Making policy is hard, but really important

We’ve talked a bit about the costs of unemployment recently and that discussion lead me to re-read Ken Rogoff’s letter to Joe Stiglitz from 2002. It’s clear in the letter than Rogoff is enraged with Stiglitz criticism of the IMF, but also with his arrogance and the potential consequences for vulnerable people. He’s right to be: the conduct of public policy has huge consequences for millions of people and we take on a heavy burden upon ourselves when we make policy recommendations. It should never be done lightly.

This confidence brims over in your new 282 page book. Indeed, I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem.

You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better.

Joe, throughout your book, you condemn the IMF because everywhere it seems to be, countries are in trouble. Isn’t this a little like observing that where there are epidemics, one tends to find more doctors?

Ethics of doping

Peter Singer on doping in sport:

At the elite level, the difference between being a champion and an also-ran is so miniscule, and yet matters so much, that athletes are pressured to do whatever they can to gain the slightest edge over their competitors. It is reasonable to suspect that gold medals now go not to those who are drug-free, but to those who most successfully refine their drug use for maximum enhancement without detection.

Julian Savulescu proposes that instead of trying to detect whether an athlete has taken drugs, we should focus on measurable indications of whether an athlete is risking his or her health. So, if an athlete has a dangerously high level of red blood cells as a result of taking erythropoietin (EPO), he or she should not be allowed to compete. The issue is the red blood cell count, not the means used to elevate it.

To those who say that this will give drug users an unfair advantage, Savulescu replies that now, without drugs, those with the best genes have an unfair advantage… Setting a maximum level of red blood cells actually levels the playing field by reducing the impact of the genetic lottery. Effort then becomes more important than having the right genes.

This discussion of the value of genes vs effort, and the morality of using drugs to level the genetic field, seems to have parallels with social redistribution. We begin unequal because of genetic differences. Through a system of taxes, subsidies, and other transfers, we redistribute the fruits of effort, genetic talent, and opportunity.

What is interesting is that most people think it is fair to redistribute some of the fruits of talent to the least lucky in society. That is why we have progressive systems of taxation, for instance. But, in the sporting arena, pure talent and opportunity is glorified and there are few serious movements to redistribute the lottery. That’s not to say there isn’t some action, but the call for more equal outcomes in sporting contests clearly not as strong as in economic contests.

Devious pricing?

Apparently UK supermarkets sometimes advertise deals that charge prices higher than the usual, listed price:

In the worst cases, Which? found that supermarkets doubled the shelf price of an item when they began promoting it as a money-saving multibuy. It found that Asda was selling a Goodfella’s Deep Pan Pepperoni pizza at a standard price of about £1, but when it went on to a multibuy deal, the price jumped to £2.50 for one or £4.50 for two.

What is conspicuously lacking from the report is the percentage of advertised deals that do not involve a saving. Mistakes happen, and there are plenty of ways in which a listed price could dip below the deal’s price if supermarkets regularly adjust prices. If only a few dozen examples of this could be found across the tens of thousands of deals that supermarkets advertise every year then I’d be tempted to chalk it up to errors, rather than devious pricing strategies.

Of course, it could be that supermarkets are systematically taking advantage of our decision heuristics, which would be far more exciting 🙂

Morality in sport


On Tuesday night at the London Games, some of the world’s best badminton players hit some of the sport’s worst shots. Sad serves into the net. Returns that sailed far wide. …On Wednesday, four women’s doubles teams — two from South Korea and one each from China and Indonesia — were disqualified. …The eight players were found to have tried to lose their matches intentionally, apparently because they had determined that a loss would allow them to play a weaker opponent in the next round.

I don’t really understand the moral outrage over this. The competition is set up such that winning it is easiest if you lose some matches, but there are also sporting norms that say you have to do your best to win every game. Obviously, when the rewards to winning the competition are high, those incentives will over-ride the norms of sporting conduct. It’s no surprise that teams would try to throw a match, although I am surprised that they did it so obviously: you’d think they’d practice this sort of thing a lot if most competitions work this way.

There’s a more technical discussion of incentive compatibility constraints in the design of the competition over at Cheap Talk.

The moral imperative of amoral theorising

Luigi Zingales:

Oddly, most economists see their subject as divorced from morality. They liken themselves to physicists, who teach how atoms do behave, not how they should behave. But physicists do not teach to atoms, and atoms do not have free will. If they did, physicists would and should be concerned about how the atoms being instructed could change their behavior and affect the universe.

My colleague Gary Becker pioneered the economic study of crime. Employing a basic utilitarian approach, he compared the benefits of a crime with the expected cost of punishment (that is, the cost of punishment times the probability of receiving that punishment). While very insightful, Becker’s model, which had no intention of telling people how they should behave, had some unintended consequences. A former student of Becker’s told me that he found many of his classmates to be remarkably amoral, a fact he took as a sign that they interpreted Becker’s descriptive model of crime as prescriptive. They perceived any failure to commit a high-benefit crime with a low expected cost as a failure to act rationally, almost a proof of stupidity.