For my Market Design class, I’m analyzing a hypothetical scale-up of the Bandhan Ultra Poor graduation program studied by Course 14 Professors Banerjee and Duflo. My project will also acknowledge some of the concerns raised by this harrowing report on the future of microfinance in India from the NYT (via my Market Design professor Al Roth):

http://marketdesigner.blogspot.com/2010/11/microfinancial-crisis.html

I’m a sucker for good economics, but I’ll admit that there are places where it doesn’t belong. One of these places is often in the mouths of political candidates during election season–for many reasons beyond the singular point of this piece. But the point that I’d like to harp on is the strict divide between economics and political debate– namely, that seven times out of ten it shouldn’t be part of yours just yet.

Economics is the rational study of efficiency: how best to maximize utility, catch a derivative and set it to zero. Government is a study of sometimes irrational fairness. The two work closely together and are necessarily intertwined in practice, but also necessarily unequal in discourse and theory. They are not on par, cannot be used interchangeably in the pursuit of good policy, and do not deserve the same pedestal in a democratic society such as ours for given reasons.

The basis of our government and our culture as a whole favors being fair over being efficient– the spirit of democracy feeds on the idea that there is no number that outweighs justice. It brings to mind a number of things: utilitarianism for one, which with a special calculus quantifies utility in order to reach a balanced equation for the kind of problem seemingly found only in Omelas,. How many people’s marginal happiness is worth a single child’s undeserved torment? Economics claims that this can be a fair amount. Justice says zero, uncompromisingly.

In a rational society we maximize happiness and profit: leaving poor children without textbooks is a justified solution so long as the detriment of their situation is outweighed by the utility that society receives from taxpayers keeping their dollar. In a just society we maximize equality of opportunity– when that equality is breached, when one child grows up with an unequal capability to engage his or her society as an individual, we know that we have failed on a major level. The fact that America is allowed to forget this mantra in favor of economic buzzwords during political open season is intolerably ignoring the foundation of our society.

This revolves back around to debate and good policy. Because our country favors fairness over economics, good debaters can only argue economics once they’ve justified that their policy is fair. And conversely, once you’ve justified that something is fair it’s your duty to justify that it is also maximally economically efficient, given the constraints. But substituting one for the other is building houses of long elaborate assertions on top of a foundation made of sand– and it drives me crazy as an observer.

Which brings me lastly to government cheese– a colloquial term for government handouts provided to the extremely poor, motivated by a program during the Reagan administration that actually, literally, distributed surplus cheese to those on welfare.
I like to keep my opinions moderate and blunt. Furthermore, I don’t believe there’s a binary opinion out there that could reasonably cover as broad an issue as austerity in government spending. But I do have one binary option to present to anyone considering political office: before you consider abusing economics, please either justify first that your platform preserves the foundations of what we consider justice or get off the podium.

Ever wonder why in New York, there are lines of Japanese tourists at Saks and Fifth Avenue? Or why wherever there are designer outlets, there are small middle-aged Asian women teeter-tottering from the weight of their designer haul?

The answer? Japan’s premium pricing.

When foreign goods enter Japan’s market, they become, by default, a ‘premium good’. This is the consequence of Japan’s government policy where protection tariffs increase the cost of foreign goods and informal cartels keep the pricing high. A $298 designer bag in the U.S. has a market price of $711 in Japan. However, with the advent of online auction sites and mid-street level brands like Uniqlo (which has their production site in China), Japanese consumers are becoming more and more disillusioned and dissatisfied with the high costs they price for designer goods. What will be interesting to see is if government policy will actually change or if Japanese consumers will continue to embark on ‘shopping trips’ to the U.S. and Europe for their fill of premium goods at Western market value.

Reference: Business of Fashion, “Japan’s Premium Pricing”

Looking for some interesting economics reading? I found this paper today on the ‘economics of drinking.’ http://repec.rwi-essen.de/files/REP_09_158.pdf

The title is a bit deceptive, for the ideas in that paper can be applied to any drug. In essence, alcohol acts as a ‘social lubricant’ that facilitates easier communication between players in a game (or some interaction.) This therefore allows for the participants in the game/interaction to understand the opponent, and thus facilitate full information.

The theory is a bit sophisticated, but those who have taken 14.04, or other advanced game theory classes, could work through it; those in 14.01 could trudge through it with some effort or skim the methodology.

Cheers!

When evaluating a policy program, researchers face a huge problem: sample selection. Consider the following example: suppose we offered kids summer classes to practice and improve their math and reading skills. After the program has ended, we compare the test scores of the kids who took the summer classes to the test scores of kids who didn’t. We find that the program kids’ test scores are significantly higher than the other kids’ test scores. Does this mean our program succeeded in raising test scores?

Not necessarily. We can imagine that the academically strongest, most enthusiastic kids would jump at the opportunity to join this summer program while the less-motivated kids would prefer to stay at home. That is, the program kids are mostly comprised of kids from the “smarter” group. In the absence of the program, the program kids would still have outperformed the other kids. Thus a simple comparison of test scores does not allow us to separate the innate ability of the program kids from the benefit of the summer program, and so we can’t tell how beneficial the program was.

If you take 14.74, examples and arguments like these will become second nature to you. You’ll explore several techniques to get around sample selection, including randomized control trials (used extensively by JPAL, where I currently UROP), difference-in-differences (particularly applicable to the example above), and ATE/TOT/LATE/ITT (average treatment effect, treatment on the treated, local treatment on the treated, and intention to treat, of which ATE is the topic of my 14.36 paper).

Feel free to email me (csperez@mit.edu) if you want to discuss sample selection or the econometrics used to get around it.