Auction the Immigration Permits

One of the seemingly unfair things regarding inter-state relations today is the trouble that many people go through in order to qualify for visas into the countries of Europe of North America. Starting with the demolition of committees intent on determining the labour requirements in the UK, Tim Harford presents a brilliant and market-driven approach to issuance of permits to immigrants.

While I am opposed to strong nationalism as a form of discrimination, I also understand the possibility that some immigrants could be motivated to move to countries with welfare systems. This possibly small number of freeloaders may then benefit from redistribution of income from other tax paying workers. Tim Harford's solution challenges the cultural biases by asking governments to price immigration permits through auctions and use the proceeds in supporting public services. A good idea in applied economics even if politically impractical for the time being.

I am impressed because auction theory is among the ideas in economic theory that I find to have real and practical value. More thinking power to Tim Harford.

Bailout Rejected

This blogger has tried to make sense of the financial crisis and the rescue package that US Treasury and the Federal Reserve Bank proposed to congress. Now that the US House of Representatives rejected the proposal containing the rescue package, what followed are recriminations between the parties and the attempts to blame either of the presidential candidates.

As I tried to make sense of the crisis, I find that there is no more informed and clear thinker than Paul Krugman. First because he dedicated a large part of his early career to studying these cycles and has written a number of accessible books such as this and secondly because there's immense argument with the commentariat infusing ideology and biases into definitions on what the problem is.

One finds evidence of the diversity of these views from professional economists themselves as this page on the reason site shows. While answering the same four questions, it is clear that there's a bit more agreement and coherence on the causes than the appropriate solutions in addition to the utility value of the Paulson-Bernanke Plan.

Besides the clarity of Krugman's thinking on this matter, this short article by David Leonhardt of the NYT makes lots of sense of the convoluted genesis and proposed solutions. As he states, the package will remain controversial because of the mixture of the real objectives with other issues will make the plan internally inconsistent.

In spite of my reluctance to accept government interference in markets and the support for the market to be allowed to complete the decimation of uncompetitive firms, i think that the possibility of contagion and further harm is real and calculated assistance to restore lending is important to ease the liquidity trap.

A New Kind of Sub-prime Loans

To the extent that it allows the lending of minor sums to individuals with low income and who necessarily lack a credit history to acquire credit for entrepreneurship, micro-credit may be comparable to sub-prime loans. Daniel Gross argues for an extension of micro-credit to the citizens of low income countries out of the view that the Grameen Bank concept of micro-loans is an effective poverty buster.

While the piece argues that micro-lending is not a panacea, it also states that with infusion of new technologies and proper financial management principles, micro-loans are a way out of poverty. To my mind, micro-loans may be useful but their transformative power may be overstated because of the limits that thye place on the businesses that individuals may pursue. In addition, as an earlier blog post stated, most of the recipients engage in similar businesses that are expanded through loans but that incomes generated from them are often enough to live slightly above the poverty line.

Bank Crisis Dissected

On a number of occasions on this blog, I have expressed the view that tighter regulation of hedge funds is not necessarily in the public interest. This view is consistent with the thinking that limited regulation does have immense benefits compared to costs. Given the spate of collapses and rescues that is ongoing in the US starting with the sub-prime mortgage crisis and is now squarely hurting Wall Street banks,it is important to consider what structural factors have created the crisis.

Without doubt, a number of these banks were very highly leveraged and for a time made huge profits from sophisticated financial instruments such as derivatives. Joseph Stiglitz, Kenneth Rogoff and Thomas Friedman all have had their take on the issue. However, I think that Robert Samuelson's piece here not only tightly states what the problem is, but explains the miscalculation that resulted from the same models.

I am unsure that Wall Street will not be the same again as similar claims were made during the collapse of LTCM a decade ago, but it is clear that readjustments will take place in financial services houses in addition to there being stronger claims for regulation of these firms who appropriate profits for owners but require public money to ensure their survival during crises. I am all for prudent regulation unless it is made clear that no public money is to be used to save any private firms. With the rescue that has occurred already, there's a real moral hazard and it will only be a while before the geniues are back with presumably better models.

Predictable Problems for Performance Pay

One area where the principles of economics may aid professions is in the area of designing incentives and payment. Yet my cursory review of the manner in which the emoluments of lawyers, doctors, teachers and other professionals are designed shows that they are often informed by assumptions that may not be sensible to a dispassionate reviewer outside the profession.

Judging the performance of doctors illustrates the dilemma here because medical care is expensive. Oversight institutions therefore design systems to ensure that the doctors have an incentive to perform better by ensuring that the material outcomes such as mortality rates and hospital stay is reduced. Dr. Sandeep Jauhar writes in the NYT about the schemes that doctors have adopted in response to pay for performance schemes in hospitals in the United States.

The essay simply illustrates some principles that any student of economics would advise an administrator going out to measure performance. The first is that all incentive schemes are likely to lead to unintended consequences such as doctors avoiding surgery on the most morbid patients in order to drive up survival rates and other measures that are being monitored. As John Kay states here, over time, the metrics are pursued as an end to themselves as opposed to being viewed for their original intent. As stated here, measuring performance precisely is more nuanced than any simple algorithm or metrics can ensure because professionals quickly learn to game the system.

Why Bata Sells Shoes in Africa

In many forums discussing the continent of Africa, I have heard the sensible claim that this is still a continent where a number of adult people die well before they have ever worn their first pair of new or any shoes. and yet for the large number of African children who attend primary school, the one name that is synonymous with and most recognizable brand is Bata. There's no doubt that this is one of the most ubiquitous companies in the main cities of the African continent.

Ian Austen reports on the passing on of Thomas Bata, the founder's son who was the Chief Executive has passed on. The story states that the corporation that makes nearly 300 million pairs of shoes annually was indeed run by this "shoemaker for the world". As most firms find out in Africa, the continent is a difficult terrain for business but Thomas Bata's statement declaring that the expansion into Africa was motivated by the desired to sell shoes is clearer than many state. All I am certain of is that he found reasonable returns for his efforts selling shoes to a continent with an uncomfortably large number of the world's unshod.

Quote of the Day

"Why? Because renewable energy technologies — what I call “E.T.” — are going to constitute the next great global industry. They will rival and probably surpass “I.T.” — information technology. The country that spawns the most E.T. companies will enjoy more economic power, strategic advantage and rising standards of living. We need to make sure that is America. Big oil and OPEC want to make sure it is not". Thomas Friedman

I have eschewed quotations from popular writers but Thomas Friedman qualifies today because of this very profound sense of insight and the enormous bet that he makes here. In spite of the science some still claim that global warming is not proven and that there's no reason to change course, the quote suggests that future economic prosperity will come from identifying greener sources of energy. I can tell that the demand for the alternatives would be good because they would moderate the costs of petroleum in addition to reducing dependence of a single source that is largely available from member countries of a price fixing institution aka OPEC. Friedman however goes further by stating that it could be the precursor of the countries that would be dominant in the next phase of economic growth. I will keep watching.

Restaurants Refuse to Serve Tap Water

A large majority of goods that exist meet the test of private goods for which an owner is entitled to charge and exchange without compulsion. In the case of bottled water on the one side and diamonds used for jewelery,I accept this principle but state that I eschew purchase of the first and are lucky that whereas I have seen some sparkling examples, cannot afford the latter.

A number of posts on this blog such as this have stated that bottled water in particular is oftentimes sold under false pretense. The first of those is that tap water is inherently unsafe and the second is that all bottled water meets is necessarily filtered and meets the highest safety standards. Behind this is just the need to create the public to believe that consumption of tap water is very risky. Granted that some brands are very classy and tastefully marketed, the cost of bottled water compared to tap water is also reason to ask whether there's any justification for it.

A story in the Guardian reports here that restaurants are also exploiting the fears and the possibility for high profits by refusing to serve tap water to their clients at n cost. I am sure that the antagonism of one's clients to this extent is not necessary for any restaurant that intends to keep its good name. Customers are correct to refuse to pay for bottled water though in this instance, the need for a glass to take a pill should have alerted the manager to use his discretion to the benefit of his customers. A middle ground could be for restaurants to charge a modest amount for tap water because of the real costs that go into serving it and take away the unsightly coercion.