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Archive for 2011

Why Ranking Charities by Administrative Expenses is a Bad Idea

How does one know whether a charitable donation will make an impact? For this we need a simple formula (easy to write, hard to apply):

Idea X Implementation = Bang for your buck

When I give talks about aid effectiveness, people often comment that they too think this is important. And to make sure they are supporting good charities, they always hone in on the charities’ finances to see how much goes to administrative and fundraising expenses. Charity Navigator, for example, scrubs these numbers and doles out stars to charities that don’t spend “too” much on operations.
Given the title of my book with Jacob Appel, More Than Good Intentions, many assume that they are speaking my language, and that I admire such focus on those numbers too.
But I do not. Those numbers do not tell you what is really happening.


Google Makes a Bad Economist

I love Google. But it’s not a very good economist. Type “unemployment rate,” and here’s what it yields:
The first of these links is from Google, and it tells you that the unemployment rate is 8.7%. The second is to the Bureau of Labor Statistics, which tells you that it is 9.1%.
Technically, both are correct. But you are better off not relying on the Google number. You see most economic discourse is about seasonally-adjusted data—the unemployment rate adjusted to take account of the usual seasonal ups and downs. But Google links instead to the non-seasonally-adjusted data, which virtually no one pays attention to. And this is why its little graph wiggles up and down so much.


Full Disclosure: My Partner, The Labor Economist

I’ve been writing a bit recently about labor issues, and about topics which touch on administration policy. And my better half, Betsey Stevenson, is currently serving in the administration as Chief Economist at the Department of Labor. So I realized that a disclosure about all of this is probably in order. Rather than mindlessly re-type this disclosure every time I write about anything where there’s any possibility of a conflict, I thought I would outline it all here, now, and just link to this in the future.


We're Halfway to a Lost Decade

Our current slump began a lot earlier than you think. Which means that we’re halfway to a lost decade.
Many people date the financial crisis as beginning when Lehman collapsed in September 2008. But the economy was already in recession. The NBER reckons the recession began in December 2007. But look closely, and you’ll see that it may have begun a year earlier.
That’s the case I made in my latest Marketplace commentary, which you can listen to here. The point is more easily made with a simple graph. (Click inside the story for a bigger version).
The blue line is the usual measure of GDP, which is obtained by adding up total spending. When you read the newspapers, this is the number they report. But the Fed’s Jeremy Nailewaik has convincingly shown that the red line—which is the sum of all income—is the more reliable measure. In theory the two lines should be identical—one person’s spending is another’s income—but in practice, the measurements differ. I’ve also plotted the peak, trough, and latest reading of each measure.


A Secondary Market for Graduate Degrees?

I recently finished the Knight-Bagehot Fellowship at Columbia. It’s a one-year program that lets business journalists take classes across the university to “enhance their understanding and knowledge of business, economics and finance.” One of the program’s perks, and there are many (including dinners with the likes of Paul Volcker, Jamie Dimon, and Joseph Stiglitz), is that you can get an M.S. degree from Columbia’s journalism school by taking just six additional credits. Considering it usually takes 30 credits, and about $53,000, to get one of those, it’s a pretty good deal.
Back in 2006 I got my M.S. from the J-school, the old-fashioned way. So during my Bagehot tenure, I didn’t take a single additional class there. And yet, come graduation day, they gave me a second diploma. Expecting just the certificate in economics and business journalism that comes with the fellowship, I was too stunned to say anything as they handed it to me up on stage, and I certainly wasn’t going to give it back. But what the heck am I going to do with two degrees from the same school?


Freakonomics Quorum: Why, During a Bad Economy, Does Crime Continue to Fall?

The FBI recently announced that the number of violent crimes fell 5.5 percent in 2010, with property crimes falling 2.8 percent. This extends the dramatic reduction in crime that began in the 1990s. The Times declared that criminologists were baffled by the news, and Levitt was baffled by their bafflement:

Apparently, everyone expected crime to rise because of the weak economy, which I find strange, because there is zero evidence of any relationship between violent crime and the economy, and a relatively weak one between property crime and the economy. Plus, relative to 2009, the economy in 2010 was substantially improved.

We spent an entire chapter in Freakonomics exploring the factors that do and do not seem to have brought down the rate of violent crime in the U.S. In short, factors that matter include: number of police; number of prisoners; changes in drug markets; and the availability of abortion. And those that don’t seem to much matter: the economy; innovative policing strategies; most gun laws; capital punishment; and demographics.
There is of course no reason for anyone to have complete confidence in the arguments we presented, even if they were more empirical than most arguments about crime. Still, as Levitt said in the excerpt above, it is surprising that so many people seem wedded to the view that the economy drives violent crime even when the evidence supports the contrary.
So, given the amount of bafflement on the issue, it seemed like a good time to convene a Freakonomics Quorum.


Do Paid Chores Pay for Themselves?

My son now travels three days a week, and my daughter-in-law has knee problems. What to do about such tasks as gardening, lawn mowing, leaf raking, etc.? They could hire a gardener; but their kids, now teenagers, are confronting scarcity: Their allowances no longer cover the things they want to buy—they have become economic people.
To solve both parental and offspring problems, the kids have offered to engage in household production in return for extra pay. The garden now looks better, leaves are raked more quickly and the lawn is mowed on time—and the kids have more spending money. I have no doubt that paying the kids is cheaper than hiring a gardener—cheaper than the market solution. Of course, my son could order the kids to do the tasks, but paying them is a nice way to give them spending money. I wonder, though: Does their pay of, say $10, represent a $10 increase in income? Or does my son cut back on the things he used to pay for and now makes the kids pay for themselves? If so, do teenagers understand this kind of fiscal substitution?


Why Does the South Still Commemorate the Civil War, But Not the North? Bring Your Questions for Historian Peter Coclanis

This year marks the 150th anniversary of the start of the American Civil War. Celebrations, commemorations, remembrances of all kinds are planned over the next four years. Twenty-two states are getting in on the action. But the majority of events, and the people displaying the most zeal for the occasion, are in the South.

In December, a mostly white crowd turned out in their antebellum best for the Secession Ball in Charleston, S.C. In February, the Sons of Confederate Veterans descended on the state capitol in Montgomery, Ala., to cheer the reenactment of Jefferson Davis being sworn in as president of the Confederacy. My home state of Virginia, where a third of all Civil War battles were fought, is spending millions in hopes of cashing in on the four-year event. In the South, the Civil War is still big business, which got me thinking: why are the ones who lost the war trying the hardest to remember it? The Civil War devastated the South, and plunged much of the region into a century of poverty and economic stagnation, the effects of which are still apparent in many areas. The South’s relationship with the “Lost Cause” is obviously complicated, but where else in history do we see the losers commemorating a war while the winners, by comparison, largely ignore its anniversary?


More Depressing News on America's Financial Literacy (or Lack Thereof)

I’ve written on the woeful state of Americans’ financial literacy a few times in the past. There is probably no academic researcher more attuned to the problem than Annamaria Lusardi of Dartmouth. This week’s NBER e-mail blast describing the latest crop of economics working papers includes nine papers; of those, four are written or co-written by Lusardi on this topic.
Among the highlights (or, I should say, lowlights); the bolding is mine:

“Americans’ Financial Capability”
This paper examines Americans’ financial capability, using data from a new survey. Financial capability is measured in terms of how well people make ends meet, plan ahead, choose and manage financial products, and possess the skills and knowledge to make financial decisions. The findings reported in this work paint a troubling picture of the state of financial capability in the United States.
The majority of Americans do not plan for predictable events such as retirement or children’s college education. Most importantly, people do not make provisions for unexpected events and emergencies, leaving themselves and the economy exposed to shocks.


More Fecal Transplants Coming Your Way!

The podcast we put out a few months ago called “The Power of Poop” continues to draw incredulous e-mails. In a nutshell: throughout civilization, human feces has posed considerable health hazards; when it gets into the water supply, for instance, a lot of bad things can happen. But in recent years, a variety of medical researchers, many of them gastroenterologists, have pushed for a greater understanding of poop, and have made some startling discoveries. Among them: fecal transplants (yes, you read that right) seem to provide substantial medical benefit for several maladies.
So it’s always nice to see fecal transplants in the news, as in this report from Tampa about a woman who was suffering from Clostridium difficile and had her health apparently restored by a “transpoosion” (although the method of the transplant in this case was, I have to say, much harder to stomach than the transplants we covered in the podcast — so you might not want to open the link if you’re eating …).


The Rise of the "Dual-Master Bedroom"?

This statistic seems unbelievable to me on a few dimensions, but it is still worth thinking about:

The National Association of Homebuilders predicts that by 2015, 60% of new homes will be designed with “dual master bedrooms.”

From a CNN.com article called “Options for Your Mediocre Marriage.” One option:

If it’s possible, consider separate bedrooms. You’d be surprised how the creation of privacy and nonmarital spaces in a marriage might help. Already one in four Americans sleep in separate bedrooms or beds from their spouses.

Even if the 1 in 4 number is true (and that includes separate beds, not only bedrooms), I wonder how that translates into demand for a 60% supply of “dual masters.”


Why I Hate (And Can't Live Without) My Phone

203-512-2161
That’s my phone number. It has been for the past eight years and presumably will be for the next eighty. Until they make the Google Chip for my brain. Initially it lived inside a Blackberry. I vaguely remember ordering it online from a company that sold Blackberries to deaf people. I’m not deaf.
For some reason they gave me a Connecticut area code even though I live in New York. I always tell people it’s my “Greenwich office.” Greenwich is famous for all the hedge funds there. It’s a joke. I hate Connecticut. Too many roads have the same name and all run parallel to each other. You drive on them for hours until you finally realize you’re simply never going to arrive at your destination. Every house is bigger than the next in Connecticut. It makes me feel anxious and jealous.
I see little kids riding bicycles outside these mega-mansions. I hate them. Then I hate myself for hating little kids. There’s nothing good about Connecticut.
Except my phone comes from there somehow.


Freakonomics Radio Live in St. Paul, Minn. This Week

On Thurs., June 9, we’ll bring Freakonomics Radio alive (or die trying) on the stage of the historic Fitzgerald Theater in St. Paul, Minn. Details here and here.
St. Paul is home to our distribution/production partner American Public Media (the folks responsible for Marketplace, A Prairie Home Companion, etc.). It is also the hometown of Steve Levitt.
We have a variety of stunts and surprises in store (including some for Levitt: shhh!).
And we’ll preview some of the material from our five upcoming hour-long Freakonomics Radio specials airing this summer on public radio. The titles: “The Church of ‘Scionology,'” “An Economist’s Guide to Parenting,” “The Folly of Prediction,” “The Suicide Paradox,” and “The Upside of Quitting.”
If you live within reasonable distance of St. Paul, I very much hope you’ll come out; there’ll be a Q&A, book signing, and other yuks.


Airplane Seat Reclining: A Good Real-World Altruism Test?

A good idea from a reader named Mark Mize:

Reading this article, I was immediately reminded of the section in SuperFreakonomics regarding altruism:
I think the choice to recline one’s airplane seat is a great example of natural altruistic tendencies. Reclining one’s own seat increases his comfort, but only at the expense of the person directly behind him. Then, in order for that person behind to increase his own comfort level back to what it was before the person in front reclined back into his space, he must now recline back into the space of the person behind him at the expense of that person’s comfort, and so on. An experiment observing this behavior may be a better measuring stick of natural human altruism tendencies than the Dictator game or similar games since the behavior could be observed in real time and without the behaviors associated with knowing one is being observed in a laboratory.


How to Fix the Postal Service?

This week, Bloomberg BusinessWeek put the financial woes of the U.S. Postal Service on its cover with a story titled “The End of Mail.” The dire plight of the USPS isn’t exactly news — it’s been losing money since 2006, including nearly $20 billion since 2007. But the cliff the agency has been driving toward is fast approaching. The agency is now almost $15 billion in debt. Unless the government steps in, it will default on $5.5 billion of retiree health-care costs in September. By October it will reach its legal debt limit, and by the end of the year, the USPS will be out of cash — insolvent and unable to operate.
So what to do? How do you fix a federal agency that, if private, would rank as the 29th largest company on the Fortune 500 list? It can’t just go away, can it?


The Latest Odds on Palin, Ahmadinejad, Strauss-Kahn, and … Another Recession?

Interesting browsing these days on the prediction market InTrade, which is still mourning the loss of its founder John Delaney (a man I very much enjoyed knowing a bit the past few years):
1. Barack Obama to be re-elected President in 2012: 62.0% chance
2. Mitt Romney to be Republican Presidential Nominee in 2012: 29.6%
3. Sarah Palin to formally announce a run for President before midnight ET on 31 Dec 2011: 41.9%
4. Mahmoud Ahmadinejad to no longer be President of Iran before midnight ET 31 Dec 2011: 31.0%
5. Dominique Strauss-Kahn to be guilty of at least one charge: 84.0%
6. Christine Lagarde to be named the next Managing Director of the IMF: 85.0%
7. The U.S. Economy will go into Recession during 2012: 20.0%
We should assume that Nos. 1 and 7 are inversely correlated. I went to the site this morning looking to see if there’s a contract out on Lloyd Blankfein, having read this (NYT) article, but I don’t see one (yet?).


FREAK-est Links

Is there a mathematics generation gap? Do good restaurant reviews cause price hikes? Journals of the American Economic Association wave goodbye to double blind peer reviews, and more.


Winners of Heart + Mind Donations Contest

Earlier I ran a contest for two free copies of More Than Good Intentions. The quick summary: we ran a randomized trial to test whether employing the use of statistics, and worse yet scientific evidence, would raise more or less money when added to a standard emotional appeal in a direct mail marketing solicitation for donations for Freedom from Hunger (a charity I respect and do research with). We split the analysis by size of prior gift. The Freakonomics contest then asked two questions:


The Price of Liberty

I’m back to inviting readers to submit quotations whose origins they want me to try to trace, using my book, The Yale Book of Quotations, and my more recent researches.
James Curran asked:

Could you try a question that is of some import to my family… The saying ‘Price of Liberty is eternal vigilance’ is generally attributed to Thomas Jefferson. However, the original sentiment was phrased as ‘The condition upon which God hath given liberty to man is eternal vigilance’ by the Irish statesman John Philpot Curran (of whom a complete lack of evidence has never stopped my family from claiming as an ancestor).
So the question becomes, did Jefferson paraphrase Curran? Or is the modern wording the work of some nameless editor who can’t quote or attribute correctly?


Why Did WikiLeaks Have Such Little Impact?

A few months back, hundreds of thousands of pages of U.S. government documents were made available to the public through WikiLeaks. I have to say that, at the time, I thought this would be a history-making event. I figured there would be loads of interesting and controversial revelations in the documents. Huge scandals would emerge; heads would roll.
I was recently reminded, while reading a months-old copy of The Economist, just how little of interest has thus far emerged from the documents. The U.S. ambassador to Ecuador was sent home by the Ecuadorians because she had written a leaked cable saying (gasp) that the Ecuadorian police were corrupt. The article mentioned that a similar fate had befallen the American ambassador to Mexico.
Is that it? Is there nothing of importance in State Department cables?


Festival Economia: A SxSW for Economics

I’m giving a speech at the 6th annual Festival Economia in Trento, Italy, this week — a huge street fair financed by the provincial government and large corporations. As with Austin’s South by Southwest Music Festival, visitors buy badges and can attend any event. The only difference is that this is economics for the masses instead of music (and film) for the masses.
Why should a government spend tax dollars on this? I would argue that it educates the citizenry; but also, and much more importantly, it creates social capital — it creates cohesion among the citizenry that might otherwise be missing. That it also brings in thousands of visitors who pay for lodging and meals probably makes it attractive to local businesses too.


Nine Ways to Guarantee Success (And Failure)

I really blew it and everyone knows it. I was even asked to speak at some conference about failure on I think June 13. I might’ve deluded myself into thinking I’m the keynote speaker. But I might just be on a panel. Hopefullly I won’t fail at it. But if I do, I hope you can all come and watch it happen in slow motion. By the way, my favorite technique in public speaking is to slightly slur my words, but that’s another post.
I’m like Dr. Failure. I know exactly what you need to do if you want your wife to hate you, if you want to get thrown out of school, if you want to lose your investors $100 million. If you want to lose your home.
One-sixteenth of the time people are happy. The rest of the time they’re not. So if you start to avoid all the things that cause unhappiness then maybe there’s a small chance you can improve the ratio in your favor.
Claudia says, “Why are you writing about failure? Think positive!” What? Avoiding every possible way to fail is the most positive thing you can do to be happy and successful.


How Advancements in Neuroscience Will Influence the Law

Oh, my neck! Oh, my back!
Every day, legal decisions are made based on the pain, suffering, and anxiety people say they’re feeling, even though we have no objective way to measure them. So what if we could see inside people’s minds — not just to know what they’re feeling now, but what they’ve felt in the past too?
Advancements in neuroscience are already improving our ability to do so. A new article published in the Emory Law Journal (full version here) entitled “The Experiential Future of the Law,” by Brooklyn Law School professor Adam Kolber, looks at how these advancements will continue over the next 30 years (to the point of near mind-reading), and how they’ll inevitably lead to changes in the law.


The Supreme Court Provides a Dissertation Topic for a Budding Economist

Last week, the Supreme Court ordered California to release at least 30,000 prisoners due to poor prison conditions caused by overcrowding.
This is what economists call a “natural experiment,” or what I prefer to call an “accidental experiment.” The Supreme Court order will be a “shock” to the California prison system, leading to roughly a 10 percent reduction in the prison population there. I used this sort of accidental experiment in a paper I published back in 1996, finding a large impact of mandated prison releases on state crime rates. If my estimates remain relevant to the current time period, I predict that California violent crime rates should rise about 4 percent relative to the rest of the U.S. over the next few years. That adds up to about 80 extra homicides a year.
Five years from now, no doubt, an economics graduate student will analyze the data and tell us what the actual numbers look like. Unless, of course, I beat them to the punch!


Launching Into Unethical Behavior: Lessons from the Challenger Disaster

Ann E. Tenbrunsel is a professor of business ethics at the University of Notre Dame. Max Bazerman is a professor of business administration at Harvard Business School. The guest post below is adapted from their new book Blind Spots: Why We Fail to Do What’s Right and What to Do About It.
 
Launching into Unethical Behavior
By Ann E. Tenbrunsel and Max H. Bazerman
The 25th and last flight of the shuttle Endeavour has come and gone. Which means there’s just one shuttle flight left: July 8’s Atlantis launch will be the 135th and final mission for the program, 30 years after the first shuttle test flights occurred.
For anyone who was around on Tuesday, January 28, 1986, it’s difficult to watch a shuttle launch without remembering the Challenger disaster, when the space shuttle disintegrated 73 seconds after launch, killing all seven crew members. While the most commonly referenced explanation for what went wrong focuses on the technological failures associated with the O-rings, an examination of the decision process that led to the launch through a modern day “behavioral ethics” lens illuminates a much more complicated, and troubling, picture. One that can help us avoid future ethical disasters.


Jonathan Levin: The Most Recent John Bates Clark Medal Winner

I have been remiss in not offering public congratulations to Stanford economist Jon Levin, who recently became the latest recipient of the John Bates Clark Medal, given annually by the American Economic Association to the most promising economist under the age of 40.
Levin is best known for his contributions to economic theory, but my favorite paper of his is one that is quite applied. Levin and co-authors describe their efforts to help a wireless carrier bid more effectively in a government-run spectrum auction.
As noted in a blog post I wrote at the time, the strategies engineered by Levin’s team generated $1 billion in surplus for the company that hired them. The economists did, however, make one dreadful mistake: they agreed to be paid by the hour instead of getting a share of the surplus.


The Daughter Test and Why Steve Levitt is Angry About the Online Poker Crackdown

As an economist, Steven Levitt says he has an underdeveloped moral compass. In the past, the University of Chicago professor and Freakonomics co-author has tricked colleagues into drinking cheap wine and opined that drug dealers in Sao Paulo would do a better job keeping communities safe.
But his moral compass went spinning when the U.S. recently cracked down on the top three online poker companies, resulting in 11 indictments. The federal government accused PokerStars, Full Tilt Poker and Absolute Poker of running their operations illegally, including paying banks to secretly process transactions.
“I think it makes no sense at all,” Levitt says. “Most things that are made illegal, everyone agrees on: homicide, theft–there’s a general agreement. And then there are these other activities that fall into a gray area. I think poker is so obviously on one side of the gray area relative to legality that it just doesn’t make any sense to me.”
Levitt says he doesn’t usually get riled up over such issues, but then he realized why he got so angry: his daughter.


Deciding How to Decide: Taste-Matching Or Expert-Based?

This blog post is co-authored with Jacob Appel, co-author of my recent book, More Than Good Intentions.
Among the many questions David Gomberg and Justin Heimberg pose in their hilarious book Would You Rather is the following:

“Would you rather…
Become increasingly intelligent with the consumption of alcohol, but also become increasingly convinced you are Gloria Estefan
OR
Have a firm grasp of Roman numerals but look exactly like Weird Al Yankovic?”

Well, that’s a tough one. Seriously. It’s a classic problem of apples and oranges—or maybe, given the absurdity of the alternatives, a problem of apples and, say, cut-off jeans shorts—two things that are thoroughly incommensurable. Fortunately, those are not real choices.


Why Trademark Tarnishment Laws Are Dubious

We recently wrote about Disney’s attempt to trademark “Seal Team Six”–the name of the Navy SEAL unit that killed Osama bin Laden. Disney’s bid to make a buck off the SEALs didn’t go down very well – the public response was overwhelmingly negative. It also caught the attention of the Navy, which made clear that it had a better claim over the name. Last Thursday, Disney gave up.
But just as one bizarre trademark dispute recedes, another one springs up.
Last Wednesday, the New York Stock Exchange threatened to sue the widely-read liberal blog Talking Points Memo over TPM’s use of a file photograph of the NYSE trading floor. (Copy of letter here).