Anna and (The) Economist

Last Friday, I, Aco, and some friends had lunch at the School of Dentistry's refectory -- in building E, should you are curious where it is. While walking our way to that place, he told me that The Economist read a hilarious obituary on Anna Nicole Smith. Later on I looked upon that piece and can't agree more with Aco that it's a tragic yet comically amusing.

Now I'm going to ask Manager: if even the prestigious The Economist takes the trouble in making such obituary, can we do the same thing on, say, the late actress who has been found dead in a hotel near Salemba not so long ago?

Celebrity | The Economist

Market Failure: Fake Scientist and Her Wild Pink Yam Pills

A frequent visitor of this cafe once told me that he's amazed with economist abhorrence toward banning or regulation. Well not always. The standard text-book told us that government regulation might be needed if competitive market fails to prevail. And one among reasons why market does not work efficiently is the problem of incomplete (asymmetric) information.

And this is the hilarious yet tragic example of it: the fiasco of self-proclaimed scientist turned TV celebrity and best-selling author in UK. Here is the lead:

For years, "Dr" Gillian McKeith has used her title to sell TV shows, diet books and herbal sex pills. Now the Advertising Standards Authority has stepped in. Yet the real problem is not what she calls herself, but the mumbo-jumbo she dresses up as scientific fact, says Ben Goldacre.

Certainly, if the article is correct, the viewers of her TV shows, buyers of her books, and consumers of her Wild Pink Yam and Fast Formula Horny Goat Weed Complex pills are doomed. Consumers who do not have information as Dr (err, no) Gillian McKeith has (or pretends to have), buy products with no medical value --while in fact efficiency-wise they shouldn't buy those fake products at all.

To prevent that thing happens and to rectify the market efficiency, economics allows various government related authorities to step in --Advertising Standards Authority and Medicines and Healthcare Products Regulatory Agency, in this case.

You see, mate. We don't always hate government and loathe regulation.

ps: Following Aco, I was about to post a picture. But on the second thought, I don't think the horny goat pix is appropriate here in the cafe.

Market Failure

We'll miss you, Chief!

Imagine a soccer match between Persija Jakarta and PSM Makassar. Before the match, there is this opening attraction and all that. From Persija side, there is a parade of ondel-ondel (native clowns of Betawi). From Makassar, they have a guy acting and dancing in a costume resembling Sawerigading (the main character from the I La Galigo epic).

What do you think? I bet many Indonesians, or at least those sitting on the Senayan bench (the stadium, not the House) would enjoy the show.

But in Illinois, this could mean a big thing: racism. It has been years that every time our basketball team is playing, the audience is divided: pros and cons with regard to the using of an Indian chief as the mascot of Fighting Illini (that's the team's proud name). Some think the mascot honors the American Indians, some think it is derogatory. (As for me, I always enjoy the solemn dancing. The first time I watched the game I did not understand why some people with Illini t-shirts were standing and some sitting, with a very high tension between the two groups).

And the tension continues, to the parking lots, to the street, and even to the department halls. Professors are divided. Students hold demonstrations, for and against.

Honestly, I don't know which one is politically (in)-correct. It is just that, whenever I bought a ticket, I expect some fun. And the Chief was fun.

But now, he's leaving.

(Picture from ESPN.com)

Update: A friend from Ole Miss emailed me:

I am sad he is gone. I am against the idea that animals are meant for mascots for which humans are too highly dignified. Why don't we change all college team symbols to some respectful human character and drop the word 'mascot'?

A funny fact...The U of Mississippi mascot is Colonel Reb, an old Southern plantation owner. (Although, he looks more like a confederate leader to me.) You know what plantations represent: the slavery. Now, that's clearly wrong. They have not abolished the mascot, they just decided to keep him off the frontlines of sporting events. But you see the confederate flag all over the campus when there is a game. Confederate flag license plates, confederate flag doormats, etc.

See this: I miss the Chief.

She is right: hypocrisy it is.

Flood Rescue Strategy: Saving X or Y?

It seems that the flood has been receded. It is now somewhat safe to launch a slightly provocative quiz on the subject. Here it is.

Assume:
There are two types of area that has been submerged by flood in a city, X and Y. X is located in a riverbank and inhabited by low-income people, the ones who can only afford the cheaper almost-like-slum housing by the river. They get used to, and are better prepared to, annual flood. Yet, once the flood hit like this year, they have to face higher level of water, and danger, coming into their way. Despite little grumbling, they still can smile --as seen on TV.

Y area, on the other hand, has never been inundated, except this year. The population is relatively well-off people, middle class who can afford suburban housing in, supposedly, flood free residential area. By that, understandably it was really desperately shocking for them, unprepared as they were, to see the water swallowed their properties. When the shock ceased, they enraged, blamed the authority --any authority--, and some of them started to take legal action against the city government --as read in newspapers headlines.

Problem:
You are the city administrator in charge for rescue scheme. You are, however, only equipped with limited resources --personnels, money, boats, etc-- to be deployed, that doesn't allow you to cover both areas. Now, which area that you are going to intervene, X or Y?

To make things more complicated, your boss, the elected official, called you up. He wanted to make sure that the disaster would not obstruct his chance for running in the next election for his second term.

And your answer, please? And why?

The best answer will be awarded free coffee and cheesecake, specially prepared by Manager. She hates the flood, it reduces the cafe revenue.

p/s: This quiz is a modification of Amartya Sen's illustration on the problem of informational base for evaluative judgments and the theories of justice and social ethics, in his book Development as Freedom, page54-56.

Added
You may want to replace the flood with sharp rise of poverty level right after a massive economic crisis; people in X the chronic poor; people in Y new social climbers who just managed to escape the damned poverty line, --thanks for recent economic boom--, but are hardly too far away from it yet; and the call from your boss a democracy. And instead of a flood rescue plan, it's a poverty alleviation program.

Of course, the prize of a sensible answer will be increased accordingly. Perhaps, a ticket for Java Jazz would do, Manager?

social ethics | policy trade-off

One Billion Chickens

Yesterday I read the Kompas daily headline on the impact of avian flu. I came across the statement made by an official from Coordinating Ministry of Economy as follows:

"At the moment, the production of chicken poultry reaches 1 to 1.2 billion chickens per year, or around 300,000 to 400,000 chickens per one cycle of breeding (three to four months). Due to avian flu, the consumption drops by 50-60 percent of that number".

One billion chickens! For one who doesn't fancy eating chicken, like myself, that's a flabbergasting number indeed.

But first, regardless of the validity of those numbers, can you spot something funny in above mentioned statement? Yes, 1.2 billions chicken (in a year) divided by four (one cycle) would never equal to 300,000. But let's just assume that he's been misquoted.

Now, check the one billion chickens production number.

From googling, Indonesia Poultry and Products Annual Overview - August 2005, released by US Department of Agriculture, Foreign Agricultural Services, reported that the estimate number of broiler chicken production in 2006 is 672,000 tons. Broilers consist of 60 percent of total chickens produced, the rest is local-breed variety. Combine the two, we have 1,120,000 tons chickens. Now, assuming average chicken's weight is 1.4 kg. So the number of chicken is 800,000 million. Not bad, we have 200 million chickens lost in calculation.

Next, 50-60 percent plunging consumption is a very big drop indeed, if that's the real case. In 2005, the avian flu human death announcement led only to 25 percent decline. I wonder why this year has bigger impact.

Furthermore, as the cost of production is IDR 8,000-8,500 per kg:

"... the minimum selling price is IDR 9,000 per kg. It's in a normal condition. (But) now to sell at IDR 3,500-4,000 only is already hard. As such, the loss might reach IDR 1 trillion. That's only taking account the direct impact to chicken farm, not yet the indirect one to restaurant, hotel, and traders".

OK, let's do simple math again. Let's say, the loss per chicken is IDR 5,000 (IDR 8,500 production cost minus IDR 3,500 actual selling price). If we put the total loss at IDR 1 trillion, it implies that we are talking about 200 million chickens. So the government assumes that they can contain the avian flu within less than one breeding cycle. The question, can the government do that?

To be fair, the one trillion IDR loss is, however, only half of the story because consumers will substitute chickens to other products --fish, meat, vegetables, instant noodles, etc--. There must be some gains in the latter's' business.

This, however, does not discard the fact that avian flu is a problem. A serious one.

avian flu

Talking Nonsense #278

Café Salemba is proud to present its third album: Regulation. Unlike the previous albums, Tax the Dead Birds and I Didn’t Shoot Milton, this one comes with more fusion and a little hard rock. It has five compositions: Got a Nobel? (featuring Jeff Sax), Indonesia Bangkit, Non-Farmer Can Also Be Poor, Screw the Market (composed by me), and Price Is Like Oxygen (featuring H. Chavez).

Hope you like it.

(Film) Industrial Policy, the UK Way

So the Hollywood dominates the world film market. British film is declining. What should Britons do? The standard economics would be letting the competition goes on. Let lousy films with funny accent perish, if they can't cope with the market force.

Probably the Britons can no longer stand losing their cultural supremacy against their ex-colony. As Prime Minister Hugh Grant¹ once said:

We may be a small country but we're a great one, too. The country of Shakespeare, Churchill, the Beatles, Sean Connery, Harry Potter. David Beckham's right foot. David Beckham's left foot, come to that.

And his Chancellor of the Exchequer (a.k.a: Minister of Finance in case you are not familiar with this term) Gordon Brown --no, he's the real Tony Blair's Chancellor—announced in September, 2004:

I shall hereby declare that small budget films entitled tax relief 20 percent of production cost, and 16 percent for films costing more than £20m.²

And the result, as claimed by UK Film Council, is --for the money spent for film-making:

Statistics from the UK Film Council reveal that £840m was spent last year, up by 48% from the £569m spent in 2005. Studios are also coming to Britain in greater numbers - inward investment increased by 83% to £570m.³

Yeah, right. So much for the free market idea.

Now move to Indonesia. We want to have strong film industry, producing not only money-making but also good quality films. The ala UK tax break proposal seems attractive. But how can we be sure that taxpayers money going to the film makers, instead of building the schools or rice subsidy to the poor, would produce the industry boom like in UK –and, I would like to add, not the likes of crappy local films we often find in cinema nowadays? If we insist for the plan, we’d be better sure that, first, the economic benefit (multiplier effect on income and employment) coming from the plan exceeds the cost for tax break (or subsidy). Second, the produced films are competitive vis-à-vis Hollywood ones, which usually come from the quality of the product. And third, the mechanism to prevent discrimination in selecting the recipient is in place and well enforced.

A tall order indeed.

---
¹ In Love Actually.
² Well, not precisely, but see official guidance for UK film makers on tax-relief.
³ From The Guardian

film | industrial policy

Being Married May Not Be Like It Used to Be (Comments on: "Signaling game - a trivia" )

In a recent post, AP posed some questions about what signals would a man holding a baby at a mall be sending. Ignoring the self-absorbed nature of his question (after all, self-absorption is partly what this Cafe is all about), I will try to give some comments. The point in that post about the man wearing a certain t-shirt has been dealt with sufficiently in that post's comments and I won't discuss it here.

Being married probably sends different signals than it used to do...
In the old days, a married man would be thought of of having a stable life, an ability to make long term commitment, an aversion to risk etc. On average, marriage men would then be rewarded in the job market in the form of a marriage premium, loosely defined as the difference in wages between married and unmarried men, everything else including age, education, experience and work tenure the same. They would earn more, and accumulate wealth faster.¹⁾

Why does such premium exist? There are three main competing explanations. The first one is the discrimination explanation. This relates to the points raised earlier about married being seen as a signal of stability. Because of that, employers may have some bias in favor of married men when they make decisions on hiring (and firing), wages, benefits, and promotions . The second explanation is the specialization within marriage explanation, that says that marriage premium is a result of actual increased productivity that comes about when married men specialize in the market activities. They are able to do this because their spouses specialize in household/non-market activities (this is partly why I said "in the old days"). This increase in productivity translates to higher wages for married men. The third explanation is the selectivity explanation, which basically says the premium is observed because some of the qualities that make men perform well in the job market (responsibility, 'people' skills, good looks ²⁾) happen to be the same qualities that make them perform well in the marriage market, and thus they are rewarded in both markets. These qualities are observed by both employers and spouses but unobserved by the econometrician who then attributes the difference in wages between married and unmarried men to their marital status.

Empirically, marriage premium has been declining in western societies. I'm not aware of any study using Indonesian data (please enlighten me), but I would imagine even if the premium really has existed in the past, it would be less important now than it is before, especially for the sub-sample of Jakarta white collar workers. Given the lack of empirical evidence, that statement and the following are just conjectures and may well be proven wrong.

First, marriage is probably not such a good signal for stability anymore. With the cost of marriage dissolution (monetary and otherwise) decreasing, people are entering and quitting marriages easier. At least if you believe the newspapers and infotainment. If these anecdotal evidence are anything to go by (they probably shouldn't be ³⁾), marriage may now signal potential instability somewhere down the road, something that employers are keen to avoid.

Second, the gains from specialization are probably not important for Jakarta white collar workers because now, even young households typically would employ maids and nannies: there is not much specialization to begin with.

In short: being observed as a married man is probably not as advantageous in the labor market today as it was before. If that is true, than it seems that there is even less incentive for a woman who is active on the dating/marriage market to look at a man holding a baby at the mall favoringly. A guy who thinks that being observed as a married man is giving out signal that says "sorry I'm not available" is simply flattering himself. The signal he will be sending is probably: "Hi there. Even if I might be available - and remember the cost of dissolving my marriage is relatively low - you might as well look for a single man since I don't command that much premium in the labor market..."

...but having a child may still signal stability
What signal does holding the baby give away? In most cases, the arrival of a baby would be associated with an increase in specialization: the mother would reduce market hours, experience career interruption and a reduction in wages. The father would respond by increasing market hours and probably earning more. No need to look further for an example, read AP's (and Juli's) own account. Whether this would turn into an advantage is not clear; the total family income may stay constant because the increase in the husband's income may be matched by an increase in the family's spending (on the child) and the decrease in the wife's income, as the empirical work by Light ⁴⁾ has demonstrated.

However, having a baby may still send a strong signal about stability. Infotainment watchers probably agree with that statement. A lot of marriages of celebrities seems to hinge on these beautiful couples having an offspring. (Okay, after a disclaimer about not having empirical evidence, I got a little carried away - I am now using infotainment to support my argument!) To what extent it is really important is not clear, but having a child certainly increase the cost of divorce, monetary and otherwise.⁵⁾ Although having a noisy dispute over custody seems to be a new attention-getting vehicle a la Tamara Blezinsky (sorry, can't help it).

So, if you're caught holding a baby in public, you're actually sending a mixed signal. People may see you as a s.n.a.g. (if you still need a definition, you're probably reading the wrong blog). Another signal has been suggested by some commenters: you are a pushover of a husband and are dominated by your wife. Or that you cannot afford a nanny.Or that you chose not to hire a nanny even though you could afford it just to make a point. Or maybe you and your spouse want to make a point about equal bargaining in the household, and so on.

Or, if you're like me, you just enjoy spending time with your baby daughter and couldn't care less about other signals you might be sending.

¹⁾ See papers by Korenman and Neumark (1991), Korenman and Blackburn (1994) , Hersch and Stratton (2002) for examples of empirical papers on marriage premium.
²⁾ Here's a link to the discussion in the Cafe about what beauty can buy you in the labor market. Here's the related Slate article.
³⁾ Note that nationally, the rate of divorce in Indonesia has actually been on the decline in the past decades (Jones 2000), largely due the increase in the age of marriage and the decline in the number of arranged marriages. Shorter term trends or among a subsample of population (urban, white-collar workers) are hard to come by.
⁴⁾ Light (Demography May 2004).
⁵⁾ If the child's welfare is in each parent's utility function, a divorce that may affect the child's well being will be against their own interests.

signaling | marriage premium | household economics

Self Promotion #394: The Future of the Intellectual Imperialists is Not Dismal and #395: How to Improve Your Love Life

(links to the previous installments: #393 and #392)

The future of the economics, the dismal science, is not so dismal, according to this article in the New York Times. Here's a quip:

"....economists have been acting a lot like intellectual imperialists in the last decade or so. They have been using their tools — mainly the analysis of enormous piles of data to tease out cause and effect — to examine everything from politics to French wine vintages...."

"...As “The Soulful Science,” a new book by Diane Coyle, puts it, there has been a “remarkable creative renaissance in how economics is addressing the most fundamental questions — and how it is starting to help solve problems.”..."

Well, what is certainly not going to be dismal is the future of the thirteen "Economists to Watch" who were featured in the article. Andrew Leigh of the ANU calls them the young guns, although I think Leigh himself is a young gun, certainly one of the top young economists in the southern hemisphere (check out his academic website).

One of the thirteen on the NYT list is Ben Olken, who has done a number of his studies on Indonesia, and his works on corruption, social capital have been discussed in this Cafe (see the links to those discussions here).

An interesting fact about the list is that out of the thirteen economists on it, six of them are married to each other, a clear example of positive assortative mating (ah, this reminds me to do a post on assortative mating in the future).

Examples of positive assortative mating among economists are indeed abound. For my fellow economists whose partners are not really into utility maximization thing, don't give up just yet. There are ways to do it, which brings us to Self Promotion #395: How to Improve Your Love Life.

From Greg Mankiw's blog:

How to Improve Your Love Live

Having trouble satisfying your girlfriend? A reader of this blog emails me his remedy for the problem:

"...You'll be pleased to know that I managed to persuade my girlfriend (a biologist) to buy a copy of your "Principles of Microeconomics" recently here in the UK, so that we could have more informed discussions about interesting economics problems...."

Okay, that;s probably falls into the category of how not to charm your girl/boyfriend. And see also the following letter from a nerd comment in the blog:

".... I'm tempted to try this with my girlfriend. In time she can work up to Romer and Mas-Colell-Whinston-Green. Until then, our love life just won't be complete...."

Err... Oh well, the future is probably dismal after all.

Update: Arya at On Indonesia and the Economy also has a post about the young guns. According to him (I paraphrased), there isn't enough credit being given to economists whose work are as technically sound as those done by the featured economists, have more practical uses, but on topics less sexier than some of those on the list. I think I agree with him.

self-promotion | economists | dismal science | assortative mating

Macroeconomics revolution in sight?

Let’s talk about macroeconomics --a subject that discusses the national output, inflation, unemployment, and the likes. If you fancy more thorough definition of macroeconomics, you can always consult the text-book, of course.

But firstly we need to imagine how a (national) economy works. And in this respect, I think the credit goes to John Maynard Keynes and his General Theory of Employment, Interest, and Money, who brought the macroeconomics into the world, as a result of his thinking on Great Depression in 1930s. This was the first revolution.

With help of IS-LM model of Hicks (1937), how an economy work, in Keynesian way, can be best described as interaction between goods market (equilibrium of aggregate demand that consist of consumption, investment, government spending, and, export import; and output) and assets market (equilibrium of money market and asset market), connected by the interest rate.

This is a powerful model, at least until the 1970s. It also gives a room for government to fine-tune the economy along its cyclical pattern of boom and bust through fiscal policy (in goods market) and monetary policy (in money market).

But in 1970s the assault of Keynesian model came from two directions, empirically and theoretically (Akerlof, 2007). Empirically, the Philips curve, one of main feature of Keynesian model, for converse relationship between inflation and unemployment didn’t hold, mainly in US. They had stagflation.

And theoretically, and more interestingly, some of basic Keynesian model tenets were no longer valid as a result of the discovery of five neutralities: the independence of consumption and current income, the independence of investment and finance decision, inflation stability at natural rate of unemployment, and ineffective monetary policy with rational expectation; and Ricardian equivalence.

Alright, OK, I see you raise you eyebrows. That’s OK, don’t bother too much, I just want to say that the science gave birth to its second revolution, particularly after the Lucas rational expectation theory, and called the outcome New Classical macroeconomics.

And this took places by mainly adopting the micro-foundations approach of firms profit maximising and consumer utility maximising; and lending heavy weigh on market perfection. And they believe, more or less, any government intervention and fine-tuning effort would be useless.

Afterward the works have been going on, as well as the battle between two schools of thought. By incorporating market imperfection (frictions) into the model to defend the old Keynesian pre-suppositions, the New Keynesian reacted to New Classical Model. And the newest proposal came from Akerlof (2007), in pdf, who introduces sociological term of norm into equation to nullify five neutralities championed by New Classical macroeconomists abovementioned.

But, in my opinion, the New Classical revolution and the works afterward haven’t really brought a new general model of the economy, they way Keynesian did. All are only partial assaults on the Keynesian framework, without producing a comparable great model on how the economy works.

I once emailed one of the authorities in the field, Gregory Mankiw, asking for another possibility of scientific revolution in Macroeconomics:

I was expecting that Asia crisis in 1998 brought a revolution in the field, the way Great Depression in 1930s delivered Keynesian revolution. Alas, it wasn't the case. Why?
-r

And his answer

Good question, I don’t know.

greg

Maybe you know the answer?

P/s: This is the extension of this old posting, adding a little methodological issue into the discussion here.

macroeconomics