Cost Benefit Analysis and Utility

Cost Benefit Analysis:

"Formal benefit cost analysis counts everyone’s gains and losses equally. But common sense and the principle of diminishing marginal utility agree that a dollar’s worth of gain is more valuable to someone with few dollars than it is with someone with many. Obviously, taking $1 each from 900,000 poor people to give $1 million to a hedge-fund billionaire doesn’t reflect a social gain, but a formal benefit-cost analysis will show that it does: after all, the net benefit is $100,000. Thus gains and losses should be adjusted by (at least) dividing each gain or loss by the income or wealth of the person bearing it, so that a $20 gain to a family with an income of $20,000 weighs as a heavily as a $10,000 gain to a family with an income of $1 million."

Canadian Medicare

Yglesias: "Canadian Medicare is pretty similar to American Medicare, but our Medicare is for old people and there’s is for everyone. So if you like Medicare, you’d also like Medicare. And if you hate Canadian-style socialism, you ought to favor dismantling Medicare."

Greg Mankiw's Blog: The Least Surprising Correlation of All Time

Greg Mankiw's Blog: The Least Surprising Correlation of All Time:

This graph is a good example of omitted variable bias, a statistical issue discussed in Chapter 2 of my favorite textbook. The key omitted variable here is parents' IQ. Smart parents make more money and pass those good genes on to their offspring.

Suppose we were to graph average SAT scores by the number of bathrooms a student has in his or her family home. That curve would also likely slope upward. (After all, people with more money buy larger homes with more bathrooms.) But it would be a mistake to conclude that installing an extra toilet raises yours kids' SAT scores.

It would be interesting to see the above graph reproduced for adopted children only. I bet that the curve would be a lot flatter."

If You Are So Rich, Why Aren't You Smart?

...The individual heritability of IQ is about 0.5: take an individual with a IQ 6 points above average and their children will be expected to have an IQ 3 points above average....

The rule of thumb, I think, is that half of the income-test score correlation is due to the correlation of your test scores with your parents' IQ; and half of the income-test score correlation is coing purely from the advantages provided by that component of wealth uncorrelated with your parents' (genetic and environmental!) IQ.

...The masters at explaining this, of course, are (Googles) Samuel Bowles and Herbert Gintis, "The Inheritance of Inequality" http://www.umass.edu/preferen/gintis/intergen.pdf...

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UPDATE: Conor Clarke reminds me of Christiane Capron and Michael Duyme (1989), "Assessment of Effects of Socio-Economic Status on IQ: A Full Cross-Fostering Study," Nature http://www.nature.com/nature/journal/v340/n6234/pdf/340552a0.pdf: "changes in IQ resulting from changes in postnatal environment are of similar magnitude and exhibit the same general trend independently of the SES of the adopted children's biological paretnts."

Low income hinders college attendance

The worst scoring students from high SES families complete college as frequently as the best students from low SES families. Only 29% of high-achieving kids belonging to the lowest SES quartile obtained a bachelor's degree, compared to 74% of high-achieving kids in the top SES quartile. This success rate for high-aptitude poor students (29%) is less than the success rate for students with the lowest aptitude from the top SES families.

Felix Salmon » Blog Archive » Just because you’re rich doesn’t mean you’re smart | Blogs |

Felix Salmon » Blog Archive » Just because you’re rich doesn’t mean you’re smart | Blogs |: "Wealth Corollary of the Efficient Market Hypothesis... says that if you’ve made lots of money, you must be pretty smart. I think there’s a pretty good case to be made that the EMH(WC) is responsible for ... many of the obsequious interviews with rich individuals frequently featured in the financial media.The problem is that it’s far too easy for people to simply assume, on the grounds of wealth alone, that therefore there must also be some degree of financial sophistication. The annals of finance are full of people taking advantage of the financially-illiterate..."

Salmon talks about Anne Leibowitz who lost millions. Her credit was so bad, her applications for an American Express credit card had been repeatedly denied at the time when American Express offered to pay her big bucks to become their spokesperson in a new ad campaign.

Yglesias responds:

To me the interesting thing goes beyond hedge fund rules and obsequious interviews in financial media, to a much more general phenomenon of the enormous general social, cultural, and intellectual prestige accorded to rich people. In this vein, Leibowitz is not a good example, since obviously she’s a rich person second and a famous photographer first and her work can be judged on its own photo-centric terms.

But in general it seems to me that we pay extraordinarily little attention to the giant role played by luck and happenstance in determining who becomes a super-successful businessman. Bill Gates, for example, clearly knows something about software and something about business. But there are lots of people who fit that bill. There’s only one Gates because it’s in the nature of things that only one firm gets to write the operating system that, thanks to strong network effects, becomes dominant and lets you start reaping monopoly profits. Nothing wrong with it, that’s life. But in general, as a society we tend to treat successful businessmen as if they were omniscient central planners who’d gotten rich through their powers of clairvoyance. In fact, the whole point of having businessmen instead of central planners is that nobody’s that omniscient—we let some flowers bloom and some chips fall and life moves on. But there’s no particular reason to believe that the ex post winners have enormous insights. If you hang around a casino, on any given night someone’s going to make money playing roulette, but that doesn’t mean you should ask him about his roulette strategy and it certainly doesn’t mean you should ask his opinion about public policy issues far outside his area of focus.

Harvard University - Belfer Center for Science and International Affairs - An Economic View of the Environment » Blog Archive » The Wonderful Politics of Cap-and-Trade: A Closer Look at

Thoma: ...the recent discussion between Brad DeLong and Greg Mankiw on the effects of giving away rather than auctioning carbon permits under a cap and trade system (see, e.g., here, here, here, and here). Mankiw begins with the premise that:

Rather than auctioning the carbon allowances, the bill that recently passed the House would give most of them away to powerful special interests.

But is it correct to classify the program as "giving most of them away to powerful special interests"? Here's Harvard's Robert Stavins who knows a thing or two about this topic. He notes that "it is remarkable (and unfortunate) how misleading so much of the coverage has been of the issues and the numbers surrounding the proposed allowance allocation." He also says that "we should be honest that the legislation, for all its flaws, is by no means the 'massive corporate give-away' that it has been labeled. On the contrary, 80% of the value of allowances accrue to consumers and public purposes":

Harvard University - Belfer Center for Science and International Affairs - An Economic View of the Environment » Blog Archive » The Wonderful Politics of Cap-and-Trade: A Closer Look at: "The headline of this post is not meant to be ironic. Despite all the hand-wringing in the press and the blogosphere about a political “give-away” of allowances for the cap-and-trade system in the Waxman-Markey bill voted out of committee last week, the politics of cap-and-trade systems are truly quite wonderful, which is why these systems have been used, and used successfully."