Open access economic theory

While digging up material for the following post on a paper by Ariel Rubinstein I came across Theoretical Economics: An open-access journal in economic theory (ed. Rubinstein) which is worth looking at if you are interested in economic theory and enjoy freebies.

Its first issue's contents are:

A model of choice from lists Abstract PRINT VIEW Ariel Rubinstein & Yuval Salant
Hierarchies of belief & interim rationalizability Abstract PRINT VIEW Jeffrey C. Ely & Marcin Peski
Financial equilibrium with career concerns Abstract PRINT VIEW Amil Dasgupta & Andrea Prat
Revenue comparisons for auctions when bidders have arbitrary types Abstract PRINT VIEW
Yeon-Koo Che & Ian Gale
Information, evolution & utility Abstract PRINT VIEW Larry Samuelson & Jeroen M. Swinkels

You can be notified to get future issues via the registration page. Rubinstein is a buzz. His website is great and all his books are on it in downloadable form.

Economists & social conscience

Does studying economics damage your social conscience? Is the damage greater if you mathematise social reality?

Ariel Rubinstein's, A Sceptic's Comment on the Study of Economics, looks at whether economics students respond more 'toughly' to a firm's difficulties when the economy is experiencing high unemployment, by sacking workers, than would four groups of students from other disciplines (mathematics, law, philosophy and those doing an MBA). Does an economics education imply you are more likely to target profits than worker welfare? What levels of dissonance arise with respect to how you would expect others to resolve the situation? Do you become 'nastier' if you analyse things using maths formulae?

The alternatives available in terms of sackings are presented as a table showing how profits are related to various worker layoffs. For the mathematically adapt, the same info is presented as a a math formula. In both cases maximum profits were obtained with an intermediate level of sacking but losses would not be incurred even if no-one was laid off. The study was repeated with readers of a business newspaper and with Harvard PhD students.

The idea was to see the weight different groups would attach to pursuing profitability and the extent of concern they would show towards the workforce. The paper follows recent studies asking if studying economics makes you selfish and uncooperative. Among the main results:

1. Economists would sack more workers and go for higher profits.
2. Given a maths formula, rather than the table, all groups who use the formula sack more.
3. Most believe real managers would be tougher than they were, with least dissonance among economists. Highest dissonance arose when a formula was used.
4. Oh yeah, and women are more compassionate than men.

There are several points one Rubinstein draws from this:

'If you believe that the manager of a company is obliged morally or legally to maximise profits, then you should be pleased by the success of economics in educating its students. However, you might be disturbed by the fact that so many economics students did not show any tendency to maximise profits. ....even the Harvard PhD students differed in their prediction of what a real manager would do.

Alternatively, you might approach the results with the idea that a manager is committed not only to maximising profits but also to taking into account the welfare of his workers, particularly when the economy is in recession and unemployment is high...Under these circumstances, striving to maximise profits
regardless of the consequences appears to be 'ethically problematic'.

(while) ...a major drawback of the survey is its inability to determine clearly whether differences are due to selection bias or are the result of indoctrination..... even if the economics profession attracts certain types of people, the results still suggest that something is wrong in the way we relate to students in our undergraduate programmes. It appears that the MBA programme is more successful in producing students with more balanced views.

(If) ....the choice was presented as a mathematical formula, a vast majority of the subjects in all disciplines...maximised profits though many of them were aware of the existence of a trade-off (evident from the fact that many of those who chose 100 said that they believe that a real vice president would fire less than the number required to maximise profits). This appears to support the intuition that presenting a problem mathematically, as we often do in economics, conceals the real-life complexity of the situation (my emphasis).

.....we need to re-evaluate the use of mathematical exercises which lead students to focus on the task of maximisation rather than on real economic problems. In the best case, these mathematical exercises simply make the study of economics less interesting; in the worst case, they contribute to the shaping of a rather unpleasant 'economic man'."

There are complex framing issues here. But it seems plausible to me that (self-selection of nasty people aside) economists might make more profit-oriented decisions than non-economists. And I always do get a twinge of unease when the unemployed are treated as a 'variable' in a Phillips curve. Mathematics is an important skill in economics (and social science generally) but it should help determine sensible outcomes not blind people to possible harmful social consequences of their decisions.

Rubinstein comments on his study here (an absolute gem of a paper!) and the article is also discussed over at Andrew Leigh's blog here.

Transparency in monetary policy

My colleague Jan Libich has written an interesting piece on transparency in monetary policy (here, paper # 5). It suggests improvements in RBA's procedures that should enhance public understanding of monetary policy, improve RBA credibility and hence economic outcomes.

A university dirty secret

The Australian today pre-publicises a forthcoming article in People and Place that blows the cover on one of the Australian university system's worst-kept 'dirty secrets'. Many of the foreign students purchasing education services in Australia are in fact purchasing Australian resident immigration status not education. While we brag about our success in exporting education services the truth is that the quality of our services often are not the motivation for people studying here.

Quote:

MANY overseas students believe Australian universities are little more than factories" producing permanent residency visas by offering cheap courses tailored to meet migration requirements.IT, accounting and engineering courses were among the most popular degrees for Indian students hoping to stay in Australia after their studies, according to new research.

"These factories were considered to be places that had little to do with education and much to do with migration," the study, to be published in the Monash University journal People and Place, says.

Those institutions with the highest quota of Indians were known as "PR factories", where students could gain permanent residency after graduation.

"Even before coming to Australia they will have figured out which courses will provide the easiest way to PR and will base the course they enrol in on this," says the study by a University of Amsterdam PhD student Michiel Baas.

The report also found universities supported the PR model, adapting courses to encourage students to sign up.

"They (universities) freely admitted that they kept close track of changes in the the MODL (Migrant Occupation in Demand) list in order to predict which new courses would be in demand in the coming semester," it said.

The study comes as the Howard Government considers changes to the skilled migration program that could result in new strict visa conditions for overseas students.

Australia's universities are increasingly just not being competitive with overseas universities and are driven by deceptions such as this. The incentives to deceive are obvious when most universities face budget stringencies and when Vice-Chancellors are increasingly expected to be CEOs of profit-maximising firms rather than providers of academic leadership in institutions that deliver public as well as private goods. Governments have incentives to conceal all this since it lends credence to the lie that Australian universities are adequately funded - they can attract lots of international students. This article has potentially explosive impacts for Australian universities.

Smart blonde joke

A guy gets on a plane and finds himself seated next to a cute blonde. He immediately turns to her and makes his move.

"You know," he says,"I've heard that flights will go quicker if you strike up a conversation with your fellow passenger. So let's talk."

The blonde, who had just opened her book, closes it slowly and says to the guy, "What would you like to discuss?"

"Oh, I don't know," says the guy. "How about nuclear power?"

"OK," says the blonde. "That could be an interesting topic. But let me ask you a question first. A horse, a cow, and a deer all eat the same grass. Yet the deer excretes little pellets, the cow turns out a flat patty, and the horse produces muffins of dried poop? Why do you suppose that is?"

The guy is dumbfounded. Finally he replies, "I haven't the slightest idea."

"So tell me," says the blonde, "How is it that you feel qualified to discuss nuclear power when you don't know shit?"

(Thanks Bernd)

Dirt Cheap CDs

CD retailers have taken a battering from the rapid rise of MP3 players and music downloads. Established businesses are also threatened by the growth of factory suppliers and websites that sell CDs for $15 or less about half the regular retail price. Illegally copied CDs purchased in Australia or overseas are a further source of competition.

But as the AFR today (subscription required) points out, even pre-recorded CDs face competition from firms, such as Dirt Cheap CDs , which take advantage of the government's decision to bypass the Copyright Amendment Act (No. 2) 1998 which permits parallel imports of non-infringing copies of a sound recording.

Midnight Oil's frontsman Peter Garrett, the ALP's arts spokesman, as usual sees such competition as jepardising careers of Australian artists and their royalties. But Dirt Cheap CDs is also improving consumer choice and 'gains-from-trade' arguments show the value of gains to consumers here exceed losses to artists. If Australia did wish to promote its own rock performers then explicit subsidies to performers would outperform limiting access to cheap overseas CDs. Why however would one ever want to subsidise such activities? The performers appeal to a mass audience and those who cannot succeed would seem to have questionable talent - even the successful don't have much! There are better users of public money.

Pro Hart 1928-2006

I was saddened to read of the death yesterday of Pro Hart. I have visited his gallery in Broken Hill and always enjoyed his visions of outback Australia and dragonflies. His carpet cleaning ads were a memorable part of commercial television history in Australia. Australia's most popular artist did not have his paintings displayed in the National Gallery of Australia. The art snobs be damned of course, he laughed all the way to the bank and I am glad he did.

I liked the tribute at The Currency Lad.

Mid week review

I had a hectic week trying to balance pervasive, creeping administrative duties - that I am not handling dutifully - with my research. I have mainly been blogging in the evening while the rest of the family are studying for exams or watching TV.

The Bill is hard to break (despite my annoyance that it has become a soap opera) and I sometimes watch Four Corners. For years I was a TV bug who had to exert self-control to limit my viewing. Now I just don’t want to watch. For shows like The Sopranos which I do enjoy, I buy or rent DVDs and watch at my leisure. There’s no intellectual pretence about my not watching TV – there are good shows but I want to do other things.

A couple of weeks ago I found that even John Quiggin watched Futurama so, out of curiosity, I took a look at it on TV. I then borrowed DVDs for the first two series. I’ve got through most of them over the last week. This is a fun show with caustic, adult humor. I found myself giggling at the insanity of Leela catching Bender ‘jacking on’ in the bathroom while he takes his electricity fix. Not a show to take that seriously (a Wikipedia entry analyses it and a review is here) but it has twisted humor that appeals to me. I was discouraged to find FOX cancelled the series in 2003 because it didn’t have enough audience appeal!

Best part of Tuesday was going to Hanabishi Restaurant at 187 King St, Melbourne in the evening. Some people have described this as the best Japanese food in Melbourne and perhaps Australia (here, here, here). I really have no idea about that. We went with a visiting Japanese academic who knew how to order and the result was a great evening.

As usual I invite your views on anything that interests you. Do you like sushi or Futurama? Do you think that Tony Blair is a more imposing political figure than anyone we currently have in Australian politics? Do you have any good (life or food) recipes?

Women's problems

A shocking video from the New York Times (now subscription only, story here) shows a woman in Pakistan threatened by judicially-justified death unless she leaves her husband to return to continue her forced work in a brothel.

Ms. Mukhtar Mai in 2002, ordered by village elders in Pakistan because her 12 year old brother walked with a women from another tribe.

Or more recently of Nazir Ahmed who slit the throats of his four daughters because one of them married a partner he disapproved of.

I guess she is marginally better-off than the 5,000 women honour-killed each year, mainly in Islamic countries. Islam does not seem to support such killings but it really does need to sort out its public image on these issues.

I have problems treating these sorts of events and the attitudes that underlie them with cultural sensitivity. The treatment of these unfortunate women is barbaric.

Update: The New York Times reports that Mrs Mukhtar Mai is now helping young victims of abuse in Pakistan and prosecuting their tormentors in the courts. The unnamed women being persecuted in the courts by her former pimp has had all charges against her dropped and the pimp has been prosecuted.

Did liberalising abortion reduce US crime?

In relation to the post immediately following, Rabee Touky provides a link to C.L. Foote and C.F. Goetz ' Testing Economic Hypotheses with State‐Level Data: A Comment on Donohue and Levitt (2001)' here which critiques the conclusions of J.J. Donohue and S. D. Levitt 'The Impact of Legalized Abortion on Crime', Quarterly Journal of Economics, 116:2, pp. 379–420' (an unpublished version here). They claim there is a significant error of reasoning. Correcting for this error Foote and Goetz claim there is no evidence that liberalising abortion laws led to a decline in US crime rates.

In response, Donohue and Levitt in, "Measurement Error, Legalized Abortion, the Decline in Crime: A Response to Foote and Goetz (2005), (here) acknowledge the error but claim that, correcting for it, leaves their original conclusions intact. They argue that liberalised abortion laws explain about half the reduction in US crime rates.

There is an animated discussion on this debate over at the Freakonomics blogsite. The issue is also discussed in The Economist here. In my view Foote and Goetz have a point. My brief response is as follows:

FG criticism. DL claim that higher abortion rates mean less crime. This is partly because crime rates are concentrated among young age groups but also because, DL claim, unwanted children are more likely to be criminals. FG denies evidence for this second link although they agree the first link will operate.

DL test the abortion crime link by comparing criminal behaviour of different groups of young people. These groups are defined by their birth years and state of residence. These groups will have different ‘abortion exposures’. They test if those with a high exposure are less likely to commit crime. The difficulty is that different states will be exposed to other differences in factors that might motivate criminal behaviour - for example the introduction of crack cocaine. If these specific state-year factors affect states at the same time as changed abortion laws, but are not controlled for, they will distort conclusions relating to links between abortion and crime. In DL’s case controls can be used because DL has several points within each state-year combination based on abortion exposure for different age groups (15 year olds, 16 year olds etc). Then one can calculate the difference between the original age specific data and the average abortion exposure and average criminal activity within each state and year to eliminate any factors that affect all ages within a state equally. Then look at the relation between demeaned crime and demeaned abortion exposure.

One could also control for state-year effects that operate on the age-year level or the state-age level. An age-year factor would affect all US individuals of a certain age while a state-age factor would operate if people of different ages in different states were more likely to commit crime. Eliminating state-year, age-year and state age effects would allow a test of the hypothesis that abortion exposure drives crime. This can be achieved by regressing arrests (in a particular year, with a cohort born in a particular state with a particular birth year) on abortion exposure in that state and for that birth year along with state-year controls. DL didn’t include this latter variable.

FG also criticise DL on the more basic grounds that when comparing arrest propensities they use total arrests not arrests per capita. This confuses things because it will mix up reduced crime from the first channel (less potential criminals) with that of the second channel (less unwanted children).

FG do this and recompute DL regressions with controls and with variables in per capita terms and find that abortion exposure has a statistically insignificant effect on per capita arrest rates once state-year controls are accounted for. Abortion would only operate to reduce crime by reducing numbers in young age groups who commit crime.

DL counterargument. DL respond that their earlier paper provides six types of evidence that abortion exposure reduces crime and that the FG critique influences only one of these types of evidence. They point out that the insignificance results of FG only arises when state-year effects are accounted for and when ‘arrests’ are replaced with ‘arrests per capita’. They claim is this finding is an artifact of using a crude abortion proxy – indeed the proxy that they used in their original paper. They come up with a new measure that (i) accounts for the actual month and year of birth of an individual; (ii) incorporates cross-state mobility between birth and adolescence and (iii) reflects the state of residence of those having abortions – to account for the fact that women crossed state lines to get abortions. Correcting for measurement errors and allowing for state-year interactions – but not expressing arrests in per capita terms and hence not accounting for the first channel of influence of abortion on crime – increases the significance of the abortion impact on crime. DL then account for population level impacts by including an explanatory population variable and by expressing violent arrest rates in per capita terms. Then impacts of abortion are reduced presumably because the first channel of influence is accounted for – indeed DL claim 40% of the influence occurs via this channel. For property crime arrest rates the results linking abortion to crime are weaker and statistically significant only when an instrumental variable (measuring abortions by place of occurrence rather than state of residence) replaces the adjusted abortion variable.

Verdict. The FG criticisms are valid and the original paper by DL is flawed. There are problems when state-year interactions and population level effects are accounted for. Changing the variable used to measure ‘abortion exposure’ restores the DL conclusions when population level effects are not incorporated but substantially reduces their effects on violent crime rates when it is included – 40% of the reduction in crime occurs not because of ‘unwanted babies’ but simply because there are fewer individuals around who will commit crimes. On property crime rates, the earlier results are restored only if a proxy is included for abortion exposure which measures abortions by place of occurrence rather than residence – curiously this is one of the defects that DL recognise in their original data set. Even accepting the DL data revisions the impact of abortion on crime is lower than originally envisaged.

Lower crime in Australia

The recent Australian Crime, Facts and Figures 2005 showed a widespread reduction in crime across Australia over the past decade:

• Homicides were lower in 2004 than since 1996 and have fallen each year since 1999.
• Robberies are at their lowest since 1997 and have fallen each year since 2001.
• Motor thefts have fallen continuously since 1998 while ‘unlawful entries with intent’ have fallen since 2000.
• Arrests for drug offences have fallen 24% since 1995/96, in part due to drug law reforms.

An exception to this happy picture is that assault figures, which comprise the vast majority of violent crimes, and particularly recorded sexual assault figures, have risen steadily since 1996. 82% of sex assaults are on females (mostly girls aged 10-14 years) but boys aged under 10 years made up 33% of victims in this age group. Interpreting these sex and assault statistics is difficult. There are low rates of reporting such crimes to police so rising trends in recorded crime might reflect mainly increased incentives to report.

The big issue: Why the improvement?

Is the fall due to the substantial improvement in the economy over the past decade with greatly reduced unemployment? To better policing? Or, as suggested in an earlier post, is it due to changed abortion laws that reduced unwanted children 20 years back? As I wrote in that post:

….Steven Levitt and Stephen Dubner in Freakonomics … show ….The main factor explaining the reduction in the crime rate in the 1990s was the Roe v. Wade ruling in the US Supreme Court that extended legalised abortion to the entire US. The …evidence provided in Freakonomics strongly suggests that it was unwanted children who tended to become criminals and murderers. Abortion law reform reduced numbers of such children…..'

Andrew Leigh confirms similar findings for Australia here. This evidence is less clearcut than that for the US since there was no specific date from which access to abortion became legal but liberalisation did tend to occur at the end of the 1960s with the murder rate peaking 20 years later as with US experience. In the 1990s when the law could be expected to impact on numbers of unwanted children the homicide rate fell.

Like Leigh, the Wikipedia discussion of abortion in Australia dates the introduction of liberalised abortion laws in most Australian states to 1969/1970 or 35 years ago. The Australian abortion statistics are poor but numbers of abortions rose strongly from 1984-1996 and have continued to have risen steadily in recent years. This is consistent with sharply-reduced crime now.

As I stated in my earlier post I am not a keen supporter of abortion - as a parent I have an irremovable, intense, negative block on the idea of killing anything approximating a young 'child' - and am unhappy with recent Australian trends as described. But I am (i) not sure it is my business to impose my views on others on this, (ii) unsure of the effectiveness of prohibitions anyway, and, (iii) must identify some positive social consequences of abortions on crime.

The determinants of recent crime trends, and the role of abortion laws in particular, would make a good PhD topic for an empirically-minded economist with interests in social issues. Interested takers?

Big bucks from dope

The leaked UK Birt Report on illicit drugs mentioned in The Australian about a month ago, is available online here at The Guardian website . This report on drugs in the UK emphasises supply-side issues. It discusses the Australian 2001 heroin drought episode as a natural experiment where supply-side restrictions have been seen as effective.

I found aspects of the report implausible or, at best unexplained. That most psychological damage, measured in terms of mental health admissions, was concentrated around heroin, methadone and cannabis use and not of stimulant abuse (ice, cocaine) seems implausible.

The supply-side discussion is old hat. Yes, interventions to reduce production are expensive and often displace production elsewhere. Traffickers are flexible in adapting to interventions and technologically sophisticated. Their profit margins are high so occasional busts don't hurt much, particularly when up-and-coming drug traffickers seek to establish dealing careers by taking heavy risks - the lure of high profits encouraging attempted shifts up supply chains. And yes, it is true that risk-minimisers 'big operators' who employ 'go-betweens', may benefit from increasing risk since prices are driven up.

But it is wrong to claim that because long-term prices show real decline that controls have been ineffective. You need to assess the counterfactual - what would have happened to prices had active interventions not been pursued.

The authors see the Australian heroin drought of 2001 as providing evidence on the effects of supply interventions. Heroin prices rose, purity fell, drug use collapsed particularly among new users and use of substitute drugs increased. But in some respects they get it wrong. They claim:

• The drought could have been caused by overseas events and new marketing approaches by Asian syndicates not improved interdiction. But this is irrelevant - the drought provides the opportunity to examine drug use given higher prices irrespective of supply-side reasons for price increases. This illogic dominates much local debate on this issue.
• The drought led to higher levels of admission to methadone clinics - but their own graph page 101 of the report shows the increase lasted for only as few months. Likewise their claim that the drought worsened crime was only true short-term.
• To suggest that the switch from heroin to stimulant abuse means that the measures were ineffective is simplistic. Overdose rates fell dramatically after the drought and psychiatric complications from stimulant abuse rose strongly. There is a difficult tradeoff here in assessing damages of deaths reduced versus mental health issues which worsened.

I doubt Australian drug researchers can learn much that is particularly new from this report.

Free public transport in Melbourne....again

The Sunday Age's piece by William Birnbauer 'From Clear Roads to Gridlock: What's the lesson, Mr Bracks', argues that the low road traffic congestion experienced during the 11 days of free public transport during the Commonwealth Games in Melbourne gives a 'real world experiment for the future' supporting proposals to make public transport free. In my view it does no such thing.
Birnbauer notes traffic volumes were lower than expected during the 'Games and that the usual peak-traffic problems disappeared. Free transport, he noted, was consistent with a Sunday Age poll finding 88% support for the proposal. With actual public transport subsidies around $1 billion the extra costs of making it completely free, he claimed, would be an extra $340 million which could be met by a congestion tax, a Medicare-style levy or a levy on rates.

Whatever the claims are for free public transport, the experience during the 'Games is irrelevant in predicting future public transport demands with free provision. (i) people were actively discouraged from taking their car during the games by widespread warnings of potential long delays and extreme congestion; (ii) journeys to the games themselves were atypical and made, in considerable numbers, by visitors to the city, and, (iii) the 'triple convergence' that might be expected to create new actual demands for car travel from latent demands could scarcely be expected to arise over such a short-period. Long-term, the response of commuters in initiating new travel demands would be higher.

The details of the claimed extra costs of only $340 million also should be spelt out. Whatever the final public travel demand increase is, it must be met by increased costly bus and train services. Most of Melbourne's public system is radially directed towards the centre of the city so making transport free would disadvantage those living in the city's periphery who would continue to have poor access to public transport but would face extra costs of meeting the transport needs of those who do travel radially and who are currently well-serviced. The policy is both inefficient and inequitable.

We need effective congestion pricing in Melbourne and public transport which is priced efficiently at marginal cost but not given away free.

Virused

It took me a day or so to recover from a virus that gave me, and the rest of my family, sore throats. I recovered quickly so I spent most of Saturday swimming with my son. It was a perfect Melbourne day - not too hot, clear skies and great in the water.

My desktop computer caught a virus too, I don't think from me, which reformatted its hard drive. Fortunately, my past data files and current work were backed up so no great drama apart from the inconvenience of being forced to use a laptop. I did lose a few email contacts.

The anti-virus software I used was Norton Anti-Virus. It was the second major computer virus attack I have experienced in about 10 years and using Norton on each occasion didn't help. Friends told me the usual stories about how I'd be better off with a MAC - made me feel a lot better - but I thought about the Norton software - as it is the biggest selling brand so I assume virus writers seek ways of getting around it for that reason. I guess its a strategic game for these nasty people. The virus writers seek ways around the protection offered by major anti-virus brands creating incentives to use software by smaller market share software producers. Its a bit like a snob-good since you only want to buy it if many others don't.

On the recommendation of friend, Jack R, I am trialling PC-cillin , a less prominent brand of anti-virus software with some good web-based reviews. I'd be interested if anyone knows about this or other good software.

Baby Jesus and mum

My spirituality has been reawakened by this snap.

AWB follies

The Government is copping flack over this and deserves to. Please pass on.

Thanks to Bernd.

IR productivity gains?

The Australian today reports remarkable comments from a Commonwealth Treasury officer, Graeme Davis, that the Government's proposed industrial relations reforms , namely:

• Forming a national industrial system to replace separate state and federal systems;
• Establishing the "Australian Fair Pay Commission" to replace National Wage Cases at the Australian Industrial Relations Commission (AIRC);
• Stream-lining of Certified Agreement and Australian Workplace Agreement making;
• Including increasing the maximum agreement life from 3-5 years;
• Reduction in allowable award matters;
• Legislating 5 enforcable workplace conditions;
• Exempting companies with less than 100 employees from unfair dismissal laws;
• Exempting all companies from unfair dismissal laws if dismissal is for a bona fide operational reason;
• Increasing restrictions on allowable industrial action;
• Mandating secret ballots for industrial action;
• Discouraging pattern bargaining and industry-wide industrial action.

will not boost Australia's workforce productivity. Instead he sees the major possible growth in productivity coming from mincreased investment in human and physical capital.

Davis claimed that Australian regulation of labour markets was only slightly more onerous than that of the US and that the extent of product market regulation was about the same. But Australian workers are less educated than US workers and industry was less capital intensive.

Treasurer Costello won't be pleased. Last year he said 'I can think of no single reform which would boost productivity in the Australian economy to the same extent as real, vigorous industrial relations reform'.

The comments were made at a Productivity Commission seminar. Apart from this abstract I couldn't find documentation but when I do I'll try to post an online link.

Update: The finding that productivity growth is not primarily related to microeconomic reforms was advanced by NOIE in 2004. Here the evidence was that investment in information and communications technology (ICT) is more important. The same conclusion has recently been reached in a March 2006 report to Minister Coonan by her Department of Communications, Information Technology and the Arts suggesting that ICT will be the main driver of productivity growth over the next 20 years. The authors of this report cautiously note that 'in order to realise the predicted productivity benefits it will be necessary to support an appropriate level of investment in skill formation and in ICT related R&D' (p. 6).

Loudy Tourky

Loudy Tourky (and here) snatched a Commonwealth Games Gold Medal in her last dive in the women's 10 metre platform diving on Thursday. She had already won a Gold Medal on Wednesday in the 10 metre synchronised platform diving with Chantelle Newbery.

Loudy is sister of Rabee Tourky who is a Professor of Economics at Purdue University, an old friend and a commentator on this blog. He is justifiably very proud of his sister.

Congratulations Loudy.

Happy disaster day to you

The Washington Post's cheery doomsday feature:

• If bird flu don't get us and we don't contract mad cow disease, then global warming will. Or getting the former will save us from the latter.
• The war in Iraq and the sustained rise in international terrorism as signs of the apocalypse?

"I haven't really thought of it in that way" (President George Bush)

Invading Iraq versus Containment

Was the decision by the Coalition to invade Iraq in 2001 unwise? Many will say it was because of the difficult situation the allied military forces have subsequently encountered. They will also argue that WMD, a prime reason for intervention, have not in fact been discovered. Finally, there is growing recognition of the huge financial and other costs of the war. Initial official guesstimates of the cost of the Iraq invasion were much lower than those actually incurred, see here.

The first two reasons for opposing the invasion need not be sensible if the information that gives rise to these critical judgments was invisible to decision-makers at the time of invasion. It otherwise involves ex post wisdom. The other reason, that the costs are large, is not compelling if the costs of taking alternative available courses of action exceed those of invasion. A sensible analysis of the decision to invade needs to account for these issues.

Recently several more careful studies of the invasion costs have been provided (here). Of these, the Davis, Murphy, Topel (DMT) study (here) is of interest because it addresses the concerns expressed above. Specifically:

(i) It assesses invasion costs ex ante based on data and ‘views of the war’ as they were known in 2003 when the invasion occurred. The DMT approach is intended to avoid the ex post wisdom of many recent critiques of the invasion’s costs. While it is puzzling that actual costs turned out to be markedly higher than were loosely claimed to be plausible at that time – the DMT argument is presumably that an insufficiently detailed study was not made then, although it could have been along the lines of DMT.

(ii) The DMT cost estimates for the invasion policy are compared to the counterfactual of pursuing a sustained containment policy (with substantial US military resources based around Iraq) of the type pursued 1991-2003. This amounts to considering net costs – costs net of those avoided by invading. Containment was costly in itself because the US maintained 28,000 troops, 30 ships, about 200 aircraft and so on in the region partly to put pressure on Iraq.

(iii) Alone among recent, careful studies, DMT criticize the notion that the invasion can be rejected as a mistake because of its ‘high’ costs. They argue it is opportunity cost that matter – the cost of invasion compared to the cost of the next most plausible policy option, containment.

The DMT study is detailed and lengthy and deserves more thorough analysis than I can give it. Nor do I wish to be identified as a supporter of the DMT conclusions. I think conceptually DMT gets it right and is worth serious study on this account. But I am unsure about specific assumptions attached to the events they envisage as possible and which they attach costs.

Main Points

Pre-invasion views of the cost of the war suggest to DMT a current present value of costs of the invasion at $100b-$870b (at a 2% discount rate) compared to the other major recent cost estimates I am aware of due to Bilmes and Stiglitz (S-B) of $1-$2 trillion. About half of the DMT costs are military occupation costs. (The difference between the upper limit here and that of S-B is largely explained by the fact that S-B account for the implied macroeconomic costs of $5-$10 per barrel increased oil prices and costs such as higher interest rates which Davis et al. do not – these comprise most of the extra trillion in the S-B estimates. Also S-B make no attempt to compute benefits of the invasion by considering costs avoided through it). The S-B cost estimates are criticized on other grounds by Becker-Posner.

Much of DMT is taken up with articulating such costs – costs of US lives lost, injury costs to US forces and so on. These estimates can all be qualified and discussed but it is beyond my scope to do so here.

DMT cost a continued containment program (the counterfactual) at around $300b which is a lot even if the policy was successful - the cost would be much higher were it not. Moreover, DMT claim the containment policy was flawed since it involved Iraqi collaboration with terrorism, difficulties of ensuring compliance with WMD inspections and even raised the prospect of a possible terrorist attack on the US. These add to the costs of containment. DMT suggest a total cost, accounting for these factors, of $350b-$700b which is not vastly different from the cost they compute for the invasion policy. My intuition suggests this figure seems high – the costs of policy failures more than doubling the costs of containment itself. And indeed one could argue that coming up with a high cost of failures almost amounts to presuming a prior cost justification for invasion.

In calculating these extra costs they argue that, even though WMDs were not uncovered after invasion, that this was not reasonably knowable in 2003. This seems reasonable. A recent report indicates:

‘it was not unrea­sonable to believe that Iraq retained stocks of chemical and biological weap­ons produced prior to the first Gulf War and that it would use them if the regime’s survival were threatened. The importance that senior Iraqi officials had ascribed to WMD, Baghdad’s repeated efforts to obstruct UN weapons inspections, the regime’s failure to resolve inconsistencies in its declarations to the United Nations (in part to foster ambiguity about the status of its WMD and thereby to reassure domestic supporters and deter domestic and foreign enemies), and low confidence in the ability of US intelligence to track WMD developments in Iraq all contributed to this impression’.

Shawcross (2004) makes similar points. Saddam was obsessed with WMD and ‘the very existence of a new global terrorist network made Iraq’s presumptive possession of WMD much more threatening’ (p. 69-70). The extra costs of containment are also assumed to reflect costly attempts to maintain credible threats to compel compliance with inspection and disarmament and to include possible costs of a limited war against Iraq.

Finally, and very controversially, DMT include as containment costs the likelihood of an enhanced terrorist attack on the US. They cost the 9/11 attack on the US at $50b assessed as three times earnings of lives lost plus cleanup and restoration costs. They guess the cost of a future attack, such as a 'dirty' nuclear attack, at $100b. They then claim that ridding Iraq of Saddam reduced the probability of such an attack by 4% per year yielding a present value saving of $80b. As DMT themselves note it is unclear that the prospect of a terror attack on the US has been reduced by the invasion – it may have increased - in which case this 'savings' would instead become an additional cost.

DMT assess the costs of intervention to the people in Iraq in two ways.

(i) Lost output. In material terms they claim the Saddam regime reduced Iraqi incomes by 75% mostly due to foregone oil production and a bloated military. Pre-war Iraq had 500,000 people in security and intelligence services and a further 800,000 in the armed forces. DMT claim, if US actions can recover half this loss over one generation, the Iraqi people will be materially better-off. The strong DMT claim is that ‘war is an economic blessing for Iraqis compared to the policy of containment’ (p.55).

(ii) Lost lives and suffering. Apart from torture and repression Saddam killed or caused the deaths of 500,000 of his own citizens. He killed 200,000 Kurds and forcibly relocated 1.5 million of them. DMT estimate that, under the containment policy introduced after 1991, Saddam killed another 200,000. Their estimate is that 10,000-30,000 Iraqis would have continued to die annually had containment continued. This suggests a higher death toll than some calculate has occurred since the invasion. They acknowledge that this might not continue to be true if full-scale civil war breaks out as a consequence of invasion but suggest that one cannot assume that the alternative to invasion would have been low loss of life. Some however have claimed that civil war is already upon Iraq in terms of accepted criteria for judging such situations (e.g. Juan Cole at Salon). Some on the left seem almost jubilant with the prospect of all-out civil war!

This extent of deaths is of major concern to the international community. The Iraq Body Count (an anti-war group) claim that over the three years of the war 35,000 civilians have been killed as a consequence of the war. The death count has risen steadily as the war has continued from 20/day in year 1 of the war to 36/day in the year to March 2006. With these figures the DMT claim is only correct if (i) the civil conflict does not deteriorate further into civil war, (ii) the assumed level of deaths that would have prevailed under the Saddam regime is correct and (iii) the scale of deaths estimated by Iraq Body Count is approximately accurate. Estimates of deaths in the conflict vary greatly - the Lancet study described here suggests deaths of around 100,000 to mid-2005 but the range attached to the figures is so wide (from less than 10,000 up to 194,000) that some commentators described them as 'dartboard'. The difficulty is that in a time of war, or during an oppressive regime such as Saddam's, accurate records of body counts are unsought by those in power. Incidentally, while media attention has focused on US military deaths of around 2,000 this figure is low compared to the Vietnam War where 60,000 were killed. Of course each of the 2000 lives lost is tragic but overall this is not of the dimensions of the earlier US conflict.

DMT is a large study with many strong assumptions many of which can be criticized as being arbitrary and some as unrealistic. It is however an instance of using cost-benefit analysis to provide an assessment of the case for US intervention to deal with ‘rogue states’ based on sound methodology. I think no-one with sense could believe specific conclusions but setting the issues out as DMT have forces us to consider, in a consistent way, the types of costs that arise in this type of conflict and how they should be assessed.

Ice

The gripping Four Corners show on ‘ice’ amphetamine last Monday gave a valuable assessment of the role of this drug in Australia. Twice as many Australians are now addicted to ice as heroin.

While use of heroin in Australia fell following the so-called 'heroin drought' of 2001, some of this fall represents substitution towards stimulants such as ice and to a less extent cocaine and other stimulants. This is clearly not the whole story since increased use of these dangerous stimulants began before the ‘drought’ but it is part of the story.

Heroin use used to cause lots of overdose deaths. Now these deaths have fallen but large numbers of ice users are being admitted to general and psychiatric hospitals with stimulant-induced psychoses. The extent of the damage was clear from the Four Corners show.

My colleague Lee Smith pointed out to me that extended interviews from the show are available here, the show itself is here, while the program transcript is here. A report co-written by myself and Lee Smith on the heroin drought and the role of substitute drugs will be released shortly.

Update: Online resources on ice are catalogued by the Four Corners team here.

Mid week responses

Busy this week with administrative, research and teaching duties. As usual I am interested in your views on my blog or any other matter. An open forum!

The situation in Iraq dominated my focus this week. The left (and some of the right blessed with ex post wisdom) have decided the situation in Iraq will be improved if the US exits soon - a policy I think is morally wrong and confused given the terrible events in that country over the last 100 days and the prospects of descent into civil war. The link I provided showing the young Shia boy ordered to watch his family murdered when the US had repeatedly refused help to the local Shia community is compelling.

The bigots on the 'left' will be happy to see the Americans humiliated and themselves vindicated (on the basis of the 'wrongness' of the invasion decision) even if that means civil war in Iraq and lots of massacres. I am pleased to see there are many who disagree. The main points of the debate are simple (i) the correctness of the intervention decision must be based on an ex ante assessment of the comparative costs of intervention versus containment policies (the Davis et al (2006) approach have a sound methodology right even if some of their parameter assumptions are questionable) and, (ii) irrespective of the correctness of this decision, what matters now are costs and benefits now not sunk costs. Simple logic might lose out to the ' 'aint it awful' brigade.

On the blogging front I learnt a few new tricks with the Blogger software I use including how to write extendable posts (thanks Laura). I read two books on blogging. One by Elizabeth Castro, Publishing a Blog with Blogger , was easy where it is obvious but difficult in areas where I did need help. The other by Brad Hill, Blogging for Dummies, was a good survey of various blogging software packages. I have developed an operating blog with Wordpress and will probably publish this blog there once I get around some of its geekish features. Blogger, despite its quirks, is easy and Wordpress has learning costs.

Old cobber Jack Rozycki sent me this on the impact of blogging on journalism. I was also fascinated to read a Business Week article where the editors asked a contributor with some unconventional economic theories (measuring intangible investments, savings and 'dark matter' in current account deficits) to respond to blogger arguments in the text of the magazine. He did so in 'Do I Deserve a Wedgie?'. Its a good read.

Finally, Clarke Mansions in Ivanhoe (Kalimna) has a cockroach plague that seems to be concentrated in my home office. As I have not changed my bathing habits I don't know what brought it on. I released an insect bomb in the office and it fumigated for 12 hours. Lots of dead cockroaches when I returned but, in my new insect-free zone, my damn office computer wouldn't start. Consequence of the bomb or delayed effects of a virus from surfing the web? I don't know - but for the last few days pecking at a wretched laptop borrowed from the office.

Have a good week all!

Pop before it popped

The New York Times shows how to download up to 6,000 of the earliest recorded pop-music songs, from 1890-1920, free of charge:

several thousand cylinders, the first commercially available recordings ever produced, that have recently become available free of charge to anyone with an Internet connection and some spare bandwidth. Last November, the Donald C. Davidson Library at the University of California, Santa Barbara, introduced the Cylinder Digitization and Preservation Project Web site (cylinders.library.ucsb.edu), a collection of more than 6,000 cylinders converted to downloadable MP3's, WAV files and streaming audio. It's an astonishing trove of sounds: opera arias, comic monologues, marching bands, gospel quartets. Above all, there are the pop tunes churned out by Tin Pan Alley at the turn of the century: ragtime ditties, novelty songs, sentimental ballads and a dizzying range of dialect numbers performed by vaudeville's blackface comedians and other "ethnic impersonators."

Sample clips include "I'm Looking for Something to Eat" by Stella Mayhew "Alexander's Ragtime Band" by Billy Murray "Yes, We Have No Bananas" by Green Bros Novelty Band. The origins of modern pop music - and a lot of fun.

History of violence

Tonight I saw David Cronenberg's film History of Violence . This is based on the ultra-violent graphic book ('comic'), with the same title, written by John Wagner and illustrated by Vince Locke.

The central character, Tom Stall, portrayed by Viggio Mortensen , is a laid-back, kindly father with an electric-charged capacity to kill that lies well-hidden until needed. Tom is a psychopathic, ex-killer who changes his identity to become the loving all-American dad. Through a chance event he is forced to reveal his past identity to associates from his troubled past and then to his family. The family, initially uncomfortable with this past, come to accept it in a touching closing scene. By this time he has essentially 'killed off' his past.

The movie has something of the structure of an old-fashioned Western and a 'comic book' feel to it. Although it is very different and much less stylised, it reminded me of Sin City. Mortensen is the all-American hero (quiet, resilient, a man of action), Maria Bella is his devoted wife and mob members William Hurt (his brother) and Ed Harris comprise his menacing past.

The movie has been subject to extensive and very mixed reviews - some are here. A good factual account of the plot and its relation to the book is in a Wikipedia entry here. (Generally, it interests me that so much useful information about quality current movies can now be found in Wikipedia).

History of Violence is a mainstream movie with sex (both violent and playful) and lots of killing that is not gratuitous but is intended to make you think. I was uncertain how I would react to the movie given Cronenberg's reputation for violence but did enjoy it. I thought Mortensen particularly good As Tom but the casting is generally good and under strong direction by Cronenberg. This movie will probably make mega-bucks given the global (not only American) preference for violent movies but it is not an exploitation movie based on graphic violence.

Update: The New Republic Online review of this movie (here), by Christopher Orr, argues that Cronenberg lets the 'cat out of the bag' too early by revealling Tom's true identity at the halfway point. From that point the 'suspense leaks'. Maybe - he could never have revealled his identity and still 'cleaned up' his past.

Killings in Iraq

The US should commit to stay in Iraq until civil order is restored to prevent further killings of innocent Iraqis by insurgents. The US clearly seeks an exit, perhaps by defining a role for Iran, but to walk away now, prior to dealing with the current wave of sectarian violence, would be a crime. Past US policy mistakes are irrelevant sunk costs - the catastrophic decline in civil order Iraq over the past 100 days must be halted.

In the case described by the video in the first link above, US forces stood aside and refused to help Shia under attack for a period covering several weeks. A horrific bout of killings then occurred. Young Ibrahim Sa'ad Al-Jabouri was made to stand and watch his family murdered. The Mayor desparately sought US help only to be denied it. Eventually he was forced to seek help from Iranian militia but that didn't either didn't help or came too late. This pattern is being repeated across large parts of the country. In the US attention focuses only on devising an exit strategy.

Tom Ricks, The Washington Post's military correspondent, opposes the war but strongly opposes a precipitous US withdrawal:

In March 2003 he thought the invasion was a strategic mistake in the struggle against terrorism. His assessment of subsequent events is the title of his book, coming in September: Fiasco.
Now, however, he thinks that a U.S. withdrawal would leave chaos that might lead to radical Islamists acquiring what they most want — Saudi oil fields and Pakistani nuclear weapons. So America, he thinks, needs a plan to reduce fatalities to two or three a week, then two or three a month.

This is sensible. Substantial investment now needs to be made in restoring civil order in Iraq. Indeed even ignoring strategic considerations, attention should focus on ameliorating the miserable lives ordinary Iraqis are now experiencing. Blog accounts of daily life in Bhagdad are here. They are horrifying, real.

I dunno

A married woman will sue the Commonwealth Government for negligence after a 6 month sexual affair and social outings to restaurants, cinemas and pubs with a male partner.

The partner is a consular assistant with the Australian High Commission in London. She claims he took advantage of her when she was in London to visit her seriously injured daughter, and hence while she was vulnerable. 'It was like he had kidnapped my mind and had control of me'.

The District Court's Judge Mazza ruled that, as an officer of the Commonwealth, the partner had a duty of care to provide personal support to a person in crisis, and by engaging in a sexual relationship he provided grounds for the claim that he breached his duty of care to an Australian citizen overseas.

As I say, 'I dunno'. People will pay $3 for bottled water and will buy refrigerators that connect to the internet. Some see themselves as living eternally because they have 'faith' in Jesus. I don't understand why many things are as they are.

A flatter world

The world has been ‘flattened’ by globalization according to Thomas Friedman in his The World is Flat. By ‘flat’ he means ‘connected’ so that, with lower trade and political barriers and with digital technology advances, there is the ability to communicate or do business anywhere.

Friedman’s approach has been criticised as being descriptive not explanatory (here, here & here for a wikipedia review ) and Stephen Roach argues Friedman is describing a possible steady state not the world as it is – the world is not flat. But readers will get context and ideas from Friedman’s anecdotes.


Friedman distils ten major ‘flattening’ influences:

1. The fall of the Berlin wall which unleashed forces ending the Soviet empire and capitalism/socialism struggle. This, in turn, promoted common standards in business and science. This is the only major influence cited which is not technology-based.

2. The internet. Use of browser technology and the web flattened things. Netscape initiated the dot.com bubble promoting web commerciality, investment in fibre optic cables and firms such as Amazon.com, Goggle and eBay. Anyone could interact with anyone else on any machine.

3. Work flow software. Disparate parts of a firm were connected to other parts so when a sale was made, an item was shipped from a warehouse, a replacement item manufactured and a bill generated from a billing department. Work flow production software integrated these sorts of activities globally.

4. Open source. Much integrating software is free on the web from the 'commons' movement. Indeed the Creative Commons promotes this. The source of such innovation is partly that bright people want to show off and good ideas yield reputation awards. There is also a philosophical presumption that knowledge should be available for all. Linux and the Wikipedia are visible instances of support for free software.

5. Outsourcing. Outsourcing means taking a specific business function - such as research or running a call centre – having another company operate that for you and then reintegrating that work with a core business. Friedman writes at length about India’s IIT’s (Indian Institutes of Technology) whose graduates I taught during the 1980s. In the late 1980s, the US began to draw on these brilliant graduates in India. “India is a developing country with a developed country intellectual capacity’ (Jack Welsh) demonstrating that ‘the combination of the PC, the Internet, and fibre-optic cable had created the possibility of a whole new form of collaboration and horizontal value creation: outsourcing.’

6. Offshoring. Here whole businesses get relocated offshore to take advantage of cheap labour, low taxes or lax environmental regulation with much output exported. Textiles, electronics and car part industries have been hammered by such trends particularly in China. Alan Blinder describes offshoring as the Third Industrial Revolution.

7. Supply chaining. An example of an efficient supply chain is Wal-Mart. This monster business has carried supply-chaining – a method of horizontally collaborating among suppliers, retailers and customers to provide products at low cost by improving supply chains and cutting costs (including wages and benefits). As a retailer it has few natural resources – it can only be successful by being technology smart and by being tough with suppliers.

8. Insourcing (see here) refers to the delegation of operations from production within a business to a subcontractor that specializes in that operation. Firms like United Parcel Service (here) specialise in in-sourcing. UPS handles 14 million packages a day in over 200 countries using modern package flow technologies servicing virtually any supply chain on earth. Small firms can ‘act big’ and big firms can become local and ‘act small’.

9. In-forming. Groups like Google inform the world at low cost. Searching for information, mates and even on your own hard drive gives a supply chain of information and entertainment. Goggle now processes 1 billion searches per day globally and in a variety of languages.

10. The steroids - Digital, Mobile, Personal and Virtual - technologies turbo-charge other flatteners. Wireless connectivity means collaboration can be digital, mobile and personal. Open source will become opener, outsourcing and supply-chaining easier.

Friedman claims all these trends have recently accelerated. His views are a variant of optimistic American liberalism – it’s all so exciting but - with an occasional ‘warn your daughters’ caution. Benefits cut both ways since possibilities for progress blends with competition. This is as old as economics!

‘It doesn’t matter whether you are a lion or a gazelle.
When the sun comes up, you better start running’.

John Howard's official site?

Rabee Tourky points out that the Government has acted to close down a site of Richard Neville that parodies John Howard's official site. See here for comment and for a mirror of the apparently offensive posting. There is a long discussion over at Larvatus Prodeo.

Noboby should be publicly misrepresented but this seems a heavy-handed action. The satire is obvious to anyone who knows Australian politics and the satirical site probably wouldn't be read (or understood) by others. And there is no question that we have the right to satirise our pollies.

Cost of the Iraq war

In 2002, Lawrence Lindsey, director of the White House National Economic Council, surprised the Bush administration by saying that a war in Iraq could cost $100-$200 billion. Some considered his estimate to be exaggerated, but it is now seen as far too low. Even accounting for costs already incurred alone these figures are already exceeded (estimates of costs are being updated by the second here) .

Various economists are now working to get a feel for the scale of the costs.

(i) Scott Wallsten ‘The Economic Cost of the Iraq War’ here. At this website you can make your own costing assumptions to come up with your own cost estimate. Estimated sunk costs $500 billion with $500 billion yet to come – ignores possible benefits. The simulation exercise is fascinating, simple and grim.
(ii) Joseph Stiglitz ‘The High Cost of the War in Iraq’ here. A popular version of (iii). Emphasises the cost of the war in terms of foregone social and other programs.
(iii) Joseph Stiglitz and Linda Bilmes, ‘The Economic Costs of the Iraq War’ here. Costs exceed $1trillion – again ignores possible benefits
(iv) S. J. Davis, K.M. Murphy & R.H. Topel, ‘War in Iraq Versus Containment’ here. This 2006 study comes up with cost estimates in 2003 dollars of $410-$630 billion. This is then compared to the cost of maintaining the prior ‘containment’ policy which they estimate at $300 billion. But the ‘containment policy’, they claim, was already being criticized as ineffective and, allowing for possible costs here, total costs of containment turn out to equal the cost of intervention. The authors see net economic benefits to the people from the war in Iraq which tilts the scales in favor of intervention. An earlier study by these authors (here) dated March 2003 seems dated by subsequent events.

I'll try to collate further studies as I become aware of them. I think (iv) is the most methodologically sound approach but, its empirical assumptions have been questioned. Tyler Cowen at Marginal Revolution doubts that a Saddam-led Iraq would have raised 'the probability of a major terrorist attack by 4 percentage points in any given year...'. On the other hand, Cowen argues, perhaps the current civil war might have occurred, sooner or later, if we had stayed out. There is also a good discussion at the Becker-Posner blog here.

I set out the Davis et al conclusions below.

Prior to the invasion of Iraq a containment policy was the leading alternative to forcible regime change. Davis et al. ask:

· Was war more or less costly for the US than continued containment?
· Would a continuation of containment have saved Iraqi lives?
· Is war likely to improve the economic well-being of Iraqis?

There answers are ‘no’, ‘no’ and ‘yes’ respectively to these questions. I summarise their conclusions.

Forcible regime change in Iraq has been costly. At January 2006, the Iraq intervention implies present value costs for the US of $410-630 billion at a 2% discount rate. This captures the estimated economic costs of US military resources, the value of lost lives and injuries by US soldiers, lifetime medical costs of treating injured soldiers, and outlays for humanitarian assistance and postwar reconstruction. Pre-invasion views about the likely course of the Iraq intervention imply present value costs in the range of $100-$870 billion. Military resources devoted to postwar occupation account for more than half of total costs except in optimistic scenarios that envision a short occupation, little postwar conflict and a smooth reconstruction effort.

The view that the high cost of the intervention is an argument against the decision to invade is deficient because it ignores the costs of alternatives. Containment costs were likely to be $300 billion even if it would be completely effective in achieving its national security goals.

Moreover advocates of forcible regime change expressed concerns about containment. To evaluate these concerns, the possibility that effective containment might require the mounting of costly threats and might lead to limited or a full-scale regime-changing war at a later date is modeled. Also the possibility that the survival of a hostile Iraqi regime raised the probability of a major terrorist attack on the US is considered. These contingencies sharply raise the cost of containment. Factoring these contingencies in yields present value costs for containment from $350-$700 billion. These figures are in the same ballpark as the likely costs of the Iraq intervention from the vantage point of early 2006. Thus, even with the benefit of partial hindsight, it is difficult to gauge whether the Iraq intervention is more costly than containment.

Davis et al also consider the consequences of the war-versus containment choice on the economic well-being of Iraqis and the loss of Iraqi lives. They conclude the war will lead to large improvements in the economic well-being of most Iraqis relative to their prospects under containment. This follows because the Iraqi economy was in terrible state before the war, and it would have remained so under containment. The Saddam regime caused real income per capita to fall 75% as a consequence of misrule. Much of Iraq’s greatly diminished output was diverted to an oversized military, an apparatus of terror and repression and the relentless glorification of Saddam. Finally, the removal of sanctions, the expansion of petroleum exports, large-scale reconstruction aid, and the reintegration of Iraq’s economy into the world economy provide a strong basis for economic gains – even in a society with serious institutional weaknesses. If, over the course of a generation, Iraqis recover half the economic losses suffered under Saddam, they will be significantly better off in material terms as a consequence of regime change.

The regime also brought torture, repression, displacement and death to huge numbers of Iraqis and others. The regime killed more than 500,000 Iraqis. Under containment after the 1991 Gulf War, at least 200,000 Iraqis died at the hands of the regime or as a direct consequence of its policies, including its refusal to comply with UN Resolutions and its diversion of oil revenues and other resources to palaces and monuments. Had containment remained, history suggests that premature Iraqi deaths would have continued at 10,000-30,000 per year. The weight of evidence points to a greater Iraqi death toll from containment. Perhaps the strongest reason to question this assessment is the possibility that a post-war Iraq could devolve into an extended and large-scale civil war. This possibility cannot be ruled out. What can be ruled out in light of the evidence is that the leading alternative to war involved little loss of Iraqi lives.

Polygamy

Liam Lenten sent me this by Robert Frank on the economics of polygamy. The article examines who is harmed by polygamy.

A traditional argument is that it harms women, particularly younger women who may be coerced to enter such marriages. But that is an argument against forcing women into any marriage. What about women who accept polygamy? Some are harmed by facing more restricted choices - they may have to settle for polygamy as a second-best option if they seek a particular partner. But with fewer wives available women generally have greater bargaining power in selecting a mate thereby increasing their advantage.

Also, too, polygamy would benefit some men who would not only prefer multiple wives, but are able to attract them. But what about men who prefer monogamy? Permitting plural unions would create an imbalance of men over women among monogamists. With many formerly eligible women no longer available, male bargaining power would fall - as happened recently in China as a result of female infanticide - and many men would never marry. Thus the likely victims of polygamy are men

'This conclusion is reinforced if we take account of the costly, and mutually offsetting, jockeying for position associated with men's attempts to win the attention of scarce women'.

The wastefulness of such 'positional arms races' is clear from nonhuman animal species examples. Many species are polygynous, so some males take more than one mate and males battle ferociously for access to females. Size often decides these battles, so males tend to be considerably larger than females in polygynous species. For example, bull elephant seals weigh more than 6,000 pounds whereas females weigh 1,500 pounds. Natural selection favored larger males because the winners of the long and bloody battles between males often command nearly exclusive sexual access to harems of more than 50 females.

But being bigger increases vulnerabity to sharks and other predators. Relative not absolute size, governs the outcomes of fights, so it would clearly be better if each male were only half as large. All fights would be resolved yet all males would be less vulnerable to predators. But male seals have no way of curtailing the positional arms race that makes them so big.

Permitting plural marriage in human societies would unleash analogous competition. With women in short supply, men would face even more intense pressure than they do now to get ahead economically, to spend even longer hours honing their abs. Yet no matter how hard each man strove, the same number would be destined not to marry.

Unlike other animals, human societies can employ laws to constrain such positional arms races. Laws against polygamy function as positional arms control agreements that make life less stressful for men. This explains their appeal to the male legislatures that enact them.

A further thought: In Islamic societies women often cannot voluntarily contract marriage arrangements. From a male perspective, such restrictions are necessary if polygamy is to be widespread - otherwise the bidding up of female bargaining power that Frank describes will occur. It is crucial for the Frank argument to go through that women be free to contract. If they can't their bargaining power, both inside and outside marriage, will be reduced and hence they will be worse-off. Men without partners will still be worse off.

Mid week review

I forgot to post this yesterday. Do you have any comments to make on the world or my blogsite? I've been mega-busy this week.

Trying to get on top of a messy math problem that resists attempts to impose meaningful simplifying assumptions. Also have a dreary research report to write and some hack administration to do. Have to teach this morning then off to the Commonwealth Games this afternoon to watch the ladies weight-lifting. One performer is a family friend.

Update: The Commonwealth Games event I attended yesterday was most enjoyable. I went to the under-48kgm ladies weight-lifting event and saw the first Australian medal of the 'Games gained by pint-sized Erika Yamasaki. I also saw a new Commonwealth Games record in the Clean-and-Jerk of 94kgm by the Indian K. Nameirakpam. There was novelty value in watching these performances because I so seldom go to such events. BTW, these performances, while inspirational to watch, were a long way from world championship standards. The world record for the Clean-and-Jerk in this category was 118 kgm, 26% above the new Commonwealth record. But a very enjoyable afternoon.

Cognitive reflection and decision making

Whether you would prefer $1,000 for sure or a 90% chance of $5,000 depends on your risk-aversion. Whether you would prefer $100 now to $120 in 3 months time depends on your time preference. Economists typically accept different levels of risk aversion or time preference without explanations. But Shane Frederick, in a recent Journal of Economic Perspectives, tries to understand why people answer as they do in terms of their cognitive skills.

Answers to the following simple test seem to explain a lot:

1) A bat and a ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
2) If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?
3) In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half the lake?

This cognitive reflection test measures ability to solve math problems and the willingness to reflect on and check answers. The questions here all have intuitive but wrong answers - you have the advantage of being warned!

Frederick gave this test to 3500 respondents, mostly students at US universities. Participants also answered a survey about how they would choose between various financial payoffs and time-oriented questions like how much they would pay to get a book delivered overnight.

Getting the math problems right predicts nothing about most tastes but high scorers - those who get all questions right - do prefer taking risks even if, on average, it hurts them. So, for example, a third of high scorers preferred a 1% chance of $5,000 to a sure $60. These smarty-pants are also more patient. Particularly when the discount rate, is large. Choosing $3,400 this month over $3,800 next month implies a discount rate of 280%. Yet only 35% of low scorers - those who missed every question - said they would wait, while 60% of high scorers preferred the later payoff.

Men and women show different results. Being smart makes women patient while it makes men take more risks. High-scoring women show slightly more patience than high-scoring men but differences in risk-taking are much larger. High-scoring women are about as willing to gamble as low-scoring men, while low-scoring women are even more risk-averse. Thus 80% of high-scoring men would choose a 15% chance of $1 million over a sure $500, compared with only 38% of high-scoring women, 40% of low-scoring men and 25% of low-scoring women.

The connection between cognition and risk preferences challenges the prospect theory of Daniel Kahneman and Amos Tversky. They observed that people would accept larger risks to avoid losses than to achieve gains, even when the two choices were mathematically equivalent. The same person might take a sure $100 instead of a 50% chance of $300, yet prefer a 50% chance of losing $300 rather than a sure $100 loss. This result is a major finding of behavioral economics. But according to Frederick prospect theory works for the low-scoring group but high scorers treat potential gains and potential losses about the same.

The general idea is that time preference and risk attitudes measure cognitive ability. Preferences are not arbitrary but can be understand in terms of cognitive ability. In my own work on substance abuse I have noted that people who consume narcotics have high levels of impulsiveness and take unreasonable risks with their lives.

This survey of the Frederick paper is based on Virginia Postrel in the New York Times. The full paper in JEP is good reading. The correct answers to the test are given in the comment below.

Commentary on Iraq

The Bulletin this week has an interesting commentary on the situation in Iraq by my colleague Professor Imad Moosa. Imad was borne in Iraq but is now an Australian citizen. He supported the US invasion of Iraq and, indeed, has worked for the US in Iraq. However he was disillusioned by the adherence of the Americans to an IMF-inspired policy agenda that he saw as inappropriate for a country which had been at war. He is also 'sickened at the waste and corruption of Iraq's administration in the three years since Saddam fell'. The country earns a lot of oil revenue but is not rebuilding. He sees the future of Iraq as plausibly being determined by fundamentalist Iranian fanatics who are transforming a secular country to a sectarian province run by Iranian-appointed mullahs'. His assessment of the current situation: 'Things in Iraq were less bad under Saddam Hussein. Not better. Less bad.'

Australia's rich

The A.B. Atkinson and Andrew Leigh paper, The Distribution of Top Incomes in Australia (here) was released yesterday. The abstract:

Using taxation statistics, we estimate the income share held by top income groups in Australia over the period 1921-2002. We find that the income share of the richest fell from the 1920s until the mid-1940s, rose briefly in the post-war decade, and then declined until the early-1980s. During the 1980s and 1990s, top income shares rose rapidly. At the start of the twenty-first century, the income share of the richest was higher than it had been at any point in the previous fifty years. Among top income groups, recent decades have also seen a rise in the share of top income accruing to the super-rich. Trends in top income shares are similar to those observed among other elite groups, such as judges, politicians, top bureaucrats and CEOs. We speculate that changes in top income shares may have been affected by top marginal tax rates, skill-biased technological change, social norms about inequality, and the internationalisation of the market for English-speaking CEOs.

This is an important contribution. It has good documentation of earlier work and a careful analysis of measurement issues. It measures individual not household incomes and this seems to me a limitation. Those on low individual incomes will often be in families where both partners work. The distribution of household incomes has been flattened by high female workforce participation. On a positive note, I am also interested in evidence the authors provide of greater income inequality in Australia prior to 1950. We are more equal now than then.

But otherwise I will snoop and watch the press and other blogsites for discussion of this important piece of analysis. I will update this posting as I snoop.