Thursday, September 15, 2016

Information Radiator

An information radiator displays information in a place where passersby can see it. With information radiators, the passersby don’t need to ask questions; the information simply hits them as they pass.
Alistair Cockburn


A picture from 'Kanban in Action' .
Book authors: Marcus Hammarberg and Joakim Sunden.

Saturday, September 10, 2016

Frederick Brooks on Requirements Development

The hardest single part of building a software system is deciding precisely what to build. No other part of the conceptual work is as difficult as establishing the detailed technical requirements, including all the interfaces to people, to machines, and to other software systems. No other part of the work so cripples the resulting system if done wrong. No other part is more difficult to rectify later.

Frederick P. Brooks, Jr., No Silver Bullet: Essence and Accidents of Software Engineering (pp. 13), 1987, University of North Carolina at Chapel Hill

Monday, September 5, 2016

If you’re not failing, you’re probably not trying as hard as you could be

All the failures I’ve overcome? That’s much more important than any successes. I had to repeat ninth grade. I had to repeat the beginning of graduate school. I lost my major source of funding just before I came up for tenure. One of the major things — news flash — that they judge you on for tenure is whether you can support yourself. In each case, it helps if you can think out of the box and think of a new way of doing things. The other thing is: Follow your dreams, even if it does mean taking a risk. If you’re not failing, you’re probably not trying as hard as you could be. And being petrified of failure means you’re going to be probably a very extreme underachiever.
One of the things we recruit people for in my lab is being nice. That’s the ethos we try to encourage. “Nice guys finish last” — isn’t that a terrible message to be sending to the next generation?
I think what goes around comes around. You have to really want all the teams to succeed, all the boats to float. You want your competitors to not fail. It’s hard enough to get progress in the world if everybody’s succeeding.
. . . 
From Alvin Powell's interview with George Church (Professor of Genetics at Harvard Medical School).

Tuesday, July 26, 2016

Naked Economics: Undressing the Dismal Science

Notes collected from a wonderful book by Charles Wheelan: "Naked Economics: Undressing the Dismal Science".



Similarly, the concept of cost is far richer (pardon the pun) than the dollars and cents you hand over at the cash register. The real cost of something is what you must give up in order to get it, which is almost always more than just cash.
. . .
Economists have calculated that a 10 percent decrease in the street price of cocaine eventually causes the number of adult cocaine users to grow by about 10 percent. Similarly, researchers estimated that the first proposed settlement between the tobacco industry and the states (rejected by the U.S. Senate in 1998) would have raised the price of a pack of cigarettes by 34 percent. In turn, that increase would have reduced the number of teenage smokers by a quarter, leading to 1.3 million fewer smoking-related premature deaths among the generation of Americans seventeen or younger at the time.
. . .
This broad view of cost can explain some very important social phenomena, one of which is the plummeting birth rate in the developed world. Having a child is more expensive than it was fifty years ago. This is not because it is more expensive to feed and clothe another little urchin around the house. If anything, those kinds of costs have gone down, because we have become far more productive at making basic consumer goods like food and clothing. Rather, the primary cost of raising a child today is the cost of the earnings forgone when a parent,
still usually the mother, quits or cuts back on work to look after the child at home. Because women have better professional opportunities than ever before, it has grown more costly for them to leave the workforce. My neighbor was a neurologist until her second child was born, at which point she decided to stay home. It’s expensive to quit being a neurologist.
. . .
LeBron James is also the beneficiary of what University of Chicago labor economist Sherwin Rosen dubbed the “superstar” phenomenon. Small differences in talent tend to become magnified into huge differentials in pay as a market becomes very large, such as the audience for professional basketball. One need only be slightly better than the competition in order to gain a large (and profitable) share of that market.
. . .
When gas prices approached $4 a gallon in 2008, the rapid response of American consumers surprised even economists. Americans began buying smaller cars (SUV sales plunged while subcompact sales rose). We drove fewer total miles (the first monthly drop in 30 years). We climbed on public buses and trains, often for the first time; transit ridership was higher in 2008 than at any time since the creation of the interstate highway system
five decades earlier.9 Not all such behavioral changes were healthy. Many consumers switched from cars to motorcycles, which are more fuel efficient but also more dangerous. After falling steadily for years, the number of U.S. motorcycle deaths began to rise in the mid-1990s, just as gas prices began to climb. A study in the American Journal of Public Health estimated that every $1 increase in the price of gasoline is associated with an additional 1,500 motorcycle deaths annually.
. . .
In fact, riding a motorcycle is 2,000 times more dangerous than flying for every kilometer traveled. That’s not an entirely fair comparison since motorcycle trips tend to be much shorter. Still, any given motorcycle journey, regardless of length, is 14 times more likely to end in death than any trip by plane.
. . .
Good policy uses incentives to some positive end. London has dealt with its traffic congestion problems by applying the logic of the market: It raised the cost of driving during the hours of peak demand. Beginning in 2003, the city of London began charging a £5 ($8) congestion fee for all drivers entering an eight-square-mile section of the central city between 7:00 a.m. and 6:30 p.m.8 In 2005, the congestion charge was raised to £8 ($13), and in 2007, the size of the zone for which the fee must be paid was expanded. Drivers are responsible for paying the charge by phone, Internet, or in selected retail shops. Video cameras were installed in some 700 locations to scan license plates and match the data against records of motorists who have paid the charge. Motorists caught driving in central London without paying the fee are fined £80 ($130).
. . .
The plan was designed to take advantage of one of the most basic features of markets: Raising prices reduces demand. Raising the cost of driving discourages some drivers and improves the flow of traffic. Experts also predicted an increase in the use of public transit, both because it is a cheap alternative to driving, but also because buses would be able to move more quickly through central London. (Faster trips lower the opportunity cost of taking public transit.) Within a month, the results were striking. Traffic fell 20 percent (settling after
several years at 15 percent lower). Average speed in the congestion zone doubled; bus delays were cut in half; and the number of bus passengers climbed 14 percent. The only unpleasant surprise was that the program had such a significant deterrent effect on car traffic that revenues from the fee were lower than expected.9 Retailers have also complained that the fee discourages shoppers from visiting central London.
. . .
Good policy uses incentives to channel behavior toward some desired outcome. Bad policy either ignores incentives, or fails to anticipate how rational individuals might change their behavior to avoid being penalized.
. . .
At the same time, Wal-Mart is the ultimate nightmare for Al’s Glass and Hardware in Pekin, Illinois—and for mom-and-pop shops everywhere else. The pattern is well established: Wal-Mart opens a giant store just outside of town; several years later, the small shops on Main Street are closed and boarded up.
. . .
In general, economists tend to favor taxes that are broad, simple, and fair. A simple tax is easily understood and collected; a fair tax implies only that two similar individuals, such as two people with the same income, will pay similar taxes; a broad tax means that revenue is raised by imposing a small tax on a very large group rather than imposing a large tax on a very small group. A broad tax is harder to evade because fewer activities are exempted, and, since the tax rate is lower, there is less incentive to evade it anyway. We should not, for example, impose a large tax on the sale of red sports cars. The tax could be avoided, easily and legally, by buying another color—in which case everybody is made worse off. The government collects no revenue and sports car enthusiasts do not get to drive their favorite color car. This phenomenon, whereby taxes make individuals worse off without making anyone else better off, is referred to as “deadweight loss.”
. . .
(For those who think this is a trivial example, an average of 650 people a year break bones or are hospitalized in Paris after slipping in dog waste, according to the New York Times.)
. . .
At the same time, smokers do provide a benefit to the rest of us. They die young. According to the American Lung Association, the average smoker dies seven years earlier than the average nonsmoker, which means that smokers pay into Social Security and private
pension funds for all of their working lives but then don’t stick around very long to collect the benefits. Nonsmokers, on average, get more back relative to what they paid in. The good folks at Philip Morris have even quantified this benefit for us. In 2001, they released a report on the Czech Republic (just as parliament was considering raising cigarette taxes) showing that premature deaths from smoking save the Czech government roughly $28 million a year in pension and old-age housing benefits. The net benefit of smoking to the government, including taxes and subtracting public health costs, was reckoned to be $148 million.
. . .
What would happen if other companies were allowed to sell Viagra, or if Pfizer were forced to sell the drug more cheaply? The price would fall to the point where it was much closer to the cost of production. Indeed, when a drug comes off patent—the point at which generic substitutes become legal—the price usually falls by 80 or 90 percent.
. . .
The average cost of bringing a new drug to market is somewhere in the area of $600 million. And for every successful drug, there are many expensive research forays that end in failure. Is there a way to provide affordable drugs to low-income Americans—or poor individuals elsewhere in the world—without destroying the incentive to invent those drugs? Yes; the government could buy out the patent when a new drug is invented. The government would pay a firm up front a sum equal to what the firm would have earned over the course of its
twenty-year patent.
. . .
Anyone is free to choose another option at any time. But a shockingly high proportion of people will stay wherever you put them in the first place.
You are an organ donor unless you indicate otherwise, which you are free to do. (In contrast, the United States has an “opt-in” system, meaning that you are not an organ donor unless you sign up to be one.) Inertia matters, even when it comes to something as serious as organ donation. Economists have found that presumed consent laws have a significant positive effect on organ donation, controlling for relevant country characteristics such as religion and health expenditures. Spain has the highest rate of cadaveric organ donations in the world—50 percent higher than the United States.
. . .
One sad irony of September 11 was that one simple-minded view of government—that “taxpayers know better what to do with their money than the government does”—was exposed for its hollowness. Individual taxpayers cannot gather intelligence, track down a fugitive in the mountains of Afghanistan, do research on bioterrorism, or protect planes and airports. It is true that if the government takes money out of my paycheck, then there are
things that would have given me utility that I can no longer buy. But it is also true that there are things that would make me better off that I cannot buy for myself. I cannot build a missile defense system, or protect endangered species, or stop global warming, or install traffic lights, or regulate the New York Stock Exchange, or negotiate lower trade barriers with China.
Government enables us to work collectively to do those things.
. . .
There is an old joke, one of Ronald Reagan’s favorites, that goes something like this: A Soviet woman is trying to buy a Lada, one of the cheap automobiles made in the former Soviet Union. The dealer tells her that there is a shortage of these cars, despite their reputation for shoddy quality. Still, the woman insists on placing an order. The dealer
gets out a large, dusty ledger and adds the woman’s name to the long waiting list. “Come back two years from now on March 17th,” he says. The woman consults her calendar. “Morning or afternoon?” she asks. “What difference does it make?” the surly dealer replies. “That’s two years from now!”
. . .
Tanzanian researcher Wen Kilama once famously pointed out that if seven Boeing 747s, mostly filled with children, crashed into Mt. Kilimanjaro every day, then the world would take notice. That is the scale on which malaria kills its victims.)
. . .
Instead, he raised the issue in a column for Business Week about how the government chose to limit the total catch. At the time he was writing, the government had imposed an aggregate quota on the quantity of striped bass that could be harvested every season. Mr. Becker wrote, “Unfortunately, this is a very poor way to control fishing because it encourages each fishing boat to catch as much as it can early in the season, before other boats
bring in enough fish to reach the aggregate quota that applies to all of them.” Everybody loses: The fishermen get low prices for their fish when they sell into a glut early in the season; then, after the aggregate quota is reached early in the season, consumers are unable to get any striped bass at all. Several years later, Massachusetts did change its system so that the striped bass quota is divided among individual fishermen; the total catch is still limited but individual fishermen can fulfill their quota anytime during the season. The key to thinking like an economist is recognizing the trade-offs inherent to fiddling with markets. Regulation can disrupt the movement of capital and labor, raise the cost of goods and services, inhibit innovation, and otherwise shackle the economy (such as by letting mosquitoes escape
alive). And that is just the regulation inspired by good intentions.
. . .
Insurance companies have another subtle tool. They can design policies, or “screening” mechanisms, that elicit information from their potential customers. This insight, which is applicable to all kinds of other markets, earned Joseph Stiglitz, an economist at Columbia University and a former chief economist of the World Bank, a share of the 2001 Nobel Prize. How do firms screen customers in the insurance business? They use a deductible.
Customers who consider themselves likely to stay healthy will sign up for policies that have a high deductible.
In exchange, they are offered cheaper premiums. Customers who privately know that they are likely to have costly bills will avoid the deductible and pay a higher premium as a result. (The same thing is true when you are shopping for car insurance and you have a sneaking suspicion that your sixteen-year-old son is an even worse driver than most sixteen-year-olds.) In short, the deductible is a tool for teasing out private information; it forces customers to sort themselves.
. . .
Businesses routinely advertise their longevity. That sign outside the butcher proclaiming “Since 1927” is a politic way of saying, “We wouldn’t still be here if we ripped off our customers.”
. . .
The trappings of success—the paneling, the marble, the art collection—have no inherent relation to the professional conduct of the firm. Rather, we interpret them as “signals” that reassure us that the firm is top-notch. They are to markets what a peacock’s bright feathers are to a prospective mate: a good sign in a world of imperfect information.
. . .
In the world of Econ 101, all parties have “perfect information.” The graphs are neat and tidy; consumers and producers know everything they could possibly want to know. The world outside of Econ 101 is more interesting, albeit messier. A state patrolman who has pulled over a 1990 Grand Am with a broken taillight on a deserted stretch of Florida highway does not have perfect information. Nor does a young family looking for a safe and dependable nanny, or an insurance company seeking to protect itself from the extraordinary costs of HIV/AIDS. Information matters. Economists study what we do with it, and, sometimes
more important, what we do without it.
. . .
Human capital is the sum total of skills embodied within an individual: education, intelligence, charisma, creativity, work experience, entrepreneurial vigor, even the ability to throw a baseball fast. It is what you would be left with if someone stripped away all of your assets—your job, your money, your home, your possessions—and left you on a street corner with only the clothes on your back.
. . .
(Remember, human capital embodies not only classroom training but also perseverance, honesty, creativity—virtues that lend themselves to finding work.)
. . .
f this example sounds contrived, consider the case of the Naval Air Warfare Center (NAWC) in Indianapolis, a facility that produced advanced electronics for the navy until the late 1990s. NAWC, which employed roughly 2,600 workers, was slated to be closed as part of the military’s downsizing. We’re all familiar with these plant-closing stories. Hundreds or thousands of workers lose their jobs; businesses in the surrounding community begin to wither because so much purchasing power has been lost. Someone comes on camera and says, “When the plant closed back in [some year], this town just began
to die.” But NAWC was a very different story.4 One of its most valuable assets was its workforce, some 40 percent of whom were scientists or engineers. Astute local leaders, led by Mayor Stephen Goldsmith, believed that the plant could be sold to a private buyer. Seven companies filed bids; Hughes Electronics was the winner.
On a Friday in January 1997, the NAWC employees went home as government employees; the following Monday, 98 percent of them came to work as Hughes employees. (And NAWC became HAWC.) The Hughes executives I interviewed said that the value of the acquisition lay in the people, not just the bricks and mortar.
Hughes was buying a massive amount of human capital that it could not easily find anywhere else. This story contrasts sharply with the plant closings that Bruce Springsteen sings about, where workers with limited education find that their narrow sets of skills have no value once the mill/mine/factory/plant is gone. The difference is human capital. Indeed, economists can even provide empirical support for those Springsteen songs.
Labor economist Robert Topel has estimated that experienced workers lose 25 percent of their earnings capacity in the long run when they are forced to change jobs by a plant closing.
. . .
In the developing world, the impact of human capital can be even more profound. Economists have found that a year of additional schooling for a woman in a low-income country is associated with a 5 to 10 percent reduction in her child’s likelihood of dying in the first five years of life.
. . .
Economist Gary Becker, who was awarded the Nobel Prize for his work in the field of human capital, reckons that the stock of education, training, skills, and even the health of people constitutes about 75 percent of the wealth of a modern economy. Not diamonds, buildings, oil, or fancy purses—but things that we carry around in our heads.
. . .
High levels of human capital create a virtuous cycle; well-educated parents invest heavily in the human capital of their children. Low levels of human capital have just the opposite effect. Disadvantaged parents beget disadvantaged children, as any public school teacher will tell you. Mr. Becker points out, “Even small differences among children in the preparation provided by their families are frequently multiplied over time into large differences when they are teenagers. This is why the labor market cannot do much for school dropouts who can hardly read and never developed good work habits, and why it is so difficult to devise policies to help these groups.”
. . .
America is rich because Americans are productive. We are better off today than at any other point in the history of civilization because we are better at producing goods and services than we have ever been, including things like health care and entertainment. The bottom line is that we work less and produce more. In 1870, the typical household required 1,800 hours of labor just to acquire its annual food supply; today, it takes about 260 hours of
work. Over the course of the twentieth century, the average work year has fallen from 3,100 hours to about 1,730 hours. All the while, real gross domestic product (GDP) per capita—an inflation-adjusted measure of how much each of us produces, on average—has increased from $4,800 to more than $40,000. Even the poor are living extremely well by historical standards. The poverty line is now at a level of real income that was attained only by those in the top 10 percent of the income distribution a century ago. As John Maynard Keynes once noted, “In the long run, productivity is everything.”
. . .
The answer to that debate matters enormously. From 1947 to 1975, productivity grew at an annual rate of 2.7 percent a year. From 1975 until the mid-1990s, for reasons that are still not fully understood, productivity growth slowed to 1.4 percent a year. Then it got better again; from 2000 to 2008, productivity growth returned to a much healthier 2.5 percent annually. That may seem like a trivial difference; in fact, it has a profound effect on
our standard of living. One handy trick in finance and economics is the rule of 72; divide 72 by a rate of growth (or a rate of interest) and the answer will tell you roughly how long it will take for a growing quantity to double (e.g., the principal in a bank account paying 4 percent interest will double in roughly 18 years). When productivity grows at 2.7 percent a year, our standard of living doubles every twenty-seven years. At 1.4 percent, it doubles every fifty-one years.
. . .
Birth control, no matter how dependable, works only to the extent that families prefer fewer children. As a result, one of the most potent weapons for fighting population growth is creating better economic opportunities for women, which starts by educating girls. Taiwan doubled the number of girls graduating from high school between 1966 and 1975. Meanwhile, the fertility rate dropped by half.
. . .
Most economists would agree that the long-term trend is a growing gap between America’s rich and poor. The most stunning action has been at the top of the top. In 1979, the wealthiest 1 percent of Americans earned 9 percent of the nation’s total income; now they get 16 percent of America’s annual collective paycheck.
. . .
Of course, common sense suggests otherwise. H. L. Mencken once noted that a wealthy man is a man who earns $100 a year more than his wife’s sister’s husband. Some economists have belatedly begun to believe that he was on to something. David Neumark and Andrew Postlewaite looked at a large sample of American sisters in an effort to understand why some women choose to work outside of the home and others do not. When the researchers controlled for all the usual explanations—unemployment in the local labor market, a woman’s education and work experience, etc.—they found powerful evidence to support H. L. Mencken’s wry observation: A woman in their sample was significantly more likely to seek paid employment if her sister’s husband earned more than her own.
. . .
“Complexity will be the hallmark of our age,” he noted. “The demand everywhere will be for ever higher levels of human capital. The countries that get that right, the companies that understand how to mobilize and apply that human capital, and the schools that produce it...will be the big winners of our age. For the rest, more backwardness and more misery for their own citizens and more problems for the rest of us.”
. . .
Modern economies cannot survive without credit. Indeed, the international development community has begun to realize that making credit available to entrepreneurs in the developing world, even loans as small as $50 or $100, can be a powerful tool for fighting poverty. Opportunity International is one such “microcredit” lender. In 2000, the organization made nearly 325,000 low-collateral or non-collateral loans in twenty-four developing
countries. The average loan size was a seemingly paltry $195. Esther Gelabuzi, a widow in Uganda with six children, represents a typical story. She is a professional midwife, and she used a tiny loan by Western standards to set up a clinic (still without electricity).
She has since delivered some fourteen hundred babies, charging patients from $6 to $14 each. Opportunity International claims to have created some 430,000 jobs. As impressive, the repayment rate on the micro-loans is 96 percent.
. . .
Data notwithstanding, the efficient markets theory is obviously not the most popular idea on Wall Street. There is an old joke about two economists walking down the street. One of them sees a $100 bill lying in the street and points it out to his friend. “Is that a $100 bill lying in the gutter?” he asks. “No,” his friend replies. “If it were a $100 bill, someone would have picked it up already.” So they walk on by.
. . .
Bill Bradley opposed the ethanol subsidy during his three terms as a senator from New Jersey (not a big corn-growing state). Indeed, some of his most important accomplishments as a senator involved purging the tax code of subsidies and loopholes that collectively do more harm than good. But when Bill Bradley arrived in Iowa as a Democratic presidential candidate back in 1992, he “spoke to some farmers” and suddenly found it in his heart to support tax breaks for ethanol. In short, he realized that ethanol is crucial to Iowa voters, and Iowa is crucial to the presidential race. Since then, every mainstream presidential candidate has supported the ethanol subsidy, except one: John McCain. To his credit, Senator
McCain generally opposed ethanol subsidies during his presidential runs in both 2000 and 2008. While Senator McCain’s “straight talk” is admirable, let us remind ourselves of one important detail: John McCain is not currently president of the United States. That would be Barack Obama—an ethanol subsidy supporter.
. . .
Ethanol is not a case of a powerful special interest pounding the rest of us into submission. Farmers are a scant 2 or 3 percent of the population; even fewer of them actually grow corn. If squeezing favors out of the political process were simply a matter of brute strength, then those of us who can’t tell a heifer from a steer should be kicking the farmers around. Indeed, America’s right-handed voters could band together and demand tax breaks at the expense of the lefties. And we could really have our way with those mohair farmers. But that’s not what
happens.
. . .
Becker theorized that, all else equal, small, well-organized groups are most successful in the political process.
Why? Because the costs of whatever favors they wrangle out of the system are spread over a large, unorganized segment of the population. Think about ethanol again. The benefits of that $7 billion tax subsidy are bestowed on a small group of farmers, making it quite lucrative for each one of them. Meanwhile, the costs are spread over the remaining 98 percent of us, putting ethanol somewhere below good oral hygiene on our list of everyday concerns. The
opposite would be true with my plan to have left-handed voters pay subsidies to right-handed voters. There are roughly nine right-handed Americans for every lefty, so if every right-handed voter were to get some government benefit worth $100, then every left-handed voter would have to pay $900 to finance it. The lefties would be hopping mad about their $900 tax bills,
probably to the point that it became their preeminent political concern, while the righties would be only modestly excited about their $100 subsidy. An adept politician would probably improve her career prospects by voting with the lefties.

But in countries where the farming population is relatively large, such as China and India, the subsidies go the other way. Farmers are forced to sell their crops at below-market prices so that urban dwellers can get basic food items cheaply. In the one case, farmers get political favors; in the other, they must pay for them. What makes these examples logically consistent is that in both cases the large group subsidizes the smaller group.

In politics, the tail can wag the dog. This can have profound effects on the economy.
. . .
Consider that at the beginning of the fifteenth century, China was far more technologically advanced than the West. China had a superior knowledge of science, farming, engineering, even veterinary medicine. The Chinese were casting iron in 200 B.C., some fifteen hundred years before the Europeans. Yet the Industrial Revolution took place in Europe while Chinese civilization languished. Why? One historical interpretation posits that the
Chinese elites valued stability more than progress. As a result, leaders blocked the kinds of wrenching societal changes that made the Industrial Revolution possible. In the fifteenth century, for example, China’s rulers banned long-sea-voyage trade ventures, choking off trade as well as the economic development, discovery, and social change that come with them.
. . .
Would campaign finance reform change anything? At the margins, if that. Money is certainly one tool for grabbing a politician’s attention, but there are others. If the dairy farmers (who benefit from federal price supports) can’t give money, they will hire lobbyists, ring doorbells, hold meetings, write letters, threaten hunger strikes, and vote as a bloc. Campaign finance reform does not change the fact that the dairy farmers care deeply about their subsidy while the people who pay for it don’t care much at all. The democratic process will always favor small, well-organized groups at the expense of large, diffuse groups. It’s not just how many people care one way or the other; it’s how much they care. Two percent who care deeply about something are a more potent political force than the 98 percent who feel the opposite but aren’t motivated enough to do anything about it.
. . .
Compare how long we had to work in 2000 to buy basic items with how long we had to work to buy the same items in 1900. As the officials at the Dallas Fed explain, “Making money takes time, so when we shop, we’re really spending time. The real cost of living isn’t measured in dollars and cents but in the hours and minutes we must work to live.”1 So here goes: A pair of stockings cost 25 cents in 1900. Of course, the average wage at the time was 14.8 cents an hour, so the real cost of stockings at the beginning of the twentieth century was one hour and forty-one minutes of work for the average American. If you walk into a department store today, stockings (pantyhose) are seemingly more expensive than they were in 1900
—but they’re not. By 2000, the price had gone up, but our wages had gone up even faster. Stockings in 2000 cost around $4, while America’s average wage was over $13 an hour. As a result, a pair of stockings cost the average worker only eighteen minutes of time, a stunning improvement from an hour and forty-one minutes a century earlier.
. . .
Having said all that, GDP is, like any other statistic, just one measure. Figure skating and golf notwithstanding, it is hard to collapse complex entities into a single number. The list of knocks against GDP as a measure of social progress is a long one. GDP does not count any economic activity that is not paid for, such as work done in the home. If you cook dinner, take care of the kids, and tidy up around the house, none of that counts toward the nation’s official output. However, if you order out food, drop your kids off at a child care center, and hire a cleaning lady, all of that does. Nor does GDP account for environmental degradation; if a company clear-cuts a virgin forest to make paper, the value of the paper shows up in the GDP figures without any corresponding debit for the forest that is now gone.
. . .
China has taken this last point to heart. Chinese GDP growth over the past decade has been the envy of the world, but it has come at the cost of significant environmental degradation. Of the twenty-five most polluted cities in the world, sixteen are in China (you’ve never heard of most of them). China’s State Environmental Protection Administration has begun to calculate “Green GDP” figures, which seek to evaluate the true quality of economic growth by subtracting the costs of environmental damage.
Using this metric, China’s 10 percent GDP growth in 2004 was really closer to 7 percent when the $64 billion in pollution costs are taken into account. Green GDP has an obvious logic. The Wall Street Journal explains, “While GDP looks at the market value of goods and services produced in a country each year, it ignores the fact that a nation might be fueling its expansion by polluting or burning through natural resources in an unsustainable
way. In fact, the usual methods of calculating GDP make destroying the environment look good for the economy. If an industry pollutes in the process of manufacturing products, and the government pays to clean up the mess, both activities add to GDP.”
. . .
GDP does not take into account the distribution of income; GDP per capita is a simple average that can mask enormous disparities between rich and poor. If a small minority of a country’s population grow fabulously rich while most citizens are getting steadily poorer, per capita GDP growth could still look impressive.
. . .
The United Nations has created the Human Development Index (HDI) as a broader indicator of national economic health. The HDI uses GDP as one of its components but also adds measures of life expectancy, literacy, and educational attainment. The United States ranked thirteenth in the 2009 report; Norway was number one, followed by Australia and Iceland. HDI is a good tool for assessing progress in developing countries; it tells us less about overall well-being in rich countries where life expectancy, literacy, and educational attainment are
already relatively high.
. . .
During the financial crisis, the problems on Wall Street quickly spread to other countries. Americans—who are collectively the biggest consumers in the world—bought fewer imported goods, which harmed exporting economies around the globe. America’s GDP contracted at an annual rate of 5.4 percent in the fourth quarter of 2008. You thought we had it bad? Singapore’s economy fell in the same quarter at an annual rate of 16 percent, and Japan’s by 12 percent.
. . .
Unemployment. My mother does not have a job, but she is not unemployed. How could that be? This is not one of those strange logic riddles. The unemployment rate is the fraction of workers who would like to work but cannot find jobs. (My mother is retired and has no interest in working.)

America’s unemployment rate fell below 4 percent during the peak of the boom in the 1990s; it has since climbed over 10 percent. Even that may understate the number of people out of work. When Americans without jobs give up on finding one, they no longer count as unemployed and instead become “discouraged workers.”
. . .
Anyone who cares about unemployment should care about economic growth, too. The general rule of thumb, based on research done by economist Arthur Okun and known thereafter as Okun’s law, is that GDP growth of 3 percent a year will leave the unemployment rate unchanged. Faster or slower growth will move the unemployment rate up or down by one-half a percentage point for each percentage point change in GDP. Thus, GDP growth of 4 percent would lower unemployment by half a percentage point, and GDP growth of only 2 percent would cause unemployment to rise by half a percentage point. This relationship is not an iron law; rather, it describes the relationship in America between GDP growth and unemployment over the five-decade period studied by Mr. Okun, roughly 1930 to 1980.
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Income inequality. We care about the size of the pie; we also care about how it is sliced. Economists have a tool that collapses income inequality into a single number, the Gini index.* On this scale, a score of zero represents total equality—a state in which every worker earns exactly the same. At the other end, a score of 100 represents total inequality—a state in which all income is earned by one individual. The countries of the world can be arrayed along this continuum. In 2007, the United States had a Gini index of 45, compared to 28 for France, 23 for Sweden, and 57 for Brazil. By this measure, the United States has grown more unequal over the past several decades. America’s Gini coefficient was 36.5 in 1980 and 37.9 in 1950.
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Therein lies the problem. Americans are having fewer children and living longer. This shift means that there are fewer workers to pay for every retiree—a lot fewer. In 1960, there were five workers for every retiree. Now there are three workers for every retiree. By 2032, there will be only two. Imagine Social Security (or Medicare) as a seesaw in which payments made by workers are on one side and benefits collected by retirees are on the other.
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In nearly every society, some kind of money has evolved to make trade easier. (The word “salary” comes from the wages paid to Roman soldiers, who were paid in sacks of sal—salt.)
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Then something strange happened. In 1971, the United States permanently went off the gold standard. At that point, every paper dollar became redeemable for...nothing.

A dollar is a piece of paper whose value derives solely from our confidence that we will be able to use it to buy something we need in the future.
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The most instructive way to think about inflation is not that prices are going up, but rather that the purchasing power of the dollar is going down.

A dollar buys less than it used to. Therein lies the link between the Federal Reserve, or any central bank, and economic devastation. A paper currency has value only because it is scarce. The central bank controls that scarcity. Therefore a corrupt or incompetent central bank can erode, or even completely destroy, the value of our money.
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As a side note, you should recognize the difference between real and nominal interest rates. The nominal rate is used to calculate what you have to pay back; it’s the number you see posted on the bank window or on the front page of a loan document. If Wells Fargo is paying a rate of 2.3 percent on checking deposits, that’s the nominal rate. This rate is different from the real interest rate, which takes inflation into account and therefore reflects the true cost of “renting” capital. The real interest rate is the nominal rate minus the rate of inflation.
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As a result, long-term interest rates dropped sharply, making homes and other big purchases more affordable. Robert Barro, a Harvard economist who has studied economic growth in nearly one hundred countries over several decades, has confirmed that significant inflation is associated with slower real GDP growth.
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Governments can also benefit in the short run from what economists refer to as the “inflation tax.” Suppose you are running a government that is unable to raise taxes through conventional means, either because the infrastructure necessary to collect taxes does not exist or because your citizens cannot or will not pay more. Yet you have government workers, perhaps even a large army, who demand to be paid. Here is a very simple solution. Buy some beer, order a pizza (or whatever an appropriate national dish might be), and begin running the printing presses at the national mint. As soon as the ink is dry on your new pesos, or rubles, or dollars, use them to pay your government workers and soldiers. Alas, you have taxed the people of your country —indirectly. You have not physically taken money from their wallets; instead, you’ve done it by devaluing the money that stays in their wallets. The Continental Congress did it during the Revolutionary War; both sides did it during the Civil War; the German government did it between the wars; countries like Zimbabwe are doing it
now.
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By then, the politicians may have gotten what they wanted: reelection. A central bank that is not sufficiently insulated from politics can throw a wild party before the votes are cast. There will be lots of dancing on the tables; by the time voters become sick with an inflation-induced hangover, the election is over.
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Political independence is crucial if monetary authorities are to do their jobs responsibly. Evidence shows that countries with independent central banks—those that can operate relatively free of political meddling—have lower average inflation rates over time.
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Fed officials are prickly about political meddling. In the spring of 1993, I had dinner with Paul Volcker, former chairman of the Federal Reserve. Mr. Volcker was teaching at Princeton, and he was kind enough to take his students to dinner. President Clinton had just given a major address to a joint session of Congress and Fed chairman Alan Greenspan, Volcker’s successor, had been seated next to Hillary Clinton. What I remember mostabout the dinner was Mr. Volcker grumbling that it was inappropriate for Alan Greenspan to have been seated next to the president’s wife. He felt that it sent the wrong message about the Federal Reserve’s independence from the executive branch. That is how seriously central bankers take their political independence.
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If prices are falling, then borrowing $100 today and paying back $100 next year is not costless. The $100 you pay back has more purchasing power than the $100 you borrowed, perhaps much more. The faster prices are falling, the higher your real cost of borrowing.
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In a modern economy, more than three-quarters of goods and services are nontradable.
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Using the same Mumbai meal example, you should recognize why PPP is the most accurate mechanism for comparing incomes across countries. At official exchange rates, a Mumbai salary may look very low when converted to dollars, but because many nontradable goods and services are much less expensive in Mumbai than in the United States, a seemingly low salary may buy a much higher standard of living than the official exchange rate would suggest.
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In July 2009, a Big Mac cost an average of $3.57 in the United States and 12.5 renminbi in China, suggesting that $3.57 should be worth roughly 12.5 renminbi (and $1 worth 3.5 renminbi). But that was not even close to the official exchange rate. At the bank, $1 bought 6.83 renminbi—making the renminbi massively undervalued relative to what “burgernomics” would predict. (Conversely, the dollar is overvalued by the same measure.)
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In 2001, when the dollar was strong by historical standards, a Wall Street Journal headline proclaimed, “G.M. Official Says Dollar Is Too Strong for U.S. Companies.” When the Japanese yen appreciates against the dollar by a single yen, a seemingly tiny amount given that the current exchange rate is one dollar to 90 yen, Toyota’s annual operating earnings fall by $450 million.
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In 1933, Franklin Roosevelt ended the right of individual Americans to exchange cash for gold, but nations retained that right when making international settlements. In 1971, Richard Nixon ended that, too. Inflation in the United States was making the dollar less desirable; given a choice between $35 and an ounce of gold, foreign governments were increasingly demanding the gold. After a weekend of deliberation at Camp David, Nixon unilaterally “closed the gold window.” Foreign governments could redeem gold for dollars on Friday—but not on Monday. Since then, the United States (and all other industrialized nations) have operated with “fiat money,” which is a fancy way of saying that those dollars are just paper.
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The gold standard fixes currencies against one another; floating rates allow them to fluctuate as economic conditions dictate, even minute by minute. With floating exchange rates, governments have no obligation to maintain a certain value of their currency, as they do under the gold standard.
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The primary drawback of this system is that currency fluctuations create an added layer of uncertainty for firms doing international business. Ford may make huge profits in Europe only to lose money in the foreign exchange markets when it tries to bring the euros back home. So far, exchange rate volatility has proven to be a drawback of floating rates, though not a fatal flaw. International companies can use the financial markets to hedge their currency risk. For example, an American firm doing business in Europe can enter into a futures contract that locks in some euro-dollar exchange rate at a specified future date—just as Southwest Airlines might lock in future fuel prices or Starbucks might use the futures market to protect against an unexpected surge in the price of coffee beans.
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Soft currencies were a more serious problem for the few U.S. companies doing business in communist countries with soft currencies. In 1974, Pepsi struck a deal to sell its products in the Soviet Union. Communists drink cola, too. But what the heck was Pepsi going to do with millions of rubles? Instead, Pepsi and the Soviet government opted for old-fashioned barter. Pepsi swapped its soft-drink syrup to the Soviet government in exchange for Stolichnaya vodka, which did have real value in the West
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Exports rise and consumers are made richer by cheap imports; both of those things create demand for new workers elsewhere in the economy. Trade-related job losses in America tend to be small relative to the economy’s capacity to produce new jobs. One post-NAFTA study concluded that an average of 37,000 jobs per year were lost from 1990 to 1997 because of free trade with Mexico, while over the same period the economy was creating 200,000 jobs per month.5 Still, “in the long run” is one of those heartless phrases—along with “transition costs” or “short-term displacement”—that overly minimize the human pain and disruption.
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Yes, the economic gains from trade outweigh the losses, but the winners rarely write checks to the losers. And the losers often lose badly.
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Environmental quality is a luxury good in the technical sense of the word, which means that we place more value on it as we get richer. Therein lies one of the powerful benefits of globalization: Trade makes countries richer; richer countries care more about environmental quality and have more resources at their disposal to deal with pollution.
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Paul Krugman has nicely summarized the anxiety over globalization with an old French saying: Anyone who is not a socialist before he is thirty has no heart; anyone who is still a socialist after he is thirty has no head.
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Peruvian economist Hernando de Soto has argued convincingly that these kinds of informal property arrangements should not be ignored. He reckons that the total value of property held but not legally owned by poor people in the developing world is worth more than $9 trillion. That is a lot of collateral gone to waste, or “dead capital” as he calls it. To put that
number in perspective, it is 93 times the amount of development assistance that the rich countries provided to the developing world over the past three decades.
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Excessive regulation goes hand in glove with corruption. Government bureaucrats throw up hurdles so that they can extort bribes from those who seek to get over or around them. Installing a vending machine in Moscow becomes much easier if you hire the right “security firm.” What about opening a business elsewhere in the developing world? Again, Peruvian economist Hernando de Soto has done fascinating work. He and fellow team members documented their efforts to open a one-person clothing stall on the outskirts of Lima as a legally registered business. He and his researchers vowed that they would not pay bribes so that their efforts would reflect the full cost of complying with the law. (In the end, they were asked for bribes on ten occasions and paid them twice to prevent the project from stalling completely.) The team worked six hours a day for forty-two weeks in order to get eleven different permits from seven different government bodies. Their efforts, not including the time, cost $1,231, or 31 times the monthly minimum wage in Peru—all to open a one-
person shop.
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Skilled workers usually need other skilled workers in order to succeed. Someone who is trained as a heart surgeon can succeed only if there are well-equipped hospitals, trained nurses, firms that sell drugs and medical supplies, and a population with sufficient resources to pay for heart surgery. Poor countries can become caught in a human capital trap; if there are few skilled workers, then there is less incentive for others to invest in acquiring skills. Those who do become skilled find that their talents are more valuable in a region or country with a higher proportion of skilled workers, creating the familiar “brain drain.” As World Bank economist William Easterly has written, the result can be a vicious cycle: “If a nation starts out skilled, it gets more skilled. If it starts out unskilled, it stays unskilled.”
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ropical weather is wonderful for vacation; why is it so bad for everything else? The answer, according to Mr. Sachs, is that high temperatures and heavy rainfall are bad for food production and conducive to the spread of disease. As a result, two of the major advances in rich countries—better food production and better health—cannot be replicated in the tropics. Why don’t the residents of Chicago suffer from malaria? Because cold winters control mosquitoes—not because scientists have beaten the disease. So in the tropics, we find yet
another poverty trap; most of the population is stuck in low-productivity farming. Their crops therefore their lives—are unlikely to get better in the face of poor soil, unreliable rainfall, and chronic pests.
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Pharmaceutical companies earn profits by developing blockbuster drugs for consumers in the developed world. Of the 1,233 new medicines granted patents between 1975 and 1997, only thirteen were for tropical diseases.
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Argentina is the poster child for irresponsible monetary policy; from 1960 to 1994, the average Argentine inflation rate was 127 percent per year. To put that in perspective, an Argentine investor who had the equivalent of $1 billion in savings in 1960 and kept all of it in Argentine pesos until 1994 would have been left with the equivalent spending power of one-thirteenth of a penny.
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Mineral riches change an economy. First, they divert resources away from other industries, such as manufacturing and trade, that can be more beneficial to long-term growth. For example, the Asian tigers were resource-poor; their path to prosperity began with labor-intensive exports and progressed into more technology-intensive exports. The countries grew steadily richer in the process. Second, resource rich economies become far more vulnerable to wild swings in the price of commodities. A country built on oil will have a rough stretch
when the barrel price drops from $90 to $15. Meanwhile, demand for a nation’s currency rises as the rest of the world begins to buy its diamonds or bauxite or oil or natural gas. That will cause the currency to appreciate, which, we now know, makes the country’s other exports, such as manufactured goods, more expensive. Economists started referring to the perverse effects of abundant natural resources as “Dutch disease” after observing the economic effects of an enormous North Sea natural gas discovery by the Netherlands in the 1950s. The spike in natural gas exports drove up the value of the Dutch guilder (as the rest of the world demanded more guilders in order to buy Dutch natural gas), making life more
difficult for other exporters. The government also used the gas revenues to expand social spending, which raised employers’ social security contributions and therefore their production costs. The Dutch had long been a nation of traders, with exports making up more than 50 percent of GDP. By the 1970s, other export industries, the traditional lifeblood of the economy, had grown far less competitive. One business publication noted, “Gas so
distended and distorted the workings of the economy that it became a mixed blessing for a trading nation.”
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Poor countries, like poor people, often have very bad habits. Providing support can prolong behavior that needs to be changed. One study came to the unsurprising conclusion that foreign aid has a positive effect on growth when good policies are already in place, and has little impact on growth when they are not. The authors recommended that aid be predicated on good policy, which would make the aid more effective and provide an incentive for governments to implement better policies.
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The American system is a richer, more dynamic, more entrepreneurial economy—and harsher and more unequal. It is conducive to creating a big pie in which the winners get huge slices. The European system is better at guaranteeing at least some pie for everybody. Capitalism comes in all kinds of flavors. Which one will we choose?
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If we get the incentives right, we can use markets to do all kinds of things. Consider the case of rare diseases. However bad it is to have a serious illness, it is worse to have a serious illness that is also rare. At one point, there were some five thousand diseases considered so rare that drug companies ignored them because they had no hope of recovering their research costs even if they found a cure.

In 1983, Congress passed the Orphan Drug Act, which provided incentives to make such work more profitable: research grants, tax credits, and exclusive rights to market and price drugs for rare diseases—so-called orphan drugs—for seven years. In the decade before the act, fewer than ten orphan drugs came to market. Since the act, roughly two hundred such drugs have come to market.

Markets don’t solve social problems on their own (or else they wouldn’t be social problems). But if we design solutions with the proper incentives, it feels a lot more like rowing downstream.
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