Learning About [the] Loss (Function)

7 Nov

One of the things we often want to learn is the actual loss function people use for discounting ideological distance between self and a legislator. Often people try to learn the loss function using over actual distances. But if the aim is to learn the loss function, perceived distance rather than actual distance is better. It is so because perceived = what the voter believes to be true. People can then use the function to simulate out scenarios if perceptions = fact.

Incentives to Care

11 Sep

A lot of people have their lives cut short because they eat too much and exercise too little. Worse, the quality of their shortened lives is typically much lower as a result of `avoidable’ illnesses that stem from `bad behavior.’ And that isn’t all. People who are not feeling great are unlikely to be as productive as those who are. Ill-health also imposes a significant psychological cost on loved ones. The net social cost is likely enormous.

One way to reduce such costly avoidable misery is to invest upfront. Teach people good habits and psychological skills early on, and they will be less likely to self-harm.

So why do we invest so little up front? Especially when we know that people are ill-informed (about consequences of their actions) and myopic.

Part of the answer is that there are few incentives for anyone else to care. Health insurance companies don’t make their profits by caring. They make them by investing wisely. And by minimizing ‘avoidable’ short-term costs. If a member is unlikely to stick with a health plan for life, why invest in their long-term welfare? Or work to minimize negative externalities that may affect the next generation?

One way to make health insurance care is to rate them on estimated quality-adjusted years saved due to interventions they sponsored. That needs good interventions and good data science. And that is an opportunity. Another way is to get the government to invest heavily early on to address this market failure. Another version would be to get the government to subsidize care that reduces long-term costs.

Companies With Benefits or Potential Welfare Losses of Benefits

27 Sep

Many companies offer employees ‘benefits.’ These include paying for healthcare, investment plans, company gym, luncheons etc. (Just ask a Silicon Valley tech. employee for the full list.)

But why ‘benefits’? And why not cash?

A company offering a young man zero down health care plan seems a bit like within-company insurance. Post Obamacare—it also seems a bit unnecessary. (My reading of Obamacare is that it just mandates companies pay for the healthcare but doesn’t mandate that how they pay for it. So cash payments ought to be ok?)

For investment, the reasoning strikes me as thinner still. Let people decide what they want to do with their money.

In many ways, benefits look a bit like ‘gifts’—welfare reducing but widespread.

My recommendation: just give people cash. Or give them an option to have cash.

Raising Money for Causes

10 Nov

Four teenagers, on the cusp of adulthood, and eminently well to do, were out on the pavement raising money for children struck with cancer. They had been out raising money for a couple of hours, and from a glance at their tin pot, I estimated that they had raised about $30 odd dollars, likely less. Assuming donation rate stays below $30/hr, or more than what they would earn if they were all working minimum wage jobs, I couldn’t help but wonder if their way of raising money for charity was rational; they could have easily raised more by donating their earnings from doing minimum wage job. Of course, these teenagers aren’t alone. Think of the people out in the cold raising money for the poor on New York pavements. My sense is that many people do not think as often about raising money by working at a “regular job”, even when it is more efficient (money/hour) (and perhaps even more pleasant). It is not clear why.

The same argument applies to those who run in marathons etc. to raise money. Preparing and running in marathon generally costs at least hundreds of dollars for an average ‘Joe’ (think about the sneakers, the personal trainers that people hire, the amount of time they `donate’ to train, which could have been spent working and donating that money to charity etc.). Ostensibly, as I conclude in an earlier piece, they must have motives beyond charity. These latter non-charitable considerations, at least at first glance, do not seem to apply to the case of teenagers, or to those raising money out in the cold in New York.

Education and Economic Inequality

7 Dec

People seem to believe that increasing levels of education will reduce economic inequality. However, it isn’t clear if the policy is empirically supported. Here are some potential ways increasing levels of education can impact economic inequality:

  1. As Grusky argues, the current high wage earners, whose high wages depend on education and lack of competition from similarly educated men and women (High Education Low Competition or HELCO) from similarly highly educated, will start earning a lower wage because of increased competition (thereby reducing inequality). This is assuming that HELCO won’t respond by trying to burnish their education credentials, etc. This is also assuming that HELCO exists as a large class. What likely exists is success attributable to networks, etc. That kind of advantage cannot be blunted by increasing education of those not in the network.
  2. Another possibility is that education increases the number of high paying jobs available in the economy and it raises the boats of non-HELCO more than HELCO.
  3. Another plausible scenario is that additional education produces only a modest effect with non-HELCO still mostly doing low paying jobs. This may due to only a modest increase in overall availability of ‘good jobs.’ Already easy access to education has meant that many a janitor and store clerk walk around with college degrees (see Why Did 17 Million Students Go to College?, and The Underemployed College Graduate).

Without an increase in ‘good jobs,’ the result of an increase in education is an increased heterogeneity in who succeeds (random draw at the extreme) but no change in the proportion of successful people. Or, increasing equality of opportunity (a commendable goal) but not reduction in economic inequality (though in a multi-generation game, it may even out). Increasing access to education also has the positive externality of producing a more educated society, another worthy goal.

How plentiful ‘good’ jobs are depends partly on how the economic activity is constructed. For instance, there may have once have been a case for only hiring one ‘super-talented person’ (say ‘superstar’) for a top-shelf job (say CEO). Now we have systems that can harness the wisdom of many. It is also plausible that that wisdom is greater than that of the superstar. It reasons then that the superstar is replaced; economic activity will be more efficient. Or else let other smart people who can contribute equally (if educated) be recompensed alternately for doing work that is ‘beneath them.’

Social Science in a Guest Appearance in the Play, Capitalism

2 Jul

Social scientists are technology’s historians, anthropologists, sociologists, and scientists—measuring the social impact of technology. It is important to note that all this activity is forever doomed to survive in the echo chambers of the forgotten consciousness of society and consigned to only enter in casual desultory (or heated but always ineffectual) discussions. Social scientists also produce knowledge that is directly useful to Capitalism and there, of course, it plays a more important role.

Society is led by the 800-pound gorilla of Capitalism and the ‘logic’ of the market, which is quite separate from the ‘logic’ of social good, determines what is sold, how it is sold, and when. Social scientists merely study effects of new technologies as they are unleashed on the world. Universities open up new schools, departments, disciplines, and certainly new topics within disciplines as technology and reality march on. Take for example the following – two decades after television became a common amongst US households, David Phillips found evidence for ‘Werther effect’ like phenomena that linked suicides in real life to television suicides, and later still Robert Putnam linked heightened social alienation to television, and now there is a slew of literature detailing negative impact of violence on television. Of course, nobody ever thought that they might want to research the impact of something before it is released.

Social scientists are consigned to doing research that will only rarely wend its way to policymaking. And of course they will never get a chance to determine the course of technological growth, or other policies for those are tethered to Capitalism.

So what is the role of social science or for that matter science aside from helping create wealth, and helping society in a small number of cases where money making and social good coincide? There is really none in a world where increasingly the word regulation is seen as a plague.

Perhaps we can write our own epitaph – we wagged our fingers and tongues, and scribbled furiously, as the chasm between the economic engine and the social good widened and Capitalism swallowed us whole. We also made some money doing that.

Orwell Times: Corporate Beneficence

9 Jun

Corporate Beneficence, which was once limited to the rarefied realm of funding Opera Houses and Classical Music, has lately found itself immersed in a variety of ‘charitable’ activities to ‘advance’ human welfare.

As identity and consumption have become conflated, corporations have aggressively spent money on a variety of ‘charitable causes’ to reposition their brands.

Apple

“Apple has agreed to host music for an organization that uses African music to help people caught in the escalating ethnic violence in Darfur, Sudan.” MacWorld. Apple really understands its upper-middle-class pretend-liberal bourgeoisie customers, whose participation in liberal causes starts with Gay rights and ends with attending music concerts about Darfur, and never ever extends to any substantive political action. By the way, where is Darfur again?

McDonald’s

The mission of Ronald McDonald House Charities is to “provide a “home away from home” for families of seriously ill children receiving treatment at nearby hospitals.” The other, better known, mission of McDonald’s is, of course, to get those children to be sick.

Coca-Cola

The company which has been accused of depleting groundwater resources in rural India and which earned a profit of nearly $5 billion in 2005 announced that it would invest “$20 million over five years to improve global water conservation. The plan is part of the company’s effort to adapt to global warming and to address a crucial constraint to growth in emerging markets.”

Shell

“Shell Foundation’s mission is to develop, scale-up and promote enterprise-based solutions to the challenges arising from the impact of energy and globalization on poverty.”

Beyond Petroleum
British Petroleum, the company that was once part of the Global Climate Coalition, an organization set up to promote global warming skepticism, and a company that is facing criminal charges for “allowing 270,000 gallons of crude oil to seep across the Alaskan tundra” (Wikipedia) is now ‘Beyond Petroleum’.

Crystal Geyser

The bottled water company is a ‘proud sponsor’ of “American Forests”.

Walmart

Walmart, which has been widely decried for its low wages, inadequate healthcare benefits, and for ‘burying’ local mom and pop stores (pdf), and a corporation which had a net profit of close to $11.2 billion in 2005, had the following statement on its website, “Walmart charity begins with giving the local community financial support through community giving. Our community giving programs provide direct contributions to the local communities from the Walmart charity fund. Last year, Walmart charity initiatives were to exceed $170 million in support of local communities and non-profit organizations.”

Halliburton

The company sponsors a Charity Golf event. “The 2006 event raised more than $625,000, and over the past 13 years, I’m happy to report that this event has now provided more than $2.1 million to more than 48 local nonprofit charities.”

Bechtel Corp.

The corporation accused of trafficking women in the Balkans and myriad other charges of fraud in handling its contracts in Iraq generously helped fund an International Center at Stanford University.

A Small Government: US Federal Budget as Proportion of the Economy

11 Dec

The US federal budget is larger than that of any other country in absolute terms. The US government spends more than $2.3 trillion every year, about $500 billion dollars more than Japan, which has the second largest budget in the world at around $1.7 trillion.

Yet, as a proportion of the economy, the US federal government budget is small. The US federal budget of $2.3 trillion is about one-fifth (.197) of its $12.5 trillion GDP. The average budget-to-GDP ratio in developed countries in Europe is about twice as much. For example, UK’s budget of $951 billion is nearly half of its $2.228 trillion GDP, while France’s budget of $1.144 trillion is a little more than half of its $2.055 trillion GDP. The US budget-to-GDP ratio is closer to the ratios in the developing world. For example, India’s GDP of $720 billion is nearly five times bigger than its budget of about $135 billion. Surprisingly, the US budget-to-GDP ratio also matches the ratio of its left-leaning northern neighbor, Canada.

Petro-economies like Saudi Arabia have budget-to-GDP ratios that fall between those of the developing world and the developed economies in Europe. Petro-economies also fall in the middle in terms of budgetary dollars spent per person. Nigeria, unsurprisingly, is an exception in this regard, with budget numbers far below that of other petro-economies.

In terms of dollars spent per person, United States is far behind developed EU economies. The budgetary allocation per person in the EU is more than double that in the US.

There are two key caveats in interpreting all this. An exclusive focus on the federal budget understates the total government spending for countries with strong federal structures like the US. But the good thing is that federal spending and state and local spending are not inversely proportional in countries with strong federal structures but are strongly correlated. Hence, while relying solely on federal budgetary expenditure does understate the impact, it doesn’t do it by as big a margin as one would expect. Take, for example, the US, whose total budget at the state level is around $600 billion, adding which pushes total government spending to $3 trillion or still about .25 of the GDP.

Secondly, one must look at not only the size of the budget but also where it is spent. For example, the US military budget accounts for a fifth of its net budget by conservative estimates. In sheer numbers, US military budget exceeds the total military spending of the rest of the world, but in terms of its size relative to US GDP, it is a measly 4%.

Developed countries pool:

Country

GDP (in trillions, 2005 estimate, unless mentioned otherwise)

Budgetary Expenditure (in trillions, 2005 est. unless mentioned otherwise)

Proportion of budget/GDP

Population
(millions)
(2006 est.)

Budget expenditure per
Person (thousands)

Germany

$2.73

$1.362

.498

82.4

16.529

France

$2.055

$1.144

.556

60.6

18.877

UK

$2.228

$.951

.426

60.4

15.74

Italy

$1.71

$.8615

.503

58.1

14.827

Norway

$246.9 billion

$131.3 billion

.531

4.5

29.177

Switzerland

$367 billion

$143.6 billion

.391

7.48

19.197

Asia Pacific

Japan

$4.664

$1.775

.380

127.4

13.932

Australia

$612.8 billion

$240.2 billion

.391

20.09

11.95

Developed North American economies

USA

$12.49 trillion

$2.466 trillion

.197

295.7

8.3395

Canada

$1.035

$152.6 billion(est. 2004)

.147

33.09

4.611

Developing country pool:

Country

GDP (2005 est.)

Budgetary Expenditure (2005 est.)

Proportion of budget/GDP

Population
(millions)
(2006 est.)

Budget expenditure per
Person

India

$720 billion

$135 billion

.1875

1,095

123

Pakistan

$89.55 billion

$20.07 billion

.223

162

124

Indonesia

$270 billion

$57.7 billion

.213

245

235

Brazil

$619.7 billion

$172.4 billion

.278

186

927

China

$2.225 trillion

$424.3 billion

.190

1,306

325

Chile

$115.6 billion

$24.75 billion

.214

16

1546

Petro-economies

Iran

$181.2 billion

$60.4 billion

.333

68

888

Saudi Arabia

$264 billion

$89.65

.339

27

3320

Venezuela

$106.1 billion

$41.27 billion

.388

25.375

1626

Nigeria

$77.33 billion

$13.54 billion

.175

128

105

All figures from CIA World Fact Book which can be accessed at: https://www.cia.gov/redirects/factbookredirect.html

Piracy—the Real Mantra Behind Indian Success

9 May

The Wall Street Journal (WSJ) ran an opinion piece yesterday arguing that India is “rapidly evolving into Asia’s innovation center” and “leaving China in the dust” because of its famed intellectual property regime.

Not only is the claim patently bogus, but the opposite—that the Indian innovation is surviving primarily through piracy—is very likely true. It is, of course, clear that the authors of the article have never ventured to Palika Bazaar or Nehru Place in Delhi or the countless other entities that use and sell pirated materials in India. Nor have the authors ever read an Indian science book, for all they will find are hasty copies of works by foreign authors on poor paper. Nor have they ever been to an Indian store in the US. For they won’t be able to spot a rightfully purchased Bollywood movie at these stores.

Yes, India has a wonderful copyright law. At least so the gentlemen would like us to believe. However, it is rarely enforced. The article points out that in 1994 the copyright act was amended to explain the rights of holder and penalties for infringement. “In 1994, the Indian Copyright Act was amended to clearly explain the rights of a copyright holder and the penalties for infringement of copyrighted software.” Nowhere does the article mention that the act itself was rewritten to make it tougher. The only effect of the law, which the article mentions has been called one of the “toughest in the world” (without quoting sources), was to create this handbook.

Since the implementation of a copyright law that was “one of the toughest in the world,” a government study on copyright piracy in India done in 1999 concludes, “The total value of pirated copyright products sold in India during 1996-97 was about Rs. 1,833 crores which formed 20% of the legal market. Segment wise, the piracy rate is found to be the highest in computer software (44%) and lowest in cinematographic works (5%).”

Let me finish by focusing on how piracy has helped India innovate. Without the countless street level computer training centers which mostly rely upon pirated software, there wouldn’t have been an IT revolution in the country. Without the lax patent laws on Pharmaceuticals, which patented only the way in which a medication is produced and not the mix of ingredients itself, there would have been no Indian success story in Pharmaceuticals. Without the cheap knock-off science books that are abundant for poor Indian students, there wouldn’t have been the countless educated Indians with a high level of understanding of fundamentals of science.

Moving on to the authors’ contention that India is leaving behind China in the dust. The authors use the following line to support such an exaggerated claim, “The number of Indian patent applications filed has increased 400% over the past 15 years.”

Aah, the wonders of statistics.

Let’s put the numbers in perspective. “According to the World Intellectual Property Organization’s (WIPO), the number of international patent applications from Japan, Republic of Korea, and China, has risen by 162%, 200%, and 212%, respectively, since 2000. These growth rates reflect the rapidly growing technological strength in northeast Asia.” More instructively, China in 2004 filed for 1,705 patents while India filed for 689. [PDF – WIPO statistics]. One more comment about China. Chinese economy (and innovation) with annualized growth rates of upwards of 9% and with high tech stalwarts like Lenovo is flourishing. Any comments as to leaving China in the dust aren’t just wrong, but also dumb or dishonest.

Lastly, I would like to address the question of why this poorly researched article trumpeting fake achievements and rationale for India’s success has made it to the Wall Street Journal. My guess is that this is a deliberate piece, produced after much deliberation with the businesses. It comes as no surprise that one of the authors of the article, Mr. Wilder is a lawyer representing the euphemistically named IP lobbying Association called the “Association for Competitive Technology.”