More Outsourcing Opportunities: Rent-a-womb!

Check out this article from MSNBC: "Giving birth the latest job outsourced to India: As commercial surrogacy takes off, rent-a-womb trend fuels debate" I'll post a few select quotations and let you make up your mind on the efficiency/morality debate in question. We all know how economists lean in matters such as these.

ANAND, India - Every night in this quiet western Indian city, 15 pregnant women prepare for sleep in the spacious house they share, ascending the stairs in a procession of ballooned bellies, to bedrooms that become a landscape of soft hills.

A team of maids, cooks and doctors looks after the women, whose pregnancies would be unusual anywhere else but are common here. The young mothers of Anand, a place famous for its milk, are pregnant with the children of infertile couples from around the world.

The small clinic at Kaival Hospital matches infertile couples with local women, cares for the women during pregnancy and delivery, and counsels them afterward. Anand's surrogate mothers, pioneers in the growing field of outsourced pregnancies, have given birth to roughly 40 babies.
...

"There is this one woman who desperately needs a baby and cannot have her own child without the help of a surrogate. And at the other end there is this woman who badly wants to help her (own) family," Patel said. "If this female wants to help the other one ... why not allow that? ... It's not for any bad cause. They're helping one another to have a new life in this world."
...
Commercial surrogacy has been legal in India since 2002, as it is in many other countries, including the United States. But India is the leader in making it a viable industry rather than a rare fertility treatment. Experts say it could take off for the same reasons outsourcing in other industries has been successful: a wide labor pool working for relatively low rates.

Externalities

Ever walk through the grocery story, annoyed at the woman apparently talking to herself, only to realize she is actually talking on a cell phone? Its a good example of a negative externality, not unlike air pollution. Often externalities are mitigated by social norms. For instance a stern look at the offending woman in the grocery store will hopefully get her to lower her voice if not hang up. Other solutions are often imposed by store owners themselves who impose bans on cell phone use in their stores. In this article covering internet access on airlines we see that different airlines are responding differently.

We think decency and good sense and normal behavior" will prevail, said Jack Blumenstein, chief executive of Aircell LLC, which is launching service on some American and Virgin flights in 2008.

In many ways, airlines are facing issues similar to those encountered by Wi-Fi networks on the ground — at airports, coffee shops and other public places.

Glenn Fleishman, editor of the Wi-Fi Networking News site, said operators of public networks generally do not filter because users are conscious that others can see what they surf. A coffee shop employee might occasionally ask a customer to leave, Fleishman said, "but those stories tend to be pretty far between."

Airplanes, however, are different because customers are in closer quarters and are more likely to include kids.

Allowing porn could subject an airline to harassment complaints much like an employer that refuses to clamp down, said John Palfrey, a Harvard Law School professor.

"I think they have a right to (filter), but I come up short of saying they have the responsibility," Palfrey said. "I'd rather have the responsibility in the hands of passengers and require them to be accountable for what they do on laptops and airplanes."

The Fed's New Tool

As this blog discussed a few days ago, the Fed has established a new monetary policy tool called the Term Auction Facility. The reason for the TAF is that the link between the federal funds rate and the risk-free rate on short term debt has been much more tenuous since August of this year. This means that the macroeconomic effects we usually expect from a decrease in the federal funds target are not propagating though the economy.

The reason for the disconnect comes from the uncertainty generated by the mortgage mess. Wanting to overhaul their balance sheets, many commercial banks and investors alike have turned to the market for Treasury securities. Banks are looking to Treasury securities because overnight loans in the federal funds market or from the discount window are not a reasonable strategy for restructuring a balance sheet. This increased demand in the Treasury market has driven up the price and driven down yield on bonds. As a result, the impact of any Fed open market operation is reduced.

Even for the healthy banks in a position to lend, the uncertainty about the solvency of any given bank results in a higher risk premium. So not only do troubled banks face a higher price for Treasury securities, but they also face a higher rate for a 90 day loan from another bank. Combine this with the stigma and strict collateral requirements of a discount loan and some banks are really in a pinch.

One thing to note - the Fed is not changing the total value of liquidity available. So the amount auctioned off will be offset by a reduction in funds in the overnight market. Any idea on how this will work? Is the Fed going to sell Treasuries?

Let me know what you think.


The Economist had a nice article about this new policy.
A Christmas package for banks

Dec 13th 2007
From The Economist print edition

This attempt to sort out the money-market mess has its uses; but don't expect too much

IF AT first you don't succeed, try co-ordinated intervention. Leading central banks have each laboured on their own to clear the log jam in the money markets—and all have failed. The spread between the cost of borrowing for governments and that for banks has widened sharply in recent weeks. That suggests investors are warier than ever of lending to the banking system. The longer this goes on, the greater the fear that banks will drag the economy down by starving it of capital.

Christmas, when markets are closed and banks are tidying their year-end balance sheets, is always a time of sparse liquidity. This year confidence is especially fragile. The last thing the world needs is for some big bank to be scrabbling for cash on New Year's Eve. Hence this week's decision by five central banks to redirect some $100 billion of funding to the banking system—and to ensure that it can be had in dollars. Markets were torn between hope that money will at last get to those that need it and fear that the plan reveals how worried the central banks really are. They are right to be anxious: this is the authorities' best shot—and it is far from certain to work.

The plan helps explain why the Federal Reserve decided to cut interest rates by a quarter of a percentage point rather than a half (as many had hoped) on December 11th. Cuts in the official rate have proved a blunt instrument in solving the money-market crisis. Despite three reductions in the Fed funds rate, banks were still paying more on December 11th to borrow money for three months than they had been in March. Worse still, in their anxiety to rescue the financial system, central banks were endangering their anti-inflationary credentials. Headline inflation rates have stayed stubbornly elevated. The Fed reasoned—rightly—that money-market intervention was a more targeted remedy than a big rate cut would have been.

Nobody should doubt how urgently needed that remedy is. Banks have no problem borrowing money overnight, but they would be mad to rely exclusively on that as a source of funding. They need access to funding over longer periods, particularly three months. Yet those markets have been jammed as the normal providers of finance, the money-market funds, have been made skittish by losses on mortgage-related products. Central banks are trying to step into the breach.

Sick stigma

The plan is designed to deal with the things that have stymied such efforts so far. For instance, applying for help from a central bank has been seen as a sign of weakness—the financial equivalent of casting yourself as the little boy with “kick me” pinned to his shirt tail. By presenting the new package in the form of an auction, central banks hope to remove that stigma. Another disincentive for borrowers has been the penalty rates of interest charged by central banks (in particular, by the Bank of England) and the demand for very high-quality bonds as collateral. The new plan modestly relaxes such conditions.

Will that be enough? The Fed and the Bank of England have made it clear they are not adding overall liquidity to the markets (to the extent that they add money, they will take it away elsewhere). So far, the plan focuses on how to get money into the system, not how much. Yet the European Central Bank, which has been the most flexible in handling the money-market crisis, has had little more success than anyone else at reducing banks' borrowing costs. Above all, the package does not solve the fundamental reason why both investors and bankers are so reluctant to lend freely: the crippling lack of information about potential losses on subprime mortgages and related structured-debt products. Even the banks themselves will remain reluctant to lend until they know how much capital they will need to sort out the mortgage mess.

Yet the package is surely worth a try. It is worth paying a high price to stave off a liquidity crisis over new year: better that weak banks are able to borrow at the same rates as strong ones than that they are not able to borrow at all. The package will give everyone breathing space to reassess the banks' balance sheets. The hope is that a peaceful Christmas will help sentiment improve in January. But don't be fooled: it is only a hope. If it is disappointed, the clamour for central banks to start cutting interest rates will start to mount once again.

Economics and Art, Quite Literally

I ran into a piece of art the other day by economics graduate Tino Sehgal without, really knowing that I had run into art at all.

I was walking through the Walker Art Center when, out of nowhere one of the guards started singing. Loudly.

My immediate response was that she was either bored or crazy.

Turns out that it was work created by Sehgal and that other people have reacted similarly to his work. Yasmil Rayomond, the curator of the Walker show described a visit to the Biennial in Lyon, France where she also did not realize that a piece by Mr. Sehgal was on display. I quote from an article from the New York Times:

"He had a Dan Flavin, a Larry Bell and a Dan Graham in the corner," she said. "The minute I entered the space, the guard came in and started stripping. I slowly crawled behind the Dan Graham. I was so embarrassed I didn't know what to do with myself. I wanted to know the title of the piece, and I had to wait. At the end when he takes of all this clothing, he says the title and then puts his clothes back on. It was called 'Selling Out'."

The artist is 31 years old and lives in Berlin. He creates what he calls "staged situations" that include the following:

"This Is New": where an attendant quotes a museum goer a headline from the day's papers and only a response from the visitor can trigger an interaction between the two, concluding in the work's title being spoken.

"This Success/This Failure": kids play in an empty room and attempt to draw visitors into their game. Only the kids can decide whether it is a success or a failure.

"This Is So Contemporary": where a uniformed museum guard dances around the room singing "This is so contemporary contemporary, contemporary."

"Kiss" where a couple in an unbroken embrace recreate kisses from familiar works of art.

His work does have some interesting economics to it, both literally and figuratively.

His pieces can be sold (and in fact, have received five-figure sums!). But he stipulates that the exchange cannot involve the transformation of any material in any way. No written instructions, no bill of sale, no catalogs and no pictures.

The artist claims political influences from John Kenneth Galbraith, Walter Benjamin, Bruce Nauman and Felix Gonzalez-Torres.

He studied dance and economics and says that a touchstone belief is that his generation must 'come up with alternatives of producing in different ways'.

The Deadweight Loss of Santa: A Reprint

In honor of the end of the semester and the upcoming holiday break, I reprint below an old Economist article that is based on an AER article titled "The Deadweight Loss of Christmas" for your perusal and distraction.

Is Santa a deadweight loss?

Dec 20th 2001
From The Economist print edition

Are all those Christmas gifts just a waste of resources?
ECONOMICS has long been known as the dismal science. But is any economist so dreary as to criticize Christmas? At first glance, the holiday season in western economies seems a treat for those concerned with such vagaries as GDP growth. After all, everyone is spending; in America, retailers make 25% of their yearly sales and 60% of their profits between Thanksgiving and Christmas. Even so, economists find something to worry about in the nature of the purchases being made.

Much of the holiday spending is on gifts for others. At the simplest level, giving gifts involves the giver thinking of something that the recipient would like—he tries to guess her preferences, as economists say—and then buying the gift and delivering it. Yet this guessing of preferences is no mean feat; indeed, it is often done badly. Every year, ties go unworn and books unread. And even if a gift is enjoyed, it may not be what the recipient would have bought had they spent the money themselves.

Intrigued by this mismatch between wants and gifts, in 1993 Joel Waldfogel, then an economist at Yale University, sought to estimate the disparity in dollar terms. In a paper that has proved seminal in the literature on the issue, he asked students two questions at the end of a holiday season: first, estimate the total amount paid (by the givers) for all the holiday gifts you received; second, apart from the sentimental value of the items, if you did not have them, how much would you be willing to pay to get them? His results were gloomy: on average, a gift was valued by the recipient well below the price paid by the giver.

The most conservative estimate put the average receiver's valuation at 90% of the buying price. The missing 10% is what economists call a deadweight loss: a waste of resources that could be averted without making anyone worse off. In other words, if the giver gave the cash value of the purchase instead of the gift itself, the recipient could then buy what she really wants, and be better off for no extra cost.

Non-cash gifts from extended family were found to be least efficient

Perhaps not surprisingly, the most efficient gifts (those with the smallest deadweight loss) were those from close friends and relations, while non-cash gifts from extended family were the least efficient. As the age difference between giver and recipient grew, so did the inefficiency. All of which suggests what many grandparents know: when buying gifts for someone with largely unknown preferences, the best present is one that is totally flexible (cash) or very flexible (gift vouchers).

If the results are generalized, a waste of one dollar in ten represents a huge aggregate loss to society. It suggests that in America, where givers spend $40 billion on Christmas gifts, $4 billion is being lost annually in the process of gift-giving. Add in birthdays, weddings and non-Christian occasions, and the figure would balloon. So should economists advocate an end to gift-giving, or at least press for money to become the gift of choice?

Sentimental value

There are a number of reasons to think not. First, recipients may not know their own preferences very well. Some of the best gifts, after all, are the unexpected items that you would never have thought of buying, but which turn out to be especially well picked. And preferences can change. So by giving a jazz CD, for example, the giver may be encouraging the recipient to enjoy something that was shunned before. This, and a desire to build skills, is presumably the hope held by the many parents who ignore their children's pleas for video games and buy them books instead.

Second, the giver may have access to items—because of travel or an employee discount, for example—that the recipient does not know existed, cannot buy, or can only buy at a higher price. Finally, there are items that a recipient would like to receive but not purchase. If someone else buys them, however, they can be enjoyed guilt-free. This might explain the high volume of chocolate that changes hands over the holidays.





The thought actually does count

But there is a more powerful argument for gift-giving, deliberately ignored by most surveys. Gift-giving, some economists think, is a process that adds value to an item over and above what it would otherwise be worth to the recipient. Intuition backs this up, of course. A gift's worth is not only a function of its price, but also of the giver and the circumstances in which it is given.

Hence a wedding ring is more valuable to its owner than to a jeweler, and the imprint of a child's hand on dried clay is priceless to a loving grandparent. Moreover, not only can gift-giving add value for the recipient, but it can be fun for the giver too. It is good, in other words, to give as well as to receive.

The lesson, then, for gift-givers? Try hard to guess the preferences of each person on your list and then choose a gift that will have a high sentimental value. As economists have studied hard to tell you, it's the thought that counts.

* “The Deadweight Loss of Christmas”. American Economic Review, December 1993, vol 83, no 5.

Left and Right

Mankiw recently posted a conclusion of one of his Econ101 lectures with a discussion on reasons that right-leaning and left-leaning economists differ on their policy views, even though they share an intellectual framework for analysis. Here are the points he makes:

* The right sees large deadweight losses associated with taxation and, therefore, is worried about the growth of government as a share in the economy. The left sees smaller elasticities of supply and demand and, therefore, is less worried about the distortionary effect of taxes.
* The right sees externalities as an occasional market failure that calls for government intervention, but sees this as relatively rare exception to the general rule that markets lead to efficient allocations. The left sees externalities as more pervasive.
* The right sees competition as a pervasive feature of the economy and market power as typically limited both in magnitude and duration. The left sees large corporations with substantial degrees of monopoly power that need to be checked by active antitrust policy.
* The right sees people as largely rational, doing the best the can given the constraints they face. The left sees people making systematic errors and believe that it is the government role’s to protect people from their own mistakes.
* The right sees government as a terribly inefficient mechanism for allocating resources, subject to special-interest politics at best and rampant corruption at worst. The left sees government as the main institution that can counterbalance the effects of the all-too-powerful marketplace.
* There is one last issue that divides the right and the left—perhaps the most important one. That concerns the issue of income distribution. Is the market-based distribution of income fair or unfair, and if unfair, what should the government do about it? That is such a big topic that I will devote the entire next lecture to it.

Fed Policy Change

Wow, monetary policy is getting exciting. Yesterday the Fed announced a new policy known as the Term Auction Facility program (TAF). Actually the announcement was coordinated with several other central banks. For a good overview, read this WSJ piece. Basically the Fed - in an attempt to alleviate liquidity constraints in the market - is going to manage the discount window, via quantity rather than price.

Some other commentary Marginal Revolution, Fortune Magazine, and Economistsview. Expect there to be substantially more discussion of this in the intervening days.

Cable TV Is Good For Women

According to Jensen and Oster:

Cable and satellite television have grown rapidly throughout the developing world. The availability of cable and satellite television exposes viewers to new information about the outside world, which may affect individual attitudes and behaviors. This paper explores the effect of the introduction of cable television on gender attitudes in rural India. Using a three-year individual-level panel dataset, we find that the introduction of cable television is associated with improvements in women's status. We find significant increases in reported autonomy, decreases in the reported acceptability of beating and decreases in reported son preference. We also find increases in female school enrollment and decreases in fertility (primarily via increased birth spacing). The effects are large, equivalent in some cases to about five years of education in the cross section, and move gender attitudes of individuals in rural areas much closer to those in urban areas. We argue that the results are not driven by pre-existing differential trends. These results have important policy implications, as India and other countries attempt to decrease bias against women.

Minimum Wage Threatens Postal Market Liberalization

January 1, 2008 will be an important date in Germany's postal service history. On that date the last monopoly held by the former government-owned but now private Deutsche Post will disappear. Currently, Deutsch Post is the only company permitted to deliver letters under 50 grams in Germany. Several companies have been formed to participate in this €23 billion ($31.4 billion) a year market.

In an effort to improve its standing among blue-collar workers the Social Democratic Party (SPD) pushed through a minimum wage for postal workers to protect them from exploitation and to provide a level playing field for the existing and new mail deliverers.

The article Minimum Wage Threatens Postal Market Liberalization in the English edition of the German news magazine Spiegel Online informs about the reactions of the new companies, the SPD and the European Union to the introduction of the minimum wage.