Nigerian Entrepeneurs, Not a Scam

Posted on by

The abstract of a study for the World Bank by economist David J. McKenzie reads

Almost all firms in developing countries have fewer than 10 workers, with the modal firm consisting of just the owner. Are there potential high-growth entrepreneurs with the ability to grow their firms beyond this size? And, if so, can public policy help alleviate the constraints that prevent these entrepreneurs from doing so? A large-scale national business plan competition in Nigeria is used to help provide evidence on these two questions. The competition was launched with much fanfare, and attracted almost 24,000 entrants. Random assignment was used to select some of the winners from a pool of semi-finalists, with US$36 million in randomly allocated grant funding providing each winner with an average of almost US$50,000. Surveys tracking applicants over three years show that winning the business plan competition leads to greater firm entry, higher survival of existing businesses, higher profits and sales, and higher employment, including increases of over 20 percentage points in the likelihood of a firm having 10 or more workers. These effects appear to occur largely through the grants enabling firms to purchase more capital and hire more labor.

Pointer ultimately from Tyler Cowen. My cynical thoughts:

1. How does one keep corruption out of such a program?

2. Does this imply that there is an unexploited profit opportunity in lending to would-be entrepreneurs in underdeveloped countries? Note that the money the firms received seems to have been in the form of grants, not loans.

A Short Read

Posted on by

I was sent a review copy of On Inequality, by Harry G. Frankfurt. On p. 11, he writes,

a preoccupation with the condition of others interferes with the most basic task on which a person’s intelligent selection of monetary goals for himself most decisively depends.

I imagine that an egalitarian could respond: yes, I need to focus on calculating what it is that I need to be happy. However, I also need to be concerned that others are taking more than they deserve. High levels of inequality are a symptom that some people are taking more than they deserve. They are defectors in that sense, and it is important that the rest of us punish defectors and reward cooperators, who are people who take only what they deserve.

In other words, I do not think that the book will persuade anyone who does not already agree.

Life Expectancy and Income

Posted on by

Timothy Taylor writes,

the reasons for this growing gap in life expectancy by income are not altogether clear. Some explanations clearly aren’t supported by facts. For example, although overall levels of tobacco use are down, the decline seems to have happened in much the same way across income levels, and thus can’t explain the life expectancy factors. Obesity levels are up over time, but they seem to be up more among those with higher incomes, so that pattern doesn’t explain a growing gap in life expectancy by income, either. One hypothesis recognizes that there is a correlation between education and health, and also between education and income, so perhaps factors related to education and health have become more important over time. For example, perhaps those with higher incomes are better at managing chronic diseases like high blood pressure or diabetes. But again, this is an open question. Other possible explanations are looking at how the nature of jobs and job stress may have changed over time for jobs of different income levels, or whether greater inequality in a society may create stresses that affect health.

Before you comment, note carefully the methods used to assess life expectancy.

My own view is that the distribution of conscientiousness has become more unequal over time, and this has implications for both income and life expectancy.

For a view the conscientiousness is the endogenous variable (rather than exogenous, as I think of it), see Elliot Berkman. Pointer from Mark Thoma. He has another post on a piece saying that educational inequality has widened. Again, I have the same diagnosis–that the distribution of ability has widened.

The Fed and Long-Term Rates

Posted on by

A commenter writes,

you can just look at a graph of the effective federal funds rate and see that (especially in recent years) it’s moved closely — in artificial-looking steps that are surely not the recent of some fundamental market rate process — with the FOMC’s target rate. You can then see that this rate and its near-term trajectory is transmitted almost one-for-one to short-term Treasuries, CD rates, etc., and that there is a heavy influence on mortgage rates, corporate bond rates, and so on as well. The extreme market segmentation needed for B clearly doesn’t seem to be there.

The fact that interest rates generally move together can be consistent with a number of hypotheses. One hypothesis is that the Fed influences all of these interest rates. Another hypothesis is that the views of the Fed are usually not much different from the views of markets. The question to ask is what happens when the long-term interest rate is X and the Fed thinks that it ought to be Y. Can the Fed move the long-term rate from X to Y? My impression is that the answer is in the negative.

The Basic Social Rule and Dissent

Posted on by

From Elizabeth Warren’s book, as relayed by a review in the NYT.

After dinner, “Larry leaned back in his chair and offered me some advice,” Ms. Warren writes. “I had a choice. I could be an insider or I could be an outsider. Outsiders can say whatever they want. But people on the inside don’t listen to them. Insiders, however, get lots of access and a chance to push their ideas. People — powerful people — listen to what they have to say. But insiders also understand one unbreakable rule: They don’t criticize other insiders.

Pointer from various places–I first saw it from Tyler Cowen.

Remember that the basic social rule is to reward cooperators and punish defectors. I believe that without such a social rule, trust would break down and we could not have markets. However, that does not mean that the social rule is always a wonderful thing. Criminal gangs operate the basic social rule, also–they reward people who cooperate with the gang and punish people who defect from it.

The basic social rule gets applied in politics and in academics. A visitor from Mars would have a really hard time understanding how macroeconomics got into the cul de sac in which it had arrived when Olivier Blanchard wrote that the state of macroeconomics is good. I would say that Dornbusch and Fischer were really good at rewarding cooperators and punishing defectors.

Thoughts on Drug Pricing

Posted on by

A reader asked me to comment on this story, about the guy whose firm bought the license for a drug and then jacked up its price.

1. I don’t know the whole story in the example. My understanding is that with a decades-old drug, the patent is no longer effective, and generics can be made. So there is something going on here that has not been explained in the stories that I have read.

2. In theory, if someone bought a license to a drug, the cost of the license was tied to the potential revenue from the drug. We might want the value of such a license to be high in order to encourage drug research and development. But again, I am missing some important institutional details in this case.

3. Assuming that the value of the license for the drug indeed is high, then this is a fixed cost. Like many products nowadays (electricity, data transmission, digital content), pharmaceuticals are characterized by low marginal cost and high fixed cost. A price that is efficient in that it is close to marginal cost is too low to cover the fixed cost.

4. This means that there is no price that is “correct.” It also means that price discrimination often can improve the outcome. That is, charge a high price to the people willing to pay such a price, but get additional revenue by charging other consumers a price closer to marginal cost. As I tell my economics students, “price discrimination explains everything.”

5. Another option, in the case of pharmaceuticals, would be to offer prizes instead of patents. Prizes could be funded by taxpayers, or they could be funded by associations of people who would benefit from the medications.

6. However, price controls on medications treat only a symptom, without getting at the underlying problem. Price controls will lower the value of licenses to produce a drug, and that means less incentive to undertake research and development.

UPDATE: Alex Tabarrok says that we thank the FDA for the lack of generic competition.

Also, on this post, commenter Matt had an interesting solution. He would have the FDA issue blanket licenses to proven-quality generic drugmakers, so they they could instantly start to copy any drug that goes off patent without having to submit samples of that particular drug for approval.

Eugene Fama on Fed Impotence

Posted on by

He writes,

Section II uses autoregressions with error correction terms to document that the day-to-day
variation in rates for maturities of a month or more has little or nothing to do with the Fed’s target rate.
This is consistent with a Fed that has little control of rates, but we shall see that it is also consistent with a
powerful Fed whose predictable actions with respect to TF are built in advance into interest rates.

Thanks to John Cochrane for the pointer. Note that TF is the Fed funds rate. My remarks:

1. I do not trust any time series regressions.

2. I think it is interesting that a framework in which the Fed has no influence is observationally close to a framework in which the Fed controls interest rates but market participants anticipate the Fed’s actions very well.

3. We may be in an environment today in which long-term rates over-react to short-term changes in the Fed funds rate.

4. Still, I take the view that the Fed is not big enough in the financial markets to have much durable influence on market interest rates.

Deirdre McCloskey on Intangible Forces in the Economy

Posted on by

She writes,

what mattered were two levels of ideas—the ideas in the heads of entrepreneurs for the betterments themselves (the electric motor, the airplane, the stock market); and the ideas in the society at large about the businesspeople and their betterments (in a word, that liberalism). What were not causal were the conventional factors of accumulated capital and institutional change. They happened, but they were largely dependent on betterment and liberalism.

Pointer from James Pethokoukis, via Don Boudreaux.

Nick Schulz and I call this the software layer of the economy. Innovations account for our prosperity. Bad institutions account for poverty. McCloskey’s thesis is that bad ideas about society account for bad institutions. In terms of the Book of Arnold, when too many people think of merchants and traders as defectors, you get bad institutions.

There is much more to McCloskey’s summary of her thinking. For example,

For reasons I do not entirely understand, the clerisy after 1848 turned toward nationalism and socialism, and against liberalism. It came also to delight in an ever-expanding list of pessimisms about the way we live now in our approximately liberal societies, from the lack of temperance among the poor to an excess of carbon dioxide in the atmosphere. Anti-liberal utopias believed to offset the pessimisms have been popular among the clerisy. Its pessimistic and utopian books have sold millions.

Reining in the Administrative State

Posted on by

Kevin R. Kosar writes,

Congress should establish a commission to identify archaic and wasteful regulations and another to identify failed or needless executive-branch programs. Each would take suggestions from the public and work with congressional support agencies to ensure the cuts are sensible. Upon completion, each commission’s report would be delivered to Congress for introduction and a prompt up-or-down vote. So long as the program and spending reductions and terminations are modest and defensible, congressmen would have a difficult time voting against such a package.

The latest issue of National Affairs contains a few articles on the topic of Congressional weakness vis-a-vis the administrative state. In a subscriber-only article, Charles J. Cooper, after despairing of role of the Supreme Court in protecting the administrative state, offers this:

The only other way to correct the Court’s constitutional mistakes is for the people to do it themselves. The Constitution provides a procedure for the American people — ”the only legitimate fountain of power,” as Madison emphasized in Federalist No. 49 — to rein in an out-of-control federal bureaucracy, even in the face of congressional opposition. That procedure is the Article V convention process, by which two-thirds of the states can call a convention “for proposing amendments,” subject to ratification by three-fourths of the states.

You may recall that my suggested remedy is to have Congress focus on re-chartering each agency every few years. One goal would be to remind agencies that they are answerable to Congress. My thought is that this might make the FCC or the EPA less frisky about expanding their power and scope.

Judging Performance from Outside an Organization

Posted on by

Adam Ozimek writes,

I do think that those who are skeptical of our ability to meaningfully measure school performance are expressing a level of data and empirical skepticism that is not applied elsewhere.

You should read the whole post. I’ve seen excerpts from Tyler Cowen and Don Boudreaux, and neither their excerpt nor mine really conveys what Ozimek is complaining about.

My own view is that judging an organization from the outside is hazardous. I remember when Harvard’s David Cutler was touting pay-for-quality as the solution for compensating doctors, and I considered the notion absurd. If people in Washington know what individual doctors should be doing and how they should be paid, then they must also know what individual middle managers throughout the business world should be doing and how they should be paid.

Organizational outcomes should not be judged by statisticians running regressions. They should be judged by consumers voting with their dollars (using vouchers would count as voting with their own dollars).

Individual performance in the context of an organization should not be judged by Harvard economists. It should be judged by their managers, who know the context in which they work.

The problems with education and medical care is that we insulate consumers from paying with their own money for those services. This imposes a socialist calculation problem, with adverse consequences in both areas.