TMML: Every TV news report on the economy in one

This video parodies the format of every news story on the economy, ever. Seriously funny:

[HT: Alex Tabarrok at Marginal Revolution]

Try this: The Econ 101 Database

Big thanks to Jodi Beggs at Economists Do It With Models for developing the Econ 101 Database back at the end of January. The database includes lots of links to recent news stories, helpfully organised by topic-based tags, and each one includes a description on how it can be used in teaching. Even better, Jodi is updating it regularly with new material.

For example, this week in ECON110 we have been covering taxes and subsidies. Jodi's database points to this article from Slate, with the comment that it "Gives an example of how people not understanding marginal tax rates and how the tax system work to scare people into thinking that moving up to the next tax bracket is going to leave them with less money overall after taxes."

My students can probably expect things from the database to pop up now and again (although now that I've highlighted it on my blog which many of them read, I'll need to be selective!).

Enjoy!

Other related teaching stuff:

• MRUniversity videos
• 'We the Economy' short films
• The Economics of The Office
• 'The Economy' free e-book

Solutions to the problem of squealing children, Japan edition

Back in December last year, I wrote a post on dealing with the problems of squealing children at least cost:

Now, squealing children is a classic negative externality - an uncompensated impact of the actions of one party on a bystander. The poor residents of Stonefields face a cost that is imposed on them by the unscrupulous actions of the children. Since the children have no incentives to take into account the costs that they are imposing on the residents of Stonefields, they generate too much noise compared to the socially efficient optimum.

How best to deal with the problem of squealing children? In Japan, they use a command-and-control policy - a daytime noise limit of 55 decibels (night-time 45 decibels) in residential suburbs. That's not much louder than bird calls, i.e. a pretty extreme limit not conducive to playing children. Parents can be fined if their children exceed the noise limit, a solution to the problem that is based on the "polluter pays principle". Under this principle, the party that is responsible for the pollution is solely responsible for making restitution for the damage they cause.

However, Robin Harding reports in the Financial Times that Tokyo is considering changes to the noise regulations:

“In the past this wasn’t an issue but recently more people have been complaining to city halls, saying ‘the children are too loud, please stop them’,” says Yukie Nogami, chairwoman of Tokyo’s environment and construction subcommittee. “The law says city halls have to act.”

Ms Nogami’s committee will soon debate a proposal to carve out an exemption from the noise rules, either for children under 12 or for certain places such as parks and kindergartens.

In line with what I argued in December, the 'least cost' solution to squealing children might not be command-and-control policies like noise bans (which entail a high cost in foregone fun for the children), but sound-proofing the neighbourhood homes. Sound-proofing entails a one-off cost for each home, versus an ongoing cost of foregone fun. Of course, the cost of soundproofing every residential property (rather than just those located near playgrounds or day care centres) would likely be prohibitive.

However, once you have a command-and-control policy in place (like Japan's noise limits), it's going to be difficult to back out of. The noise limit created a new property right (the right to extreme residential quiet), and once created there is no Pareto-improving way to remove the right - that is, there is no way to remove the noise limits without making at least some people worse off. Who is going to be worse off? From the FT article:

About two-thirds of respondents to a consultation support the change but a minority is strongly against, complaining about everything from the lax upbringing of modern children to the effect on property prices.

The effect on property prices may well be real. If extreme quiet is valuable to Japanese homeowners (and prospective home buyers), then removing that property right is going to lower the value of residential homes (especially those close to playgrounds and day care centres). So at least some homeowners are right to be worried.

Moreover, the homeowners whose properties will be affected have a large incentive to protest the change in noise limits - the cost of the changes (in terms of lost property value) are likely high for each homeowner relative to the cost of protesting. Whereas the gains from the change in noise limits are spread widely among children and their parents, each of whom probably only gain a little from the changes. So expect lots of argument over this planned change, unless the homeowners can be adequately compensated. Following the compensation principle, if those who gain from the policy change (children and parents) can adequately compensate those who lose (affected homeowners), then the new policy (no, or higher noise limits) should be preferred. Since it would be difficult for children and parents collectively to compensate homeowners (free riders, anyone?), the compensation would likely have to come from taxpayers instead.

Of course, the better solution would have been not to have the extreme noise limit in the first place. As I noted in December (in relation to playgrounds in Stonefields):

The Coase Theorem tells us that, if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own (i.e. without government intervention). In the case of a bargaining solution under the Coase Theorem, it depends crucially on the distribution of entitlements (property rights and liability rules). Do children have the right to play and make noise? If so, then the residents would have liability to pay the children to be quiet - maybe buy them a bunch of Playstations and send them indoors to be quiet. Either that, or the children can just keep having fun in the playground and making as much noise as they like. On the other hand, do the residents have the right to peace and quiet? If so, then the children would have liability to compensate the residents for the noise of their playing. Either that, or they have to give up the playground.

Who has the rights? At the moment in Japan it's the homeowners, but I'm not convinced that was ever the least cost solution. As one respondent to the survey discussed in the FT article notes:

“To play and cry and make a big noise is a child’s right.”

Are university vice-chancellors' pay increases justified?

In the UK, the pay of university vice-chancellors' (VCs, the equivalent to president of a U.S. college) has been in the news recently. For instance, from Times Higher Education:

University vice-chancellors were paid £260,000 on average in the last academic year, a pay survey by the University and College Union shows

Neil Gorman, who was then vice-chancellor at Nottingham Trent University, earned the most in 2013-14 with his total benefits amounting to £623,000...

Seven universities paid their vice-chancellor more than £400,000 in salaries, bonuses, other benefits and pension contributions, the union said...

Sally Hunt, the UCU’s general secretary, said that the “lack of transparency and accountability surrounding senior pay and perks [was] a national scandal”.

Do university vice-chancellors deserve their high pay though? Not according to research cited by The Guardian:

The research, by economist Ray Bachan, from Brighton Business School, also looked at the extent to which the pay awards of university leaders were related to university performance measures, to shed light on whether headline pay awards were justified. In particular, it analysed vice-chancellors’ success in increasing the number of students from comprehensive schools and low-participation districts, and their record in bringing in income such as grants for teaching and research and capital funding.

It found that, while some of the pay increase could be explained by improvements in these areas, a “significant proportion” of the rise in vice-chancellors’ pay bore no relation to performance. Bachan said: “significant proportion of the sizeable annual increases are not easily explainable in terms of university performance, and this raises some concern.”

The research suggests that the presence of other high-paid staff in an institution pushes up vice-chancellors’ pay. University remuneration Remuneration committees, which set pay rates, may also seek to set the salary at a level commensurate with comparable institutions, said the study, which was published this month in the Fiscal Studies journal.

Note that The Guardian's headline is "‘Eye-watering’ salary rises for university chiefs cannot be justified, says report". The journal article by Ray Bachan (University of Brighton) and Barry Reilly (University of Sussex) in Fiscal Studies is available here (I don't see an ungated version anywhere). The authors do say something similar to The Guardian headline in the abstract:

However, even after controlling for a rich array of observable and unobservable factors, there have been sizeable increases in real pay in recent years that cannot be readily explained.

Having read the paper though, The Guardian's headline and the authors' abstract are both overstating the problem. There is nothing in the journal article by Bachan and Reilly that suggests to me that the salary rises are unjustified. I would argue quite the opposite, in fact. The authors use institutional performance as a predictor of VC salary. All three measures of 'mission-based performance measures' had positive and statistically significant relationships with VC salary, as did one of the three 'financial-based performance measures'. Other than year fixed effects, the among of funding council grants received was the most statistically significant determinant of VC salaries. So, I don't think it's correct to say that the salary rises cannot be justified - they are actually linked to institutional performance.

Of course the model doesn't explain all of the increases in VC pay - it has an R-squared of nearly 0.7, so the model explains nearly 70 percent of the total variation in VC pay. That leaves some 30 percent unexplained. But for an econometric model, that is really rather good. You might argue that not being able to explain all of the variation in VC pay means that the salary rises are not justified by performance. However, the models are not complete - there may be performance-related variables not included in the model that are important and might explain some of the remaining variation in VC pay. Indeed, the authors note themselves that:

Modelling the relationship between CEO pay and performance in the public sector is not an easy task. Estimating the relationship between VC pay and performance is also fraught with difficulties given data constraints. Our results suggest that institutional performance, external benchmarks and internal pay structures or tournaments play an important role in the pay-determining process. Nevertheless, if more detailed data on internal university pay structures (such as the pay of professors or other highly-paid staff) are made accessible or if compatible performance data on other aspects of performance not covered in this research (such as teaching and research) become available, more fruitful insights into this pay–performance relationship may be gleaned.

One further point to note is that the authors find that the proportion of staff earning more than £70,000 has a large positive and statistically significant effect on VC pay. They attribute this to tournament effects, which we have just finished discussing in my ECON110 class.

With tournament effects, a small group of highly successful workers get paid high salaries (VCs in this case), while many others accept lower salaries in exchange for the chance to become one of the highly successful few in the future. The high salaries at the top need not be related to performance of those at the top - instead, high wages at the top incentivise those lower down (e.g. other top executives) to work hard in order to ‘win’ the tournament. So, high VC (and CEO) salaries may motivate pro-VCs (and deputy CEOs) and others further down the organisational ladder who aspire to reach the top. And if the salaries of those lower down the ladder are high, the VC pay would need to be even higher to create an effective incentive. Which is essentially what the authors found.

Of course, not all academics are motivated to become VCs. The academic tournament is somewhat different  than the tournament for academic administrators (and I've blogged on that earlier - see here).

So, are the recent increases in vice-chancellors' pay justified? The research doesn't really answer that normative question fully, but possibly yes - at least, the research shows that increases in pay are linked to increases in performance. As to whether the tournament effects are 'justified', I leave that up to you to decide.