end, I decided to stay with Comcast, but got a call a couple of days later. They wanted me to upgrade to premium lineup with HBO for one dollar more per month! The deal was attractive, maybe too attractive for a graduate student. I didn't upgrade because it is really hard to squeeze HBO into my already tight TV-watching schedule.

So my finding is that if the breakup with your service provider is extremely difficult or sometimes painful, chances are the service provider isn't a monopoly. Well, who doesn't like a no-hassle cancellation? But I would always prefer money saving to a friendly conversation with an old lady. Comcast cut my bill after our hard bargaining. I save $120 over one year!

Public utilities need to be regulated because they are monopolies by nature. Only monopolies can take advantage of network externalities, so says the economics. Regulations can drive utilities companies to do crazy things (or nice things). Except for tobacco companies, utilities companies are probably the only businesses that tell customers to consume less of their products. It never makes sense to me, but that is your tax dollar/politicians at work. Of course, the regulations include a mandate to have a friendly conversation with your customers who are breaking up with you.

That is all good, but I still love the money more. With the technology catching up, more and more former monopolies are now facing fierce competition. Not a very long time ago, Comcast is still one of the highly regulated monopolies. Nothing sounds better than competition to a free-marketer like me. So, if one day we have difficulties to break up with Waste Management or PG&E, we know that technology has helped free market conquer another territory!


(Picture: screwyou.thezeroboss.com)

An alternative to school vouchers

The idea behind school vouchers is to instigate competition among schools, especially public ones. Public schools in America are in fact a gigantic bureaucracy. Not only the teachers are free from competition but also free from firing for most of the tenure- and union-protected educators. The only pressure probably comes from PTA. But as a parent with some financial resources, why would you even want to try to change the teachers and the school if you could just move to a better district or enroll your kids in private schools? As well-off parents move out, inner city schools are stuck with protected teachers and helpless parents. No way they can get out of the vicious cycle.

The beauty of school vouchers is to let the parents get back their power. As tax payers, they have every right to demand a better education for their children. It is almost painful to see such a wonderful idea suffer smear campaigns all over the country. To fight interest groups is never an easy task. But I believe in the long run America will learn to appreciate school vouchers.

My alternative to school vouchers is actually not my own idea. It has been in place in most part of East Asia for quite a long time. In Taiwan, for example, the best high schools are not private ones. It is often the case that parents enroll their kids in private schools only when they fail to get in any public ones. The trick is that junior high graduates have to take an entrance exam to get in any public high schools. The school districts often coincide with administrative divisions. For instance, Taipei city and the adjacent county, with more than 5 million in population, have only one school district. The district holds entrance exams twice a year. Pupils with the highest scores get to pick the schools first until all the slots are filled.

The system creates enormous competition among schools. The principals and teachers do not fight for budgets but for reputations. As everyone knows, competition among suppliers will only benefit consumers. I believe most of East Asian countries, such as Japan, China, and Korea, have similar systems. It turns out that public high schools in that area are probably the best in the world in terms of academic achievements.

The system, however, is not a very realistic solution to inner city schools in the U.S. I don't see any politicians dare to put their careers on reform ideas like that. It might be even more controversial than school vouchers. But let's face the truth. The way American universities compete with each other is almost the same as the system I have just described. Guess what, American higher education is the best in the world!

(Picture: freedomforum.org)

Rate your professors

It is the time of the quarter when professors are being evaluated. I found this cool site from Greg Mankiw's blog. The website calculates so-called h-index, which measures research productivity of professors. Productivity is not only in terms of quantity but should also be of quality. The index sort of captures both: h is the number such that the researcher has at least h papers that have been cited h times.

With the help of the website, I ranked the professors of Economics Department based on the h-index:

Yin-Wong Cheung (24)
Michael Dooley (23)
Daniel Friedman* (22)
Carl Walsh (21)
Joshua Aizenman (20)
Kenneth Kletzer (17)
Michael Hutchison (16)
Donald Wittman (13)
Nirvikar Singh (12)
Lori Kletzer (11)
K.C. Fung* (11)
Robert Fairlie (11)
Phillip McCalman (7)
Federico Ravenna (6)
Bernard Elbaum (5)
David Kaun* (3)
Carlos Dobkin (3)
Ryan Oprea (2)
Justin Marion* (2)
Huibin Yan (1)
Richard Gil* (1)

*Adjusted for unmatched first name initial

Disclaimer: I don't know how accurate the website and its methodology are. I did this just for fun. If there is any mistake, please let me know. I am not responsible for any interpretation you have.

The inconvenient moral high ground

Al Gore is said to have built a huge heated pool in his Tennessee residence. The utility bill per month is exceeding an average family's annual amount. Since the story was revealed right after his success at the Oscar, it sounds to me like a cheap shot taken by his right-wing opponents. Everyone is entitled to live a better or even luxurious life as long as he can afford it. The problem with Gore is that he sells a noble cause by standing on a moral high ground. And the taller you stand, the easier a target you become. A good policy cannot be just about good intentions. If you can't incorporate your good intentions into a well designed policy, you will probably at best sound like a zealous religious leader and at worst be called as a hypocrite.

When faced with constraints, very few people respond to conscience, but most will act according to incentives. The selfish human nature just can't be changed. That is why a Pigouvian tax on gas is more effective than a thousand "the inconvenient truth" movies. (Please refer to Greg Mankiw's blog for discussion on Pigouvian taxes).

Global warming is a serious issue that needs a good policy design to deal with. Making everyone the villain is not the solution. As it turned out, the most respected environmentalist politician can be made villain very easily with his own rhetoric.


(Picture: algore.com)

The Oscar goes to......

Before Sunday, British bookie already closed the bet for Helen Mirren to win the Oscar. Before the closure, you had to bet 66 British pounds to win 1 pathetic pound. They still couldn't have enough gamblers to bet on other actresses to cover their potential losses. Guess what? Ms. Mirren did win.

Unlike college basketballs, Oscar is much easier to predict. The awards are not determined by a small panel of judges, but by thousands of academy members. The group is not too bad as a proxy to the true population taste. I guess the book keepers just need to do a little telephone survey and calculate the statistics.

That might also be why betting on the Oscar is not as popular as betting on sports.
(Picture: imbd.com)

Hard to think about anything else

We are asked to present a trade-related paper in Prof. McCalman's class. I pick Dani Rodrik's provocative "Industrial Policy for The Twenty-First Century". Provocative is an adjective used by Prof. McCalman, but I think Rodrik would rather call it "part and parcel of today's broader, conventional agenda of development."

After browsing through the paper, I couldn't get the thoughts out of my head. It is not a conventional economics paper. There isn't any model or mathematics. Instead it cuts right into the economic meanings of government intervention in development.

The economic success of East Asia is often compared to the failure in Latin America. Economists have been trying to solve the mystery and prescribing medicines to developing countries. Yet I don't see any academic piece as powerful as Rodrik's. As a libertarian, I seldom believe government should play any role in economic development. But Rodrik does have insightful analysis that provides foundations for the necessity of government intervention.

Since my presentation is only open to our class, you are not going to know my full critique of this paper. But if you have too much time to kill, read it. It will probably change your perspectives of this world. As Robert Lucas' famous quote says, "Once one starts to think about [economic development], it is hard to think about anything else."

(Picture: Kennedy School of Government, Harvard University)

God bless the Internet

I have heard of MIT's OpenCourseWare before, but when I read an article in today's Wall Street Journal, it evoked my interests again. Since I became a TA for undergrad's econometrics class, I have been constantly thinking about whether our department is demanding enough in terms of course intensity. So I checked out MIT's OpenCourseWare and found that MIT's econometrics class was taught by Joshua Angrist, the phenomenal econometrician and labor economist. Wow!

It turns out that the course is indeed more rigorous than the one we are teaching. I now can refer the website to those more knowledge-hungry students and re-educate myself as well. God bless the Internet and, well, MIT.

(Picture: MIT OpenCourseWare)

No union zone

A fellow graduate student from environmental studies came to my office hours the other day. Without much hesitation, she politely asked me why I didn't sign up for TA union. I still hadn't recovered from the fact that she wasn't one of my students, but managed to tell her that I am against unions in general. She must be shocked because she seemed to be ready to pull out a form for me to sign up on the spot but had to stop at my answer. Anyway, she gathered her composure and told me, "Do you know that you are still entitled to all the benefits even if you are not a member?"

I don't like being patronized, but didn't have a quick response at the time. I simply said yes and she walked away. Later in the week, one of my classmates told me that she encountered the same rep and was sort of forced to sign up.

It is all good that people stand up and fight for their own rights as long as they don't become a monopoly. Any student who has taken econ 1 will tell you that a labor union is a monopoly in labor supply. The problem with our monopoly union is that they deprive me of getting a better deal with the university. Without the union, many good TAs like me will be better off. (I am bragging here but it is students who say I am a good TA.)

Why is that? As the same econ 1 student would tell you, the price will go up if there is a shortage in supply. With economics becomes a more and more popular major, economics department simply can't find enough TAs to help professors in larger and larger undergrad classes. Good TAs would have a niche in bargaining benefits were not for the union's intervention. And they think they are doing you a favor?

The deeper question about TA union is with their existence in the first place. Honestly, no one forces you to become a graduate student or a TA. You are simply weighing the costs and benefits of different career paths. You know what is on the table when you decide to do graduate studies. You can walk away from the deal any time. If universities do not offer competing benefits for graduate TAs, they will not get enough TAs to do the job. That is a fact and the balance of power was there long before the union. TA unions are not helping TAs, at least not those good ones.

A few words for the union officials: It is good that you find a cause in your life, but fighting for TA benefits is definitely too small a battle for people like you. Take it to the streets, Max Weber would tell you.

(Picture: www.uawhonda.com)

Cool heads and warm hearts on global warming

The most often cited evidence for global warming is the "Hockey Stick" graph shown here. Climatologists who believe in the heating up of this planet have constructed the temperature time series and concluded that industrialization has caused global warming. Many people are convinced by advocates, such as Al Gore, that if we don't do anything about global warming right away, the human race is doomed.

There are many ways to approach this issue, but the "cool heads with warm hearts" method should be adopted here. Being trained as both an engineer and an economist, I believe in science and logical reasoning. Science is evolved around skepticism. Whenever we see some so-called conclusive evidence, we must always ask how the researchers get the data and what their methodology is. I don't know how they collect earth temperature in year 1000 when people didn't even have a measure for temperature. Even if there is a scientific way to do it, extrapolation is inevitable. With extrapolation, scientists are able to manipulate the results anyway they want. Such disbelief makes it hard for me to agree with the inconvenient truth from the get-go.

That being said, I still think global warming is an issue that needs more resources devoted to. Paul Samuleson said it in the best way it can be, "because the uncertainties are so one-sided, with a small probability of very substantial damages, it might be rational to pay a 'risk premium' in terms of taking additional steps today to slow climate change. Just as individuals find it rational to sacrifice a little income today to buy fire detectors to lower the chance of a catastrophic fire, so might societies find it prudent to sacrifice some of their national incomes today to rescue the chance of catastrophic global warming in the centuries to come."

I am willing to sacrifice a little bit of today's income to buy some insurance for my future generations. I just don't like liberals' all-out war on fossil fuels or even on economic development. The political motivations hiding behind a well-meaning social issue disgust me.

(Picture: Silflay Hraka)

Krugman on Friedman

Through Greg Mankiw's blog, I read the whole thing Paul Krugman wrote for The New York of Books on Milton Friedman. I always think that Paul Krugman is smart. Yet I also believe that smart people can be very opinionated and partisan. Here is the most striking part in his tirade:

----What's odd about Friedman's absolutism on the virtues of markets and the vices of government is that in his work as an economist's economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing the role of individual rationality—but unlike some of his colleagues, he knew where to stop. Why didn't he exhibit the same restraint in his role as a public intellectual?

The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.----

If you replace Friedman with Krugman in these paragraphs and reverse the ideologies, you will find they are still very well written and true.

(Picture: MIT)

Socrates would also cry

(to be continuted)

(Picture: David Gray)

To B or not to B

"To B or not to B: that is the question." Even by the loosest standard, I am not Shakespeare-literate. The quote is related to an article in today's Wall Street Journal. The article said that there is an estimated shortage of 1,000 Ph.D.s in business schools all over the U.S. Business schools are having a hard time finding Ph.D.s to teach in MBA programs.

By a simple supply-demand analysis, we can safely say that salaries for assistant professors in business school must be driven higher because of the shortage. The article confirmed that the starting salary is around $108,000, a huge increase since 2000. In 2000, the starting salary is roughly $77,000, a number most economics Ph.D. are still hoping to get today.

The shortage, in my opinion, is caused by generous offers from Wall Street bankers. Imagine if you are an econ major in college and you are looking at offers you will probably get after graduate schools, will you go to a finance Ph.D. program or a business school? Starting salaries might be similar for an i-banker and an assistant professor, but Ph.D.s have to suffer 2~3 years more than MBAs. Besides, the growth prospect in professors' compensation is pretty dire. Taking opportunity costs into consideration, it is really not that difficult a decision to make. Ever-popular MBA degrees are also constantly increasing the demand for business school professors. Given that demand curve shifts upward while supply curve stays at the same level, it is not difficult to reach the conclusion of higher salaries for business school professors.

The question then is to ask why the salary gap between professors in economics department and their counterparts in business school persists. After all, training finance Ph.D.s is also done in economics departments. Why don't we see more economics Ph.D. migrating to business school and consequently mitigate the pay difference?

My guess is that business school professors have more responsibilities teaching MBA classes, which are gradually shifted to a composition of more seasoned executives than 20-something youngsters. It is relatively challenging for freshly minted Ph.D. to command such a task. Therefore, economics departments are and will still be the most popular destinations for econ Ph.D.s.

I've never thought that being old is of any advantage in the Ph.D. program. Now I find a comparative advantage for myself in the job market. "To B or not to B" is no longer the question for me.

(Picture: Paul Merage School of Business, UC Irvine)